BITCOIN ETF – EVERYTHING YOU NEED TO KNOW

Bitcoin ETF’s or BTC ETF are the talk of the town, while all wait for SEC decision, the delay has caused turbulence in the market. Funny it may sound, but its quite similar to childbirth, ‘to-be-parents’ wait for the right time for the announcement and are excited to hold him and nurture him and turn him/her to be the best human being on this earth. In cryptosphere, to-be-parents or traders are waiting for SEC announcement while they dream of holding the instrument and get the best returns. Alas, everything is THE BEST in dream world…

So while we wait for SEC to announce, let’s take a deep dive to know more about Bitcoin ETF’s.

What is a Bitcoin ETF?

If you are new to investment domain, first let’s understand what an ETF or Exchange Traded Fund is.

What is an ETF?

As Investopedia says – An ETF, or exchange-traded fund, is marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold.

In laymen terms think of a basket[FUND] with many single stocks or bonds[may be tens, hundreds, thousands] into it.  Now trade[TRADE] this basket throughout the day on the listed exchange[EXCHANGE]. So that’s what is an EXCHANGE TRADED FUND.

Owning an ETF would help you in diversifying an index fund and with an ability to sell short, purchase a minimum of one share and buy on margin. When compared to mutual funds, it also offers lower expense ratios than the average mutual funds.

If you are further inclined to know how it works, check Bloomberg interactive explanation.

Jumping to Bitcoin ETF, it’s a collaboration between the two most attractive and mystical world. ETF’s are one of the most popular instruments amongst investors, and so is the Bitcoin in the cryptocurrency community.

The Bitcoin ETF would be again a basket of stocks, but here the stock/bond could be replaced with either PHYSICAL BITCOIN or BITCOIN DERIVATIVES. So we would have two flavors –

  1. ETF’s that hold Bitcoin – Authorised Participants/AP could send a basket of cash [so that they are not under an obligation of holding Bitcoin]/ Bitcoin to the ETF provider. The provider trades the Bitcoin with the cash provided and returns ETF shares to AP of equal value and fewer transaction fees.
  2. ETF’s that purchase Bitcoin Derivatives – Here the basket does not hold the Bitcoin, in fact, they try to mimic the performance of the Bitcoin by trading Bitcoin swaps, Bitcoin options, Bitcoin futures and other pooled instruments.
ETF Flavour Benefits Cons/Risks/Concerns Examples
ETF’s that hold Bitcoin 1.       Low transaction costs to trade ETF’s on the market when compared to high fees applied by exchanges to trade between Bitcoin and fiat.

2.       As the underlying asset is Bitcoin the AP’s could track Bitcoin price movement and take advantage of arbitrage

1.       As the Bitcoin would be in possession of ETF provider and not AP, there is a counterparty risk

2.       While the exchange has a closing time, Bitcoin market id running all the time. Prices may fall or rise during the closed market time, and traders may not be able to mitigate losses during off hours.

3.       As the Bitcoin market is volatile the need to measure intraday NAV is required. But in exchanges, ETF’s NAV is calculated once per day. Hence an inaccurate NAV that’s is also the basis of redemption may break the arbitrage mechanism.

VANECK SOLIDX BITCOIN TRUST. To read more about it, click here.
ETF’s that purchase Bitcoin Derivatives 1.       With no custody of Bitcoin, no counterparty risk 1.       Following types of risk are associated with the ETF –

a.Margin Call Risk

b.Leveraged Trading Risk

c. Rollover Risk

d.Active Management Risk

 

 

1.      VanEck Vectors Bitcoin ETF. To know more about them, click here.

 

Are Bitcoin ETF’s a good thing?

Well, that’s the debate. Experts are divided and have their own set of arguments.

Andreas M. Antonopoulos, the author of The Internet of Money and the seminal Mastering Bitcoin, believes bitcoin exchange-traded funds (ETFs) are “a terrible idea.”

His first concern is over the price manipulation and second with centralization. While the commodity trading within the ETF mechanism is subjected to global price changes, and with bitcoin being part of it may affect its pricing as well. On Centralization, he says as fund manager now becomes the gatekeeper, a centralized office through which governance can be impacted disproportionately.

On the other hand, Hougan from Bitwise who believes the introduction of bitcoin ETFs is the prospect of institutional capital is a good thing. He says – “Better access means better price discovery and everything that gets us down that road, whether it’s the launch of futures of launch of an ETF, is a good thing.” Talking in similar lines was Joshua Gnaizda, founder at Crypto Fund Research, he stats – Bitcoin ETFs will purchase Bitcoin on exchanges, thereby directly increasing demand for bitcoin as long as the fund has net inflows. I would expect net inflows for short to medium term at least since there will be little competition and there is much unmet institutional demand.”

References

Hackernoon, News Bitcoin, Investopedia