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Bitcoin ETF, a turning point for the crypto industry?

Updated: Feb 6


The author Radim Nakládal of the article: "Bitcoin ETF, a turning point for the crypto industry?".


Author: Radim Nakládal Publication date: 18.09.2023





A significant number of individuals are interested in cryptocurrencies. They continue to view buying Bitcoin through a cryptocurrency exchange as a daunting and unclear procedure. Especially complexities of Bitcoin ownership, which include crypto wallets, Bitcoin addresses, and private keys.


These complexities have the potential to discourage certain investors and create barriers for newcomers. Actually, the main reason why this happens is because these intricacies often pose challenges and uncertainties. A spot Bitcoin ETF would enable traditional investors to access the digital asset's potential without owning it directly. So, the emergence of a spot Bitcoin ETF paves the way for an investment product that investors have been demanding for years.


For these reasons, in this article, we will focus on what ETFs are, how they work, what the implementation of a Bitcoin ETF could look like. Furthermore, we will delve into the impact and significance that spot Bitcoin ETFs are poised to have on the crypto industry.


What is an ETF?

An ETF is a combined investment security. It is designed to mirror specific assets like an index, sector, or commodity. Exchange-traded funds can be customised to track the value of individual commodities or a broad range of securities.


Because ETFs contain various assets, they are often chosen for portfolio diversification. They can hold hundreds or thousands of stocks across different industries, or they can focus on a specific sector. ETFs can also mimic unique investment strategies.

Understanding Bitcoin ETFs

These funds are bought and sold on stock exchanges, similar to regular stocks. This provides investors with a convenient way to access their benefits.


In addition, an ETF is a marketable security. This means it has a share price, making it easy to buy and sell on exchanges throughout the day. It can also be sold short.


In the United States, most ETFs are structured as open-ended funds. They are subject to the Investment Company Act of 1940, except when subsequent rules have altered their regulatory requirements. Open-end funds do not have a limit on the number of investors who can participate in the product.


Understanding Bitcoin ETFs

The idea of a Bitcoin ETF first emerged as bitcoin prices rose and its popularity grew among investors and brokers. This was driven by the potential to profit from buying and selling bitcoin.


A Bitcoin ETF is essentially a fund that includes bitcoin or assets linked to its price. These funds are traded on traditional exchanges, not cryptocurrency exchanges. The process involves a company purchasing bitcoin, turning it into securities, and then trading them on an exchange.


Despite these concepts, the Security and Exchange Commission (SEC) has consistently denied such ETF proposals. As a result, there's currently no cryptocurrency ETF that directly represents a specific underlying coin.


Security

When purchasing cryptocurrency through an exchange, you have the option to store your keys on that exchange if it provides that feature.


However, both wallets and exchanges are vulnerable to hacking, resulting in key theft and potential cryptocurrency loss. Various techniques exist for offline key storage, yet none can promise absolute security.


Unlike direct ownership, an ETF eliminates the need for personal cryptocurrency ownership. It also removes the requirements for secure key storage or transferring keys between different storage methods. Instead, owning ETF shares shifts the responsibility of key storage risks.


ETFs are Better Understood

ETFs are Better Understood

Perhaps most importantly, ETFs are widely understood across the investment landscape, unlike the increasing complexity of cryptocurrencies. While digital coins gain popularity, they also grow more intricate.


If your interest lies solely in digital currency investing, an ETF enables you to concentrate on a familiar asset. By choosing this method, you can avoid getting involved in complex subjects. These include blockchain, mining, decentralised exchanges, distributed ledgers, key storage, and cryptocurrencies.


This allows you to focus on other aspects of digital currency investing. Additionally, you would have to navigate unclear regulations regarding cryptocurrencies. Managing tax filings for capital gains arising from Bitcoin sales would also be a challenge that requires attention.


Why is the Bitcoin ETF so important for the crypto industry?

A Bitcoin ETF eliminates concerns about private keys, storage, and security for investors. They possess ETF shares similar to stocks, offering cryptocurrency market exposure without the complexities of buying and holding crypto. This straightforward approach is highly attractive to both everyday individuals and sophisticated institutional investors.


In the U.S., major financial firms like Blackrock, Fidelity, and Invesco have applied to the U.S. Securities and Exchange Commission (SEC) for ETF launches. Nonetheless, as of August 2023, the SEC has not approved a Bitcoin ETF.


All about Bitcoin ETF

Investing in cryptocurrencies is highly risky and speculative. Yet it is an opportunity to generate returns from buying and selling bitcoin. Considering the legal challenges faced by many of those exchanges, an ETF might limit investors' vulnerability to fraud or legal actions.


Long story short the approval of Bitcoin ETF would basically mean a significant jump in demand, thus in time driving the price possibly to new heights. Considering the approach of the SEC, which is entirely negative, and the approach of the public and institutions, where there is clearly a great deal of interest.


The question isn’t if spot bitcoin ETFs will be approved but when. That may take some time. This is an important historical moment in the adoption process for bitcoin and crypto industry in general.


 

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