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What is a Bitcoin ETF?

While Bitcoin Futures contracts already exist, what is an Exchange Traded Fund (ETF)? Here, we explore what a Bitcoin ETF is, and unpack its difference from a ‘blockchain ETF’.

Written by Bryan Smith Published on

While Bitcoin presently enjoys several Futures markets offered through the likes of CBOE and CME, the pre-eminent cryptocurrency has yet to achieve another financial milestone: inclusion in an Exchange Traded Fund – or ETF.

What is an Exchange Traded Fund (ETF?)

An ETF, simply put, is a marketable security that tracks either an index of funds, a commodity, or a basket of assets.

Rather than serve as something similar to a mutual fund (a professionally managed investment program funded by shareholders that trades in diversified holdings), ETFs trade similarly to a common stock on a stock exchange next to other listed companies or assets – think Microsoft (MSFT), Apple (AAPL), or Gold.

ETFs hence trade similarly to a stock, and do not have a net asset value (NAV) calculated once at the end of every day. However, ETFs enjoy higher liquidity (the degree to which an asset can be quickly bought or sold) and usually employ lower fees than a professionally managed mutual fund.

An ETF owns the underlying assets that comprises the fund (whether that is shares of a stock, gold, or foreign currency) and divides ownership of that asset into shares. As such, shareholders in an ETF do not directly own these assets, but instead do have claim to shares of the ETF itself. Simply put, asset ownership in an ETF is what we call ‘indirect’.

At the bottom line, an ETF can be considered to be a distributed fund that can be traded in portions on a currency exchange. An ETF functions through offering shareholders a denomination of the profits the fund rakes in. Given that the fund’s value is distributed through shares, shareholders can easily buy, sell, or trade shares of the ETF just as they would stocks of a company. Should an ETF be liquidated, shareholders can still retain residual value.

What are blockchain ETFs?

While we’ve yet to see a major Bitcoin ETF, there are already several ‘blockchain ETFs’ that have arrived on the market.

However, a notable distinction is that so-called ‘blockchain ETFs’ do not invest in actual blockchain-based cryptocurrencies or altcoins, but instead invest in companies involved with blockchain technology – regardless of whether the firm is a startup creating new fundamentals with blockchain technology, or an older firm introducing blockchain technology to its core practices.

Blockchain ETFs are seen to be a more ‘stable’ form of investment compared to Bitcoin ETFs, given that the former does not precisely track Bitcoin’s market volatility and is instead invested in the performance of companies themselves.

So, what are Bitcoin ETFs?

While several Bitcoin ETFs have been proposed, we have yet to see one accepted by the United States Securities and Exchange Commission (SEC).

Chiefly, a Bitcoin ETF would purchase an underlying amount of actual Bitcoin and distribute those funds into shares, distributed to shareholders.

Many proposed Bitcoin ETFs have proposed tracking the price of Bitcoin through Futures contracts rather than through the listed price of Bitcoin on cryptocurrency exchanges. Other proposals may, in time, invite the idea of tracking Bitcoin’s price through other indices.

At the time of writing, the SEC has rejected most proposals for Bitcoin ETFs given issues with liquidity and valuations. Principally, the SEC has argued that the trading volumes and liquidity on Bitcoin Futures contracts are too low to serve as a Bitcoin price indicator, given that Bitcoin Futures contracts themselves follow spot prices on Bitcoin and cryptocurrency exchanges.

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Written by

South African technology journalist, podcaster, photographer and filmmaker. Hodling - BTC, NEO, ETH.@bryansmithsa

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