May 05, 2021 - 4 min read
The idea of a Bitcoin ETF has been around since the very beginning of crypto. In theory, an exchange-traded fund that tracked the value of Bitcoin would allow investors to gain exposure to digital assets without the complexity of using a crypto exchange or to deal with direct ownership of the private keys.
That’s why the announcement of the first true BTC ETF — which was released in February of this year — is such a big deal for those looking for advanced ways of managing digital assets. And also why we thought we’d take the opportunity for a deeper look at Bitcoin ETFs. In this article, we’ll look at what ETFs are, why a Bitcoin ETF is such a big deal, and what the launch of the first fund means for the industry.
First, let’s get some definitions out of the way. An Exchange-Traded Fund or ETF is an investment fund that tracks the price of an underlying asset or index. These funds are popular among novice or risk-averse investors because those that track broad-based indexes (such as the S&P 500, for instance) provide automatic diversification at a relatively low price.
According to London-based investor Alex Williams of Hosting Data, Exchange-traded funds are similar to stocks, so your minimum investment level is whatever you pay for a share.
Today, a huge range of ETFs are available. You can buy into an ETF that tracks almost anything, from the average share price in a particular industry to the exchange value of a foreign currency to the price of a commodity. In theory, a Bitcoin ETF would work in the same way — the price of one share of a BTC ETF would fluctuate with the price of BTC. However, unlike BTC, a BTC ETF would trade on a traditional stock exchange, rather than on a crypto exchange.
There are a number of reasons why a BTC ETF has been hotly anticipated. At the most basic level, a BTC ETF would make investing in Bitcoin easier for traditional investors — both institutional and individual. This, in turn, would drive inward investment into BTC, driving both price and stability increases.
Secondly, a bitcoin ETF could combine BTC holdings with those of other stocks — Apple stocks, Facebook stocks, or even an all-stock portfolio. This would allow investors to take advantage of some of the price increase in BTC over the past few years, but to do so with less risk exposure than would be the case if they were just invested in BTC. Investors would also likely benefit from the tax efficiency granted to ETFs.
Given these clear advantages, it’s no surprise that there have been many attempts to found BTC ETFs over the past few years. However, there is a strict and relatively rigorous process to found an ETF in the USA, and one that involves securing the approval of the Securities and Exchange Commission (SEC). Up until now, the SEC has blocked the formation of these funds, because they believe BTC to be insufficiently regulated.
So if the SEC won’t allow BTC ETFs to appear on the US stock market, how has one been launched?
Well, that’s the strange aspect of this story. The first BTC ETF named the Purpose Bitcoin ETF (ticker BTCC), wasn’t launched in the USA, which is by far the largest BTC market. Nor did it appear in Europe, where similar exchange-traded products have already attracted about $6.5 billion in assets. Actually, it launched in Canada. That might come as a slight anti-climax for some. Though certainly a coup for Canada, the assets represented in the fund are tiny in comparison to similar funds in the US.
Take a broader view, though, and you’ll see that the news is very exciting. Canada’s stock market regulation is not that much different from that in the US, and if a BTC ETF can be proved effective and stable in Canada, this could pave the way for a similar fund to open in the USA. As a company that provides digital asset management solutions, we find that news pretty exciting, because it could also allow BTC ETFs to grow into a multi-trillion dollar industry. This will make it easier for mass adoption of crypto thanks to the lower barriers to entry.
The main question then is how to structure ETFs so that they can help cryptocurrencies to achieve that mass adoption. You’ll be able to see how that might work in the second article of the ETF series, next week on our blog.