Bitcoin Exchange-Traded Fund (ETF)

This article will look at something slightly different to normal, the much talked about Bitcoin ETF. Let us know if you enjoy this type of content and want more?

INTRODUCTION

There are 1000s of ETFs, but we are yet to see one for Bitcoin, this is because it requires approval from the U.S. Securities and Exchange Commission (SEC) and they have so far rejected any that have been proposed. So let’s get started in trying to understand what an ETF is and why it is or isn’t, important for the crypto space. An ETF has some similarities with a mutual fund, it is a ‘basket’ of different stocks, shares, commodities etc, but unlike a mutual fund, it can be traded like a stock. So one example may be a precious metal ETF, in this case, a variety of precious metals will be purchased by the fund, then split into shares and these shares are then traded. The price of the shares is very closely tied to the price of the underlying commodities in the ETF. So if the price of precious metals rises, the price of the ETF should also rise. If the ETF can be approved then it is also likely that leveraged positions will be accepted mean investors can invest multiple amounts of their capital with higher risk.

CUSTODY

One thing that may be holding back the growth of Bitcoin and Cryptocurrencies is the difficulty in purchasing and trading them. It isn’t difficult to more experienced people in this space, however, the prospect of buying and holding an asset that can disappear if you lose the key or transfer to the wrong address can be daunting. You can buy and hold Bitcoin on more secure exchanges such as Coinbase, but exchanges have been prone to hacks in the past and just because an exchange is secure doesn’t mean it’s impossible. An ETF could go some way to dealing with these concerns as they would act as the custodian of the Bitcoin so the investor wouldn’t have to deal with the Bitcoin directly. Furthermore, the shares that you hold are insured, so if the ETF’s fund is hacked, your money is guaranteed. This is appealing for people who want to invest and hold Bitcoin but aren’t concerned with holding the Bitcoin themselves.

TAX

The taxation situation in the crypto space is confusing and can cause some problems if you aren’t careful. Certain jurisdictions tax you on each trade, which can be disastrous for some high-volume traders. ETFs are taxed only on the profit made when the shares are sold, this helps to provide a simpler, more transparent taxation system. We are not tax experts so this shouldn’t be taken as advice in any way, just our view of the system.

ARBITRAGE

ETFs use a clever system to keep the baskets price closely aligned to the price of Bitcoin. The ETF is constantly traded so any trader can see when the Bitcoin price moves away from the price of the ETF there is an opportunity to make money. If the Bitcoin price were to move by 2% then investors would look to buy the ETF as there is an arbitrage opportunity because the ETF is now 2% lower than the Bitcoin market price, this should cause the price of the ETF to increase as investors see this opportunity. Hopefully, this will help to keep the price of the ETF in line with the underlying price of Bitcoin.

DOES THE ETF MATTER?

Views on the impact of an ETF on the crypto market are varied, some suggest that it could bring us out of a bear market, others remain very bear on the influence that the ETF would have. It seems more sensible to take the mid-ground here. No, the ETF probably isn’t going to make prices go parabolic, however, it is another tool for investing in crypto and if this helps to bring new money into the space, then it seems difficult to imagine that it won’t contribute at all.