What is Bitcoin ETF and why is it important?
The launch of the Bitcoin ETF on the New York Stock Exchange was billed as a great moment for Bitcoin, and the first trading day broke records.
There is a lot we know about this product and enough information we can get from its launch. Why are you excited about new Bitcoin ETFs and why not just buy a Bitcoin?
Here, we stop the hype to take a clearer look at what all this means.
What exactly is this new product?
Before discussing the product, itself, we must analyze a few key terms.
An ETF, or Exchange Traded Fund, is a financialinstrument designed for trading on the stock exchange. It is a mutual fund that owns an underlying asset, which is useful because it allows investors to engage in a specific market (in this case Bitcoin) without having to buy the asset directly.
As you can guess at the time, part of the appeal of the Bitcoin ETF is that it allows institutional investors who do not want the hassle to buy and store their own Bitcoin, to get into the action.
It is important to start by clarifying a key point: the Bitcoin Futures ETF does not invest directly in Bitcoin instead, it invests in bitcoin futures. Let’s analyze it in more detail.
Features ETFs: Betting on a bet
Some types of ETFs are directly supported by an underlying asset. These are known as spot ETFs. The Canadian ETF Bitcoin Spot, for example, is backed by the real Bitcoin. However, the Bitcoin fund recently launched in the US was a Futures ETF, and this is a completely different behemoth.
ETF futures do not directly track the underlying commodity, instead they are backed by futures contracts associated with that commodity.
What is a futures contract?
Let’s say, for example, that John agrees to sell Rachel a barrel of oil in six months for $1000 — Rachel believes that by then, the barrel will be trading for more, and she has just gained an advantage for herself. Meanwhile, John thinks he knows something Rachel doesn’t know, that he is sure that the oil market is going to collapse, so he just closed a good price for his barrel in a bad market and he is happy.
The point is that both parties base their price on the future of the market and how they feel about it. So, a futures ETF doesn’t really track its underlying asset very accurately, it tracks market sentiment about that asset, which can tell a completely different story.
What does this mean for Bitcoin futures ETFs?
So, let’s get back to the main story. The new Bitcoin product is a Bitcoin Futures ETF, which means that it invests in futures, but not in Bitcoin itself.
For those who are into crypto and are curious institutional investors, this can be an exciting new product, but what they really invest in is regulated futures, not Bitcoin.
Why does the Bitcoin ETF cause so much interest?
If you are already in the world of cryptocurrencies, you may be wondering why the Bitcoin Futures ETF caused so much publicity. As the OG of cryptocurrency, Bitcoin’s number one premise was to provide an alternative to centralized funding.
However, the product caused a sensation when it was launched through a central platform! Why?! There are a few reasons to answer this.
First let’s learn about the story behind this evolution. Proshares’ Bitcoin Strategy ETF is not the world’s first ETF. Some countries, including Canada, already had their own Bitcoin ETFs. However, it is the first ETF to include Bitcoin to reach the New York Stock Exchange.
Approved after extensive efforts
The approval of this fund came after almost a decade of failed applications for a similar product, all of which were shaken by the Securities and Exchange Commission. This was a long-awaited development for both investors and issuers of securities.
The New York Stock Exchange is considered a top
With the NYSE seen as the global epicenter of the economy, it acts as a barometer for new rules. Because of this, Bitcoin ETF’s entry into this arena was described as a kind of “tide surge”, with much of this excitement stemming from the belief that a new wave of Bitcoin institutional acceptance was on the horizon.
Addressed to a new audience
Another reason for the hype was that the new product allows a whole new demographic to have its first interaction with cryptocurrency. What exactly are we talking about? Why not just buy some Bitcoin?
Cryptos are a difficult asset to store and secure, and for many investors, this was enough to deter them from the market. Allowing people to engage through an intimate ecosystem, without worrying about blockchain hacks or private keys, could reach a whole new audience. Their appetite for cryptos was proven by the huge success of their launch.
Ok, now we’ve discussed the key features, limitations, and selling points of the new ETF, let’s take a look at the bigger picture.
What does this mean for Crypto?
Legality has been a key theme in Bitcoin’s history, during which several, to many people have written it off as a scam, a bubble, or simply too volatile to be considered viable. However, the acceptance of a Bitcoin-related product on the world’s leading stock exchange suggests that cryptos have reached a kind of great concept that cannot be ignored, even by the central entities designed to challenge them and be against them (like banks).
Although the Bitcoin Futures ETF won’t really buy you Bitcoin, it suggests that even the central finance giants know it’s here to stay. And that is a very big step.
What can it mean for you?
Well, it depends on your perspective. Are you already using crypto? Then you’re probably comfortable with the blockchain and the idea of self-custody. If that’s the case, the appeal of the new ETF may seem limited.
But if cryptos caught your attention – but concerns about self-custody have come between you and your first foray into the blockchain world – this asset may seem a safe entry point, giving some exposure to the bustling crypto ecosystem without worrying about Complications.
If this sounds familiar to you, just remember that no one starts out as a crypto expert!
But here’s the good news: it’s never been easier to start understanding cryptocurrencies. Looking beyond Bitcoin, cryptocurrency offers a huge range of possibilities that traditional finance simply doesn’t offer from the freedom and high returns of DeFi, to the expanding universe of NFTs and even the socially disruptive potential of DAO, The cryptocurrency market has expanded beyond just holding the coins. Instead, it has become a gateway to new ways of investing, interacting and creating that guarantee changing our rules.
Therefore, if you are considering taking your first steps in crypto and trying to understand your approach, keep in mind that it’s not just about making money. Crypto is the lifeblood of an expanding ecosystem that takes power away from central entities and returns it to people like you and me. And that seems like something worth learning.