A Beginner's Guide to Understanding Bitcoin ETFs

On July 13, 2023, the Securities and Exchange Commission (SEC) added BlackRock's spot Bitcoin ETF (exchange-traded fund) application to its list of proposed rulemaking filings.

This means that the SEC has a list of ideas for new money rules, and they included BlackRock's Bitcoin application for trading on the stock market on that list.

The SEC is a U.S. government agency that regulates the securities markets and protects investors. BlackRock is the biggest asset manager in the world, and their application is for the first-ever spot Bitcoin ETF in the U.S.

What does this mean for the crypto industry, and what exactly does a Bitcoin ETF mean? We explain it all in this article.

What is an ETF?

ETF stands for exchange-traded fund. It's like a big box that holds various financial assets, like stocks, bonds, currencies, futures contracts, or commodities like gold bars. The price of an ETF's shares will change throughout the trading day as the shares are bought and sold on the market.

An ETF can be structured to track anything from the price of an individual asset to a large and diverse collection of securities or assets. ETFs can even be structured to track specific investment strategies.

How does an ETF work?

Imagine the ETF as a big cake. It divides this pie into smaller slices called shares, which are bought by individual investors like you.

When you buy shares of an ETF, you're essentially owning a small piece of that big cake or the assets held in the ETF.

ETFs comprise different types of assets and the details of what they own and how much are listed on the ETF issuer's website. It could be a mix of stocks, bonds, currencies, commodities, or other financial instruments.

What's the benefit of owning ETF shares?

ETFs often provide diversification, which means you're not putting all your money into just one company's stock. Instead, you're spreading your investment across multiple assets, reducing the risk of losing everything if one asset performs poorly.

How do ETF shareholders make money?

As an ETF shareholder, you can earn money in a few ways. One way is through dividends or interest earned by the ETF's assets. So, if the companies in the ETF pay dividends or interest, you'll get a share of those earnings.

What is a Bitcoin ETF?

A Bitcoin ETF is an exchange-traded fund that tracks the price of Bitcoin. Investing in a Bitcoin ETF allows investors to gain exposure to the price of Bitcoin without having to invest in the currency directly. It's essentially a type of investment fund that enables you to buy and sell Bitcoin shares on a stock exchange like you would buy and sell an Amazon or Tesla share.

How Bitcoin ETF Works

A company or financial institution creates a Bitcoin ETF. They purchase Bitcoin on your behalf and hold it in secure storage. In return, they issue shares that represent ownership of the Bitcoin they hold. These shares are listed and traded on traditional stock exchanges, making it easy for investors like you to buy or sell them on the stock exchange market.

However, it's important to note that the performance of the Bitcoin ETF is tied to the price fluctuations of Bitcoin itself.

How does Bitcoin ETF affect cryptocurrency adoption?

The introduction of Bitcoin ETFs can potentially have a few positive effects on adoption:

Accessibility:

ETFs can make it easier for traditional investors to get exposure to Bitcoin without the need to hold and manage cryptocurrencies themselves directly. This accessibility might attract more mainstream investors to dip their toes into the crypto waters.

Trust and legitimacy:

Having regulated ETFs can help build trust and legitimacy around Bitcoin. This, in turn, could encourage more institutional investors and even cautious individuals to consider Bitcoin as a viable investment option.

Market liquidity:

ETFs can potentially increase market liquidity by introducing a new way for investors to trade Bitcoin. Higher liquidity generally leads to smoother market operations and can attract more participants, including those who were hesitant due to limited liquidity.

Can other cryptocurrencies have ETFs?

While Bitcoin is the most well-known cryptocurrency, several other cryptocurrencies could potentially have ETFs as well.

Ethereum, the second-largest cryptocurrency in terms of market capitalization, has been a popular candidate for an ETF. The demand for an Ethereum ETF has been gaining traction, and it could bring similar benefits to those mentioned earlier for Bitcoin ETFs.

Additionally, there have been discussions and proposals for ETFs focused on other cryptocurrencies like Ripple (XRP), Litecoin (LTC), and Bitcoin Cash (BCH). Each of these cryptocurrencies has its unique characteristics and potential for investment products.

However, it's important to keep in mind that the process of establishing cryptocurrency ETFs involves regulatory considerations, approval from financial authorities, and other factors. The specifics may vary from country to country, as regulations differ internationally.

Final Word

As shown by BlackRock's recent application, the potential launch of a Bitcoin ETF represents a significant step towards increased cryptocurrency adoption.

A Bitcoin ETF has the potential to enhance accessibility, build trust, and improve market liquidity, potentially expanding the adoption of cryptocurrencies.  

The more institutions accept cryptocurrency as a true financial asset, the better for the industry and the global economy.

Disclaimer: This article was written by the writer to provide guidance and understanding of cryptocurrency trading. It is not an exhaustive article and should not be taken as financial advice. Obiex will not be held liable for your investment decisions.