The price of Bitcoin has been soaring ever since the introduction of this premier cryptocurrency by Satoshi Nakamoto in 2009. While this is happening, it’s capturing the interest of investors who want to get into leveraging on profits from the price action of Bitcoin. However, most are wary of the many issues around Bitcoin including its volatility, setting up of wallets and security concerns when managing the asset. It is with the advent of these issues that has led to the entry of Bitcoin ETFs as an investment vehicle into Bitcoin without the direct exposure to the asset.
Definition of Bitcoin ETFs
A Bitcoin ETF fully known as Bitcoin Exchange Traded Fund refers to a situation where investors pool their funds towards the purchase of contracts of an underlying asset or index where in this case the asset will be Bitcoin. You trade on a contract that allows you to leverage on the price action of Bitcoin (of course to make profits) through a traditional stock exchange as opposed to going through the complicated process of trading on a cryptocurrency exchange and handling Bitcoin by yourself. Hence, you buy the Bitcoin ETF through investment firms who manage the asset on your behalf.
There are speculations that an increase in number of Bitcoin ETFs in the US especially among leading investment firms it will lead to further skyrocketing of the Bitcoin price as more people demand to hold the asset indirectly. Other countries in Europe and Canada have more Bitcoin ETFs compared to the United States of America.
How Bitcoin ETFs Work
When purchasing a Bitcoin ETF, you are buying a share of the exchange traded fund which will fluctuate alongside the price of Bitcoin. Therefore, if the price of Bitcoin goes up, so will be the value of your share in the ETF and vice versa. Only this time you are not trading the Bitcoin via an exchange like Binusu or Binance but on the usual market exchange such as the NYSE or TSX.
Advantages of Trading Bitcoin ETFS
Diversification – Purchasing an ETF allows you as an investor to buy more than one asset. It is possible for a Bitcoin ETF to hold other assets such as Apple, or Microsoft stocks on top of having Bitcoin in this one bundle. Therefore, ETFs allows investors to mitigate investment risks as well as diversifying portfolios including already held equity portfolios.
Convenience – Buying a Bitcoin ETF gives investors an opportunity to make profit out of the price of Bitcoin without going through the hassle of managing the cryptocurrency directly either through a crypto exchange or individual wallets. Hence, Bitcoin ETFs simplify the process of buying and investing in the cryptocurrency.
Disadvantages of Trading Bitcoin ETFs
You Don’t Own Bitcoin
Firms allowing you to buy Bitcoin ETFs deny you an opportunity of owning Bitcoin directly. Therefore, you don’t realize the intended benefits of why Bitcoin was introduced by Satoshi Nakamoto, who intended to use the cryptocurrency against the risks prevalent in the traditional financial system. Further, you lose the ability to enjoy privacy associated with interacting with the Bitcoin blockchain. As an investor in Bitcoin, you lose all these benefits because a Bitcoin ETF is regulated by the government something Satoshi wanted to eliminate while designing and introducing Bitcoin.
ETF Price Tracking Inaccuracy
It is true a Bitcoin ETF tracks the price of Bitcoin as traded in the primary market. However, because it’s a fund with a bundle comprising of other assets, the ETF may not reflect the accurate price action of Bitcoin because it reflects the value of the entire holding.
EFT issuing firms normally charge management fees to compensate for the convenience they extend to investors. Therefore, owning a huge number of shares in Bitcoin ETF attracts huge management fees especially over the long term. This is contrary to owning Bitcoin directly where you do not attract any management fee.
Denial to Participate in Cryptocurrency Trading
Owning a Bitcoin ETF limits your ability to trade with other cryptocurrencies because it is just an investment fund interested only in tracking the price of Bitcoin. Contrastingly, owning Bitcoin directly and some knowledge about trading you can explore other income generating activities like trading Bitcoin against or for other cryptocurrencies like Ether, Bitcoin Cash, XRP among others.
Impacts of Bitcoin ETF on the market
Discussions around possible Bitcoin ETF approval in the US has drawn a lot of interest in the cryptocurrency leading to increased demand which has further shot the price to $37k at the time of this writing. Institutional investors who find buying Bitcoin directly as risky are willing to jump in if there is an ETF approval by US authorities. Research shows that in the event there is a Bitcoin ETF approval, it will attract $14 billion into the crypto market within the first year. Owing to this surge in demand against a constant supply of 21 million Bitcoin to be ever produced, it will push the price to at least $125K by the year 2025. Therefore, it is a monumental phase for the crypto ecosystem as we await the Bitcoin ETF approval.
Not only in terms of the price, as the Bitcoin ETF is expected to lead to an improvement of other elements such as increased liquidity, market confidence, increased crypto adoption, market maturity, regulatory clarity, as well as price discovery and transparency.
Ultimately, this is not financial advice, however, it will be interesting to witness the eventual growth of the industry and possibly the much-awaited bull run.
ad the Bitcoin whitepaper you will notice this is a genie already out of bottle, so no need to be left out!
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