What is a bitcoin-ETF?

1. What is an ETF?

An Exchange Traded Fund (ETF) is an index fund whose shares are traded on an exchange.

In fact, an ETF is a type of security that acts as a certificate for a portfolio of stocks, bonds, commodities or cryptocurrencies.
The price of this security follows an index based on certain underlying assets.

In the US, in order to register an ETF fund, an ETF provider submits an application to the Securities and Exchange Commission (SEC). The SEC classifies the shares of such funds as securities.

2. How is an ETF different from an investment fund?

Unlike an investment fund (such as a mutual fund), an ETF can be traded in the same way as a stock in an exchange trade. Thus, transactions in ETF shares can be carried out throughout the trading day and their price can vary depending on the supply and demand ratio and on the activity of market participants.

ETF shares are usually more liquid than investment fund units. The latter are usually traded in the country of fund’s establishment. However, exchange-traded investment funds may be traded on foreign exchanges. ETFs may also be traded on margin.

Since an ETF is traded like a stock, it does not calculate the daily net asset value, as is the case with an investment fund. Also note that the market value of such assets may be higher or lower than the net asset value.

Net Asset Value (NAV) is the price per share of an investment fund or ETF. The per share value of a fund is calculated by dividing the total value of all securities in its portfolio (less all liabilities) by the number of such assets outstanding.

3. Why are crypto-enthusiasts paying attention to ETFs?

ETFs are a more or less familiar instrument to members of the world of traditional finance. The popularity of such products grows year after year.

To invest in bitcoin ETFs, market participants don’t need to have a wallet, register on a digital asset exchange, worry about safe custody of funds, etc. Also, investors are not exposed to the risks of hacking trading platforms, fraud by dishonest exchange owners, and phishing attacks. Consequently, these instruments may be of interest to traditional investors who do not want to delve into technical aspects.

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There is an opinion that bitcoin-ETFs will certainly attract large investments to the cryptocurrency market, and this will contribute to the growth of its capitalization, as well as the massive adoption of new assets.

For example, Ari Paul, co-founder of cryptocurrency hedge fund BlockTower, is convinced that the influx of institutional investors will be the main driver of the next mid-term bitcoin price rally. According to Paul, the main barrier preventing big investors from entering the industry is the lack of reliable storage solutions for digital assets aimed at market whales.

IronWood CEO Michael Stratton is confident that if the SEC approves a cryptocurrency-based ETF, large investment firms and funds, including Fidelity and Ameriprise Financial, will certainly enter this market.

4. Why are some against bitcoin ETFs?

Many prominent members of the crypto industry are skeptical of exchange traded funds.

For example, Ton Weiss, a prominent trader and analyst in the crypto community, argues that the price of bitcoin won’t necessarily rise once an ETF based on it is launched.

Bitcoin evangelist Andreas Antonopoulos calls such funds a “terrible idea.” He says ETFs will make the cryptocurrency market more centralized and susceptible to aggressive manipulation by institutional investors.

Bitcoin ETFs were also criticized by renowned cryptographer Nick Szabo. He believes there may be more harm than good from such funds.

“I’m not lobbying for ETFs. They can create more problems than value. The recent bitcoin sell-offs have thrown out or will soon throw a lot of ignoramuses out of the market. We don’t need new ones in their place,” Sabo stresses.

Ethereum creator Vitalik Buterin is convinced that the crypto industry needs practical and useful applications rather than exchange-traded funds.

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5. Which companies are seeking to launch bitcoin ETFs?

VanEck, SolidX, and CBOE have been making significant recent efforts to launch bitcoin-based ETFs. In particular, these companies regularly try to convince the SEC that the market is ready for such financial products.

VanEck is creating the MVIS Bitcoin US OTC Spot Index based on bitcoin price data supplied by cryptodialers Genesis Trading, Cumberland and Circle Trade. The company plans to leverage this index into a bitcoin-ETF.

CBOE plans to launch six ETFs at once. Their distinctive feature is futures as the underlying asset.

However, the conservative SEC is in no hurry to approve applications to open bitcoin ETFs.
According to officials, bitcoin is highly susceptible to market manipulation.

At the end of August, for example, the SEC rejected applications to open the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF. At the same time, the agency rejected several applications from Direxion and GraniteShares. Shortly before that, in July, the SEC rejected the Winklevoss Brothers’ second application to launch a bitcoin ETF.

This fall, BlackRock also postponed its ETF launch “until a better time. Their representatives said they would not offer exchange-traded products to clients until they saw that the industry had matured enough. Shortly before that, Barry Silbert’s Grayscale Investments withdrew its application to launch an exchange-traded fund.

6. What is ETP?

An ETP (Exchange Traded Product) is a financial instrument traded on a securities exchange. It tracks the growth of a particular underlying index, which may be based on stocks, commodities, derivatives or cryptocurrencies.

The ETF discussed above is a type of exchange-traded product. The ETP category also includes:

  • Closed-End Funds. They are publicly traded investment companies and are listed on the stock exchange as stocks. Such funds raise the necessary amount of capital only once by means of IPO, by issuing a fixed number of units.
  • Exchange-traded derivative contracts – standardized derivatives, such as futures and options, traded on organized exchanges.
  • Exchange Traded Notes (ETNs), which are debt securities by their nature. Exchange-traded certificates (Exchange-traded certificates) and Exchange-traded currencies/commodities (ETCs) also fall into this category.
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An example of an exchange-traded product is Amun Crypto Basket ETP. The instrument under the ticker HODL5 is based on an index based on several of the most liquid cryptocurrencies, weighted by their market capitalization. It is noteworthy that soon after its launch, this product became the leader in terms of trading volume on SIX Swiss Exchange.

7. What is an ETN?

ETNs (Exchange Traded Notes) are unsecured debentures whose value is linked to the price of some asset (a basket of stocks, bonds, commodity futures or cryptocurrencies).

One of the factors that affects the value of ETNs is the credit rating of the company issuing such instruments. In other words, the price of an exchange-traded note can fall due to a decrease in the issuer’s credit rating, even if there is no change in the underlying index.

ETNs are also traded on an exchange, but their main difference from ETFs is that the note issuer is not required to buy and hold any assets to track the price of the index. The main risk with notes is the possibility of the issuer defaulting.

Some ETNs follow a given index “leveraged”. This means that the issuer commits to pay a multiple of the index up or down.

An example of such instruments in the context of the cryptocurrency market is the bitcoin exchange-traded notes from the Swedish company XBT Provider, which allow you to invest in a basket of 5 or 10 assets.

In August, USD-linked bitcoin exchange-traded notes appeared on the Nasdaq Stockholm listing. However, these ETNs fell foul of the SEC, which felt that XBT Provider was sowing confusion with the terminology. The SEC ordered the suspension of trading in these instruments on the U.S. market.

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