Let’s understand what an ETF is ?
Exchange Traded Funds are a type of investment and are traded on a Securities Exchange. An ETF can either be a single asset, currency or commodity or it can be a mixture of assets,stocks, commodities, etc. It can be traded throughout the day (until the market is open) and can be easily bought and sold. The price of the ETF will go up and down in the same way as it would go of any stock in the exchange depending on demand and supply. ETF is highly liquid and the feature that it can be traded throughout the day, makes it different from a Mutual Fund. Mutual Funds are not traded on an exchange and their value changes only once per day after the markets close. In short you can say an ETF is the best of both the world’s, it has features of a stock as well as of Mutual Funds.
Now Let’s come to Bitcoin ETFs.
It is an ETF in which the underlying asset is Bitcoin, i.e. the value of the ETF will be dependent on bitcoin. The Fund will mirror the price of Bitcoin, any rise and fall in the price of BTC will directly change its price.
If you are an investor who is attracted by the lucrative volatility in Bitcoin, but you do not want to go through the complex procedures of creating a wallet,storage and security issues, Bitcoin ETF is for you. Apart from this another added feature is that if you predict that the price of BTC is going to fall, you can even short sell ETFs. You cannot short sell an actual Bitcoin.
Why is it in the news ?
Crypto ETF’s have already come up in UK and Canada earlier this year. But never got a go ahead in the U.S. More than 10-15 asset managers have applied for Bitcoin ETF Funds to the U.S. Securities and Exchange Commission (SEC) since the last 7-8 years. They were rejected each time. Historically the SEC has finally given a nod to ProShares and they will be launching the first ever Bitcoin ETF by the name “BITO”. It will make its debut on Tuesday 19th October, 2021 on the New York Stock Exchange with a 75 day period during which the SEC could object to its listing. Not only this a majority of other ETFs are lined up in the coming weeks.
ProShares will be launching a Futures based ETF i.e. it will replicate the value of Bitcoin Futures contract.
Confusing! Confusing! Confusing! Right-
The ETF launched by ProShares will not directly be betting on Bitcoin. It will be dependent on Bitcoin Futures whose value is in turn dependent on the actual price of Bitcoin.
A Futures contract is an agreement to buy or sell an asset or a commodity, at a price fixed before in a specified time period. The buyer of a futures contract takes the obligation of paying the specified amount and taking the underlying asset, when the contract expires. The seller takes the obligation to provide and deliver the asset on expiry of the said contract.
Futures contract are used as a hedging tool. Lets take an example in Bitcoin to understand better-
Say the price of BTC currently is $60k and you assume the price to go up say before the end of October,2021.
You can enter in a futures contract at $60k. On expiry i.e 30th October whatever maybe the price of BTC, you have the obligation to buy it at $60k. Say the price of BTC goes up to $70k, you will just have to pay $60k to buy BTC. Whereas if the price goes down to say $55k, you will still have to buy BTC at $60k as per the contract.
So we can say here that U.S. SEC has played it smart here, they are about to list a fund which will not directly trade into Bitcoin but into Bitcoin Futures. Analysts have predicted that this may not get any major changes in the spot price of BTC. But the bulls are looking to en-cash on the positive sentiments of the market and we have already seen a 40% rise in October, with BTC trading almost near its all time high. With more and more cash flow increasing in funds like these, it will create a buying pressure in the market and in turn will lead to increase in the prices of BTC. The Nasdaq has also approved the listing of Valkyrie Bitcoin Strategy ETF. Grayscale owned by Michael Saylor is also planning to convert its Grayscale Bitcoin Trust to spot ETF.
Should you invest in a Bitcoin ETF ?
Lets go back in time to understand this. In 2013 when for the first time Cameron and Tyler Winklevoss had proposed for an ETf like fund, at that time Bitcoin was quite new. People were not aware about the procedures of how to buy or store a Bitcoin. Back then there were no user friendly exchanges, you had to go through complex procedures for buying and storing bitcoin. Retail investors were also worried about the security, transaction charges were high and there was no certainty about the concept of Bitcoin, hence people were easily fooled. Infact I had a friend who bought BTC at $1500 in 2013 when the price was close to $950 as someone fooled him into buying saying this is a premium Bitcoin😅. I laughed at him then and I laugh at him today as he sold that coin for mere $600. Anyways coming back to the topic, do you think we have these issues in the current day ? No right you can just download the app of an exchange like CoinDCX and at the tap of a few fingers you can checkout the prices and place your buy order and even sell it back in a few seconds! Infact the transaction charges now are also minimal as compared to investing in an ETF. An ETF will charge you around 1% annual fees. So if you are investing $100, you will end up paying $1 just as the transaction fees.
Concluding this I would say Bitcoin Futures ETF is a good bullish news for the Crypto World, indirectly cash is going to flow in and boost investment in Bitcoin. But if you are not one of those old school people who just trades funds of the securities exchange, I’d suggest you go the direct way and invest in Bitcoin 😉