- A Bitcoin ETF is an ETF that mimics the price movement of Bitcoin.
- Investing in a Bitcoin ETF provides leverage to the price of Bitcoin without having to learn about how a Bitcoin works.
- Through these ETFs, an investor is able to get exposure to Bitcoin without going through the complicated process of trading Bitcoin.
ETFs are regulated traditional financial products and can be bought through a number of stock broking platforms such as Fidelity, CommSec, etc. The most popular ones track major stock indices, such as the Standard & Poor’s 500 Index, the ASX 200 or other traditional assets and commodities like oil and gold.
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Being a relatively newer asset class, there is not much of an investment vehicle available for investors. However, recently, the emergence of cryptocurrency ETFs, especially those around Bitcoin, have popped up like mushrooms. These Bitcoin ETFs have given an opportunity to Bitcoin investors to invest in Bitcoin without a direct ownership.
The newest investment vehicle for the cryptocurrency market, exchange-traded funds (ETFs), is much more novel. ETFs are open ended, continuously offer shares and can be redeemed for underlying investment. These ETFs have an elastic supply, which can easily accommodate growing demand. This is different from a closed-end fund, which has relatively inelastic supply that can be costly.
A Bitcoin ETF is an exchange-traded fund that has Bitcoin as its underlying asset and specifically tracks the price of the leading Bitcoin, allowing traders to purchase or sell shares of a Bitcoin ETF on a stock exchange throughout the day. They can either be cash settled or physically settled, meaning investors will receive either actual Bitcoin or fiat currency upon liquidating their ETF.
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How does a Bitcoin ETF work?
A Bitcoin ETF is an ETF that mimics the price movement of the largest digital currency by market capitalisation in the world. Through these ETFs, an investor is able to get exposure to Bitcoin without going through the complicated process of trading Bitcoin.
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Moreover, because holders of the ETF won't be directly invested in Bitcoin itself, they will not have to worry about the complex storage and security procedures required for cryptocurrency investors.
Let’s have a look at five key things around Bitcoin ETFs.
An ETF can have more than one asset in its portfolio. For example, a Bitcoin ETF could comprise Bitcoin, along with other cryptocurrencies such as Dogecoin or Ether, providing investors with the opportunity to mitigate risk and diversify their portfolio. Similarly, by trading on a regulated market exchange, a Bitcoin ETF would provide investors with a chance to diversify their existing equity portfolios.
- Tax Efficiency
Given the fact that Bitcoin and the entire cryptocurrency market is unregulated and decentralised, the majority of the world’s tax havens and pension funds do not allow for purchases of Bitcoin. On the other hand, a Bitcoin ETF trading on traditional exchanges would likely be regulated by the SEC and eligible for tax efficiency.
- Limits trading/transacting Bitcoin
Bitcoin can be traded for other cryptocurrencies, like Dogecoin, Ether, Ripple, and more. However, a Bitcoin ETF would not be eligible to trade for other cryptos, as it is not a cryptocurrency but simply an investment fund that has cryptocurrency as its underlying asset.
Investing in a Bitcoin ETF provides leverage to get exposure to Bitcoin without having to learn about the intricacies of it like how Bitcoin works, how to sign up for a cryptocurrency exchange, For example, Bitcoins and other cryptocurrencies are held in a wallet, and if an investor loses the password to the wallet, their Bitcoin is lost forever. A Bitcoin ETF makes it easy and convenient to investing in Bitcoin.
- Management fee
All ETFs usually charge management fees for the for their offerings. Therefore, owning a large number of shares in a Bitcoin ETF could lead to high management fees the long haul.
Who can invest in Bitcoin ETFs?
You don’t need to be an accredited investor in order to purchase Bitcoin ETFs. Anyone can invest in them just like shares of a company. All you need in order to begin investing in a Bitcoin ETF is to set open a brokerage account or download one of the many mobile trading apps. From there, you’ll be able to purchase a wide range of Bitcoin ETFs.