ETFs, or "Exchange-Traded Funds," are a type of financial instrument that allows investors to indirectly invest in various assets through the purchase and sale of fund units. These assets can include gold, stocks, oil, commodities, bonds, and even cryptocurrencies. ETFs are traded on stock exchanges and can increase portfolio diversification while reducing investment risk.

What is a Bitcoin ETF?

A Bitcoin ETF is a fund that allows investors to invest in Bitcoin without the need to directly purchase and hold the cryptocurrency. These ETFs are managed by financial companies, and their units are traded on stock exchanges. In other words, by buying units of a Bitcoin ETF, investors indirectly own Bitcoin and benefit from its price fluctuations.

How Bitcoin ETFs Work:

Bitcoin ETFs, instead of holding Bitcoin directly, invest in Bitcoin futures contracts. Futures contracts allow funds to benefit indirectly from Bitcoin price changes by predicting its future price.

Bitcoin ETFs are traded on exchanges like stocks. This means that investors can buy and sell these funds like any other stock. The price of a Bitcoin ETF is based on the price of the underlying Bitcoin futures contracts it invests in.

These funds are managed by professional fund managers who oversee the underlying assets, including Bitcoin futures contracts, and aim to employ the best investment strategies to achieve optimal returns.

Bitcoin ETFs provide a convenient and efficient way to invest in Bitcoin without the need to directly hold the cryptocurrency. This allows investors to benefit from Bitcoin's price changes without facing the challenges of holding and securing Bitcoin. Additionally, trading Bitcoin ETFs through exchanges provides more precise and transparent oversight of investments.

While Bitcoin ETFs offer many advantages, it is also important to consider the associated risks. These risks include the high volatility of Bitcoin prices, management fees, and potential discrepancies between futures contract prices and the actual price of Bitcoin.

Overall, Bitcoin ETFs are a suitable tool for investors who want to benefit from Bitcoin's price changes without directly buying and holding the cryptocurrency.

Types of Bitcoin ETFs

Futures-Based ETFs

Bitcoin futures ETFs are investment tools that allow investors to invest in Bitcoin without the need to directly buy and hold the cryptocurrency. These funds are backed by Bitcoin futures contracts, which determine an agreed-upon price for buying or selling Bitcoin in the future. Instead of being backed by actual Bitcoins, a Bitcoin futures ETF is supported by Bitcoin futures contracts. The value of this ETF is derived from the price movements of Bitcoin futures contracts, and the managing company must hold positions in these futures contracts.

Bitcoin Futures Trading

Bitcoin futures trading allows parties to agree on the purchase or sale of Bitcoin at a predetermined price and date. These trades are conducted on commodity exchanges such as the Chicago Mercantile Exchange (CME). When a Bitcoin futures contract expires, one party must buy or sell Bitcoin at the agreed price, even if the market price has changed.

Acceptance of Bitcoin Futures ETFs

Canada was the first country to approve a Bitcoin futures ETF in February 2021. This fund, trading under the symbol BTCC, began operating on the Toronto Stock Exchange (TSX) and attracted over $420 million in capital within 48 hours. In the United States, the ProShares Bitcoin Strategy ETF (BITO) received approval from the SEC and attracted over $550 million in capital within its first few days of trading. Other companies such as Valkyrie, VanEck, Simplify, and Global X Blockchain and Bitcoin have also launched Bitcoin futures ETFs.

Spot-Based ETFs

A Bitcoin spot ETF, recently approved by the U.S. Securities and Exchange Commission (SEC), tracks the actual price of Bitcoin. This type of ETF allows investors to invest in Bitcoin without the need to directly buy and hold the digital asset. The main advantages of these ETFs include exposure to Bitcoin through a regulated product, easy access, no need to store Bitcoin or manage private keys, and the ability to short Bitcoin.

Approval and Launch of Bitcoin Spot ETFs

The approval process for these funds began with several investment companies filing applications to establish such funds. Companies like ARK, Invesco, and VanEck were among the first to submit their applications to the SEC. After numerous amendments to these applications, the SEC announced the approval of 11 Bitcoin spot ETFs on January 10, 2024.

Bitcoin Spot ETFs

Currently, these 11 Bitcoin spot ETFs are traded on various exchanges:

- ARK 21Shares (symbol: ARKB)

- Invesco Galaxy (symbol: BTCO)

- VanEck (symbol: HODL)

- WisdomTree (symbol: BTCW)

- Fidelity (symbol: FBTC)

- Valkyrie (symbol: BRRR)

- BlackRock (symbol: IBIT)

- Grayscale (symbol: GBTC)

- Bitwise (symbol: BITB)

- Hashdex (symbol: DEFI)

- Franklin Templeton (symbol: EZBC)

Advantages and Disadvantages of Bitcoin ETFs on the Digital Asset Market

Advantages:

Ease of Access:

Traditional investors can access Bitcoin through ETFs without needing to create accounts on digital currency exchanges. This allows them to easily trade Bitcoin using their existing brokerage accounts.

Regulations:

Institutional investors such as retirement funds and asset managers, governed by specific laws that restrict direct Bitcoin investment, have a better chance to invest in a SEC-approved Bitcoin ETF. This enables them to invest in the Bitcoin market legally and in compliance with regulations.

Diversification:

A Bitcoin ETF may include assets beyond Bitcoin, such as stocks or gold. This helps investors diversify their portfolios, reducing risks associated with investing solely in one asset.

Liquidity:

Investing in a Bitcoin-related asset via a securities exchange can attract a new wave of institutional investors to the crypto market. This increases liquidity in the crypto market and encourages more participation in Bitcoin buying and selling.

Reduced Fear and Stress:

Bitcoin ETFs provide greater peace of mind for individuals concerned about storing and safeguarding their cryptocurrencies.

Disadvantages:

Tracking Error:

The performance of Bitcoin ETFs does not always align with that of Bitcoin itself, known as "tracking error." For example, between October 19 to 27, 2021, while Bitcoin's price decreased by 1%, ProShares ETF saw a 2.45% drop and Grayscale a 7.5% decrease in value.

Transaction and Management Fees:

Bitcoin ETFs typically have higher fees. For instance, the ProShares ETF has a management fee rate of 0.95% annually, charged to shareholders over the holding period, and additional costs may apply for brokerage transactions.

Ownership:

While a primary advantage of Bitcoin is decentralization and independence from governmental entities and central banks, ETFs centralize this space by holding users' private keys, which contradicts the nature of cryptocurrencies.

Trading Hours Limitation:

Bitcoin trades 24/7, but Bitcoin ETFs are subject to the opening and closing hours of stock exchanges. Therefore, traders may miss trading opportunities during ETF market closures.

Settlement Time:

Bitcoin transactions settle instantly, whereas Bitcoin ETF transactions require two business days for settlement, reintroducing investors to traditional financial system delays.

Payment Instrument:

Bitcoin ETFs cannot be used directly as a payment method. ETF shares must first be converted into fiat currencies before they can be used for payments.

Potential Impact of Bitcoin ETFs on Current Bitcoin Price

Bitcoin ETF approval can have significant effects on the current price of Bitcoin, including:

1. Increased Investor Acceptance and Confidence:

Official approval of a Bitcoin ETF by regulatory bodies like the U.S. Securities and Exchange Commission (SEC) instills greater investor confidence. This formal acceptance can attract new investors who previously hesitated due to uncertainty about the Bitcoin market. For example, the approval of the first Bitcoin ETF in the U.S. led Bitcoin's price to reach $66,000

2. Influx of New Capital:

Bitcoin ETFs provide institutional and individual investors seeking a straightforward and legal way to invest in Bitcoin without directly buying and holding it. This influx of new capital can increase demand and consequently drive up the price of Bitcoin.

3. Reduction of Bitcoin Holding Risks:

Bitcoin ETFs allow investors to benefit from Bitcoin's advantages without the need for direct management and custody. This can reduce risks associated with security and custody of Bitcoin, enhancing the attractiveness of Bitcoin investments.

4. Enhancement of Public Trust in Bitcoin:

Approval of Bitcoin ETFs by reputable regulatory authorities can serve as a positive signal of public and regulatory trust in Bitcoin. This can increase public confidence in Bitcoin and its wider acceptance in society.

5. Psychological and News Impact:

News related to Bitcoin ETF approvals can have a strong psychological impact on the market, often generating excitement and increased trading activity. For instance, after the approval of the first Bitcoin ETF in the U.S., trading volume exceeded $1 billion on the first day alone.

6. Market Infrastructure Strengthening:

Bitcoin ETFs can contribute to strengthening market infrastructure, including increased liquidity, improved trading systems, and reduced price volatility. As the number of Bitcoin ETFs grows, the market gradually becomes more stable and balanced.

7. Reduction of Price Volatility:

While Bitcoin ETF approval may initially lead to price increases and volatility, in the long term, it can help reduce price fluctuations. Institutional investor entry and increased market liquidity can contribute to greater price stability for Bitcoin.

Conclusion:

Digital currency ETFs represent innovative tools for entering the exciting world of cryptocurrencies. Advantages such as ease of access, portfolio diversification, and transaction transparency make them an attractive option for investors.

However, this investment is not without risks. One of the main challenges of ETFs is the threat they pose to decentralization, a core tenet of digital currencies. By centralizing ETF management under an entity, this principle is somewhat compromised. Therefore, investors should conduct sufficient research and stay informed about the latest news and developments before entering this field