The entry of more and more investment companies and the wealthy, the legal status of bitcoin as an asset and the consequent rise in bitcoin prices; These can be the benefits of a Bitcoin ETF. On the other side of the coin, this phenomenon has its own challenges and disadvantages.
Now that the ETF, or the Stock Exchange, has been listed on the Stock Exchange for the first time in the United States in 2021, in this article we intend to answer the following questions in a comprehensive and simple way by answering the following questions:
- What is a Bitcoin ETF and how does it work?
- What are the advantages and disadvantages of Bitcoin ETF?
- What is the effect of accepting Bitcoin ETF on price?
What is a traditional ETF?
Before we move on to the Bitcoin ETF, let’s take a step back and see what an ETF is.
Tradable box An exchange-traded fund, or ETF for short, is a fund in which one or more assets are available and individuals can invest in the assets of their choice by purchasing shares in that fund.
ETF stocks are traded through the stock exchange and traded like a common stock; Therefore, it is official and in accordance with the rules of the stock exchange of a country.
Today, there are ETFs for very important and practical assets such as gold and oil, and they are traded daily on the stock exchanges of different countries of the world.
Investors who buy an ETF stake can invest in it without having to go through complicated buying processes and without experiencing the risk of holding an asset.
For example, if you buy an ETF of gold, you have invested in gold without having any real gold.
What is a Bitcoin ETF?
Simply put, a bitcoin ETF is a fund that contains a large amount of real bitcoins or is tied to the bitcoin futures market (depending on the type of fund). Individuals and legal entities can trade Bitcoin ETF shares as a share on the stock exchange. The fund’s stock price goes up and down based on the price of bitcoin.
Bitcoin ETF shares are traded on exchanges instead of digital currency exchanges. Obviously, transactions take place only at a time when a country’s stock exchange is open.
In general, there are two types of exchange traded funds for bitcoin:
- Physical ETF: This type of fund is fully supported with real bitcoin; The big risk is that it is very difficult to maintain real bitcoins (in large volumes).
- Future ETFs (Futures): This type of fund is not directly supported by Bitcoin; Rather, it uses the futures market. A full description of futures contracts is not included in this article; But just know that real bitcoin is not stored in it and only with the price of bitcoin the stock value goes up and down. Bitcoin ETFs that are to be accepted in the United States are of this type.
Why not buy Bitcoin itself?
One of the main questions that can be asked about the Bitcoin Exchange Fund is exactly what advantage the Bitcoin ETF has for the investor that makes someone buy the stock exchange instead of buying the Bitcoin itself. It may be better for a typical investor to buy his own bitcoin; But for Wealthy people or investment companies, Buying an ETF share is an extraordinary opportunity; For the following reasons:
Legal recognition of the ETF
A Bitcoin ETF is recognized by regulators. If you are a large organization and you are worried about buying Bitcoin directly for legal reasons, you can invest in its stock exchange to be covered and supported by legislators. In the United States, for example, the Securities and Exchange Commission (SEC) is directly responsible for protecting ETF investors from multiple market risks.
It is also possible to inherit an ETF under securities laws, which is a unique advantage for those who are worried about the fate of their bitcoins after death.
Ease of investment and maintenance
For someone who has worked in the stock market, entering the world of digital currencies seems complicated. Such a person can buy the fund’s share as a normal share in the stock market to invest in Bitcoin.
If you are a wealthy person and you want to buy a lot of bitcoins, you may be worried about keeping the bitcoins safe as well as the liquidity challenge. In this case, it might make sense to buy an ETF share instead of the real bitcoin.
Discount or tax exemption
In most countries, ETFs include tax exemptions or rebates. It is dangerous for an investor who has a lot of bitcoins to fall into the hands of the tax authorities and may prefer to buy it instead of the actual ETF bitcoin.
Diversification to the investment portfolio
In a stock exchange, in addition to bitcoin, it may be invested in other assets such as corporate stocks or gold; Therefore, a person holding a share of an ETF can benefit from the benefits of all the assets in the fund at the same time.
In fact, investing in an ETF is one of the best ways to help you get the idea: “Don’t put all your eggs in one basket.”
What effect does ETF acceptance have on the price of bitcoin?
The adoption of the ETF for Bitcoin (especially in the United States as the world’s largest capital market) has always been cited as one of the factors that can push the price of the king of digital currencies to the “moon”.
From 2013 to 2021, the US Stock Exchange Commission rejected several requests from large companies to establish a Bitcoin Exchange Fund. However, now (late 2021) as we update this article, expectations are over.
Rumors about the acceptance of the first bitcoin ETF in the United States have affected the market and brought the price of bitcoin close to its historical peak.
Perhaps after the launch of the first Bitcoin ETF, the market will fall in the short term according to the “buy with rumors and sell with news” strategy; But in the long run, the chances of big investors and rich people coming in are high, and that could mean injecting millions of dollars into the market.
Institutional investors, with the help of ITIFs, invest legally in bitcoins and no longer have to worry about laws, regulations, inheritance, and the safe storage of bitcoins.
But this was one side of the coin, and he also considered the other side of the coin, which could change the future of bitcoin in the long run. We go to the bitter part of the matter; Risks and disadvantages of this fund.
Possible Disadvantages of Bitcoin ETFs
Many members of the bitcoin community believe that the ETF is not only useless for bitcoin, but can also threaten the future of this digital currency. They usually give the following reasons for their claim:
Concentrated fundraising scheme for bitcoin Over time, it can threaten the main purpose of bitcoin – decentralization. Proponents of bitcoin advocacy believe that bitcoin ETFs will increase the concentration and monopoly of this asset. According to them, it is dangerous for monopoly mutual funds to own a large part of bitcoins.
Bitcoin ownership is not real
In a stock exchange fund, the shareholders each own a portion of that fund; But obviously they will not be the real owners of the bitcoins they have invested in.
In fact, according to bitcoin rules, someone owns his bitcoins who have a private key or wallet support words; Something that does not happen in the Bitcoin ETF.
The issue of forks
When a hard fork occurs in a bitcoin network (like a bitcoin cache hard fork), we have to trust the fund about the distribution of the new digital currency from the fork.
Although each ETF fund will have many customers and investors; But it will be the fund manager who will make the basic decisions, for example about forged coins.
The privacy of bitcoin holders is another concern of bitcoins. To operate on the stock exchange, individuals are identified and traders’ personal information is recorded; Something that can reduce bitcoin privacy and allow governments to have more control over bitcoin holders.
The admission of an exchange-traded fund, or bitcoin alliance, would give the king of digital currencies a better legal legitimacy and possibly open the door to a new wave of large investors.
Although this is generally considered positive for price, in the long run it may push bitcoin into focus. For start-ups such as bitcoin, which are decentralized in nature, it is not yet possible to say with certainty how effective the ETF will be.
After 8 years of waiting, the Bitcoin Exchange Fund has finally been accepted in the United States. what is your opinion? Is Bitcoin ETF Good or Bad? Write in the comments section of this article.