For many, the process of purchasing Bitcoin from a crypto exchange remains daunting and unclear. The technicalities of owning Bitcoin, such as understanding crypto wallets, Bitcoin addresses, and private keys, can be intimidating to newcomers, deterring potential investors.
This has amplified the allure of a Bitcoin ETF, or exchange-traded fund. Major U.S. financial institutions such as BlackRock, Fidelity, and Invesco have submitted applications to the U.S. Securities and Exchange Commission (SEC) to launch ETFs. However, as of January 2024, the SEC has yet to greenlight a spot Bitcoin ETF.
Grayscale’s two-year struggle to launch a Bitcoin ETF may be nearing a breakthrough. In August 2023, the United States Court of Appeals for the DC Circuit sided with Grayscale in its battle against the SEC to launch a Bitcoin ETF. By October 2023, the regulator was instructed to reassess Grayscale’s application.
In late 2023, SEC chair Gary Gensler stated that the regulator was “taking a new look” at Bitcoin ETF applications, following a series of meetings with over a dozen hopeful applicants. Analysts from JP Morgan and Bloomberg have suggested a high likelihood of one or more Bitcoin ETFs receiving approval in January 2024.
Other nations, including Canada, Brazil, and Europe, have been quicker to launch Bitcoin ETFs.
An ETF is a publicly traded investment vehicle that tracks the performance of an underlying asset or index, rather than a single company. It offers investors exposure to the value of its underlying asset, such as gold or oil. ETFs trade on traditional stock exchanges, and their value should rise and fall in tandem with the asset’s price.
A Bitcoin ETF operates similarly to other ETFs. Investors purchase shares in the ETF through their usual brokerage, and can trade them as they would shares in companies like Apple or Tesla. Bitcoin ETFs track the current price of Bitcoin and should mirror Bitcoin’s price fluctuations.
So, why not simply buy Bitcoin? For many everyday retail investors, Bitcoin and other cryptocurrencies still appear risky. Unclear regulations, the need for a Bitcoin wallet, and reliance on crypto exchanges are all unfamiliar territories that require a degree of self-education.
Owning Bitcoin places the security burden on the investor, necessitating the safekeeping of private keys and potentially requiring the purchase of a hardware wallet to protect the Bitcoin. Investors also need to figure out how to file taxes for Bitcoin sales that result in capital gains.
With a Bitcoin ETF, investors don’t need to worry about private keys, storage, or security. They own shares in the ETF just like they would shares of stock, gaining exposure to the cryptocurrency market without the hurdles of purchasing and holding crypto. This is an extremely appealing prospect for many regular investors, as well as sophisticated institutional investors.
This is why numerous hedge funds and investment firms have filed applications with the SEC for Bitcoin ETFs. Gemini founders Cameron and Tyler Winklevoss were the first to apply with the Winklevoss Bitcoin Trust in 2013. In 2018, the U.S. Patent and Trademark Office granted the Winklevoss brothers a patent for “exchange-traded products.” Others followed suit, but in the ten years since the Winklevoss twins’ attempt, the SEC has yet to approve any application for a spot Bitcoin ETF.
A Bitcoin ETF is managed by a firm that buys and holds actual Bitcoin; the price is tied to the Bitcoin held in the fund. The firm lists the ETF on a traditional stock exchange, and investors trade the ETF as they would any other stock. Bitcoin ETFs also introduce new trading opportunities, such as short-selling, where investors can bet against Bitcoin.
However, there are key differences between a Bitcoin ETF and other ETFs. Some ETFs, like those tracking the S&P 500, represent equity shares, so investors receive a portion of the dividends that any company in the ETF pays to their shareholders. This doesn’t occur with a Bitcoin ETF, as Bitcoin is decentralized.
Also, just like with other ETFs, investors must pay fees to the company offering the ETF. But with a Bitcoin ETF, a portion of these fees would go towards the custody and management fees for the purchase and storage of the Bitcoin that underlies the ETF.
A Bitcoin ETF in the U.S. is anticipated to bring a new level of mainstream credibility and acceptance to Bitcoin investing. In 2020 and 2021, large publicly traded companies like Square and Tesla bought Bitcoin as an investment for their balance sheets, sparking new adoption. However, many conservative investors still view the cryptocurrency as a risky bet or even a gimmick.
The SEC’s approval of a spot Bitcoin ETF would allow institutional investors to speculate more easily on the price of Bitcoin. It would effectively bring Bitcoin to Wall Street, with the Bitcoin ETF traded in the same places as Tesla stock, bonds, gold, oil, or any other traditional assets. This would likely provide a significant boost to the price of Bitcoin.
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