Home Guides Bitcoin ETFs: A Beginner’s Guide

Bitcoin ETFs: A Beginner’s Guide

Andrew Kamsky
Last Updated July 7, 2023 8:39 AM

Key Takeaways

  • Bitcoin ETFs track Bitcoin’s value, enabling investors to gain exposure without direct ownership.
  • Bitcoin ETFs increase liquidity, provide oversight, manage risk, and attract mainstream adoption.
  • ETFs offer accessible Bitcoin investment, boosting liquidity and potentially appreciating BTC’s price.
  • Bitcoin ETFs face risks of market manipulation, ownership concentration, and regulatory challenges.

Exchange-traded funds (ETFs) are investment vehicles that track the performance of a specific asset or group of assets. Traditional ETFs like the SPDR S&P 500 ETF (SPY) may track indices, commodities, bonds, or a basket of securities. Bitcoin ETFs are a novel concept but will be a new breed of ETFs designed to track the price of Bitcoin (BTC), the leading cryptocurrency.

These ETFs will offer investors a way to gain exposure to Bitcoin without the need to directly own, store, or manage the digital asset. The creation of Bitcoin ETFs could significantly impact the global investment landscape market by increasing liquidity in the crypto space, providing regulatory oversight, risk management and attracting more mainstream adoption.

What Are Bitcoin ETFs And How Do They Work

Bitcoin ETFs are financial instruments that are designed to track the value of Bitcoin. Normally institutional investors buy shares of the ETF, where each share represents a certain amount of Bitcoin held in the fund. In this way, investors gain exposure to Bitcoin’s price movements without the need to necessarily own, store, or manage the cryptocurrency directly themselves.

The concept of Bitcoin ETFs is new and has faced significant regulatory scrutiny. US Securities and Exchange Commission (SEC) rejected many proposals for applications of Bitcoin ETFs expressing concerns to do with market manipulation and volatility. Bitcoin ETFs potentially play a crucial role in the market by providing a regulated pathway for institutional and retail investors to gain exposure to Bitcoin, safeguarding their clients in an otherwise largely unregulated cryptocurrency landscape.

History Of Bitcoin And Blockchain ETFs

The first blockchain ETFs emerged as early as 2018 with the rise in ETF developments listed below:

2018:

  • Launch of Amplify Transformational Data Sharing ETF (BLOK) responsible for identifying professionally-selected companies involved in blockchain technology.

  • Siren Nasdaq NexGen Economy ETF (BLCN) which sought to invest in companies developing blockchain technologies.

2021:

  • Launch of the VanEck Digital Transformation ETF (DAPP), tracking the performance of companies in the digital assets economies.

  • Launch of the Bitwise Crypto Industry Innovators ETF (BITQ), which follows an index of companies that derive their revenue from crypto-related business operations.

  • Launch of the ProShares Bitcoin Strategy ETF (BITO), the first futures-based Bitcoin ETF

2022:

Bitcoin ETFs: A Beginner’s Guide

Advantages Of Bitcoin ETFs

Bitcoin ETFs provide several likely advantages whereby their mainstream adoption can offer a promising investment opportunity for those interested in the cryptocurrency market but unwilling to purchase Bitcoin outright. Some benefits of Bitcoin ETFs include:

  • Greater accessibility for investors: Institutional and retail investors may opt to invest in Bitcoin’s price changes without needing to own, manage, or understand all the details about the digital asset. They can invest in Bitcoin through familiar platforms and methods by outsourcing any worry or anxiety of self-custody to the ETF.

  • Potential for increased liquidity: As Bitcoin ETFs trade on traditional stock exchanges, opening up the cryptocurrency market to a larger pool of investors is likely to increase overall participation and can make the market more fluid, boosting transaction volumes which is likely to result in an appreciated price of BTC.

Impact Of Bitcoin ETFs On The Bitcoin Market

Bitcoin ETFs unlock greater accessibility for investors to enter the space, inviting more participants into the cryptocurrency arena. An ETF may help enhance market liquidity and make trading more fluid. Additionally, as a more regulated and secure investment option, Bitcoin ETFs provide a safety net in the somewhat risky world of cryptocurrency.

The impact on the Bitcoin market may result in an increased demand for the cryptocurrency, driving Bitcoin’s price up as ETFs acquire Bitcoin to back their shares. This ultimately means that investor behavior toward an indirect Bitcoin investment, via ETFs, will increase global acceptance.

While Bitcoin ETFs’ trading on traditional stock exchanges could decrease volumes on cryptocurrency platforms, the increased accessibility and interest might drive up overall Bitcoin trading volumes. Thus, the introduction of Bitcoin ETFs opens an intriguing new chapter in the Bitcoin market narrative, potentially redefining the cryptocurrency landscape.

Criticisms And Risks Concerned With Bitcoin ETFs

Bitcoin ETFs, despite their potential benefits, aren’t without criticisms and risks:

  • Market manipulation: Crypto markets are still developing and can be more susceptible to price manipulation, which could affect the ETFs tracking them.

  • A potential threat to decentralization: The ethos of cryptocurrencies is highly dependent on the decentralized conditions it was built on. Bitcoin ETFs may concentrate significantly high ownership of Bitcoin into the hands of a few, potentially undermining the decentralized nature of the market.

  • Regulatory challenges: Regulatory bodies like the SEC have often expressed concerns about the volatility and regulatory oversight of the cryptocurrency market. The introduction of Bitcoin ETFs could heighten these issues, possibly leading to stricter regulations that could, in turn, stifle innovation within the crypto industry.

Future Developments And Challenges

Looking ahead, the future of Bitcoin ETFs seems promising yet intricate, due to its complex array of opportunities and challenges. As Bitcoin ETFs start to emerge they will inevitably start to bridge the gap between traditional finance and the emerging digital asset world.

The journey toward widespread adoption isn’t without its obstacles. As discussed above, persistent regulatory concerns, potential impacts on market decentralization, and the susceptibility to market manipulation are still issues that must be addressed. In essence, the balance between maintaining the decentralized essence of crypto and introducing regulatory oversight is a delicate one that requires careful thought.

Bitcoin ETFs’ future and market impact depends on how well these challenges are thought of and managed. Overcoming these challenges diligently will require team effort from regulatory bodies, ETF issuers, and the broader crypto community. If navigated well, Bitcoin ETFs could potentially usher in the new era of cryptocurrency investment solidifying Bitcoin’s place in the global financial ecosystem.