Bitcoin ETFs are a product that allows people to invest in bitcoin without buying bitcoin.
To better explain what appears to be a play on words, it’s best to first understand what an ETF is. ETF stands for Exchange Traded Fund. These are stocks that replicate the value of an underlying asset.
Gold ETFs are very common: large companies buy large amounts of gold, but they don’t trade the gold, they trade ETFs: shares that replicate the price of gold are put on the market, while the actual gold is held and acts as the underlying. This makes gold trading easier.
Bitcoin ETFs work in the same way: the issuer buys a certain amount of Bitcoin as the underlying asset and then issues shares, ETFs, that replicate the value of Bitcoin.
Why do institutional investors want Bitcoin ETFs
Why buy an ETF instead of bitcoin? ETFs are better suited to an institutional audience for a number of reasons. Here are a few:
- ETFs are a regulated market, so consumers/investors are protected;
- ETFs do not need wallets, private keys and security systems to store Bitcoin, which are as useful as they are tricky.
Having said that, the only thing left to understand is why the US SEC has not yet approved Bitcoin ETFs. What worries the Securities and Exchange Commission is Bitcoin’s volatility. These weeks have shown that Bitcoin is able to gain and lose as much as 10-20% of its value in a single day. This prompts the SEC to be very cautious not to harm investors. However, Bitcoin ETFs already exist. For example in neighbouring Canada, where they have been regularly listed for a few months, and also in Brazil.
The entry of institutional investors into the Bitcoin market has increased the demand for specific products more suited to this target group. Bitcoin ETFs meet this need. At a time of particular market hype, when inflation threatens the hold of cash, but when the technological skills are not yet sufficient to buy Bitcoin directly from common exchanges, it is understandable why Bitcoin ETFs are so important. It will remain to be seen whether these motivations will be enough for the SEC to come to a final approval that would lead to the launch of this instrument also in the United States.
The post Bitcoin ETFs, what are they and why are they highly anticipated appeared first on The Cryptonomist.
