What is Bitcoin ETF? Features, How it Works, and Benefits of Bitcoin ETF

The first bitcoin exchange-traded fund is set to launch on the CBOE. This will be a huge step forward for cryptocurrency and blockchain technology, as it could bring more mainstream investors into this space. It also opens up new possibilities in terms of how we can use cryptocurrencies like BTC or ETH.


What are they?

An Exchange Traded Fund is an investment vehicle that tracks the price movements of a particular asset over time. The most common example would be an index fund that follows the performance of the S&P 500 Index. A Bitcoin ETF allows you to invest directly in bitcoins without having to buy them one by one. You simply purchase shares in the ETF and then trade those shares just like any other stock.

If you want to sell your share at some point later, all you have to do is find someone who wants to buy them from you. 

Features of Bitcoin ETF

Below are some features of bitcoin exchange-traded funds that investors should consider before investing in them. They are:

  • Low Volatility – Since ETFs track indices, volatility tends to be low compared to individual cryptocurrencies.

  • Liquidity – Unlike traditional investments, ETFs provide liquidity due to their ability to buy and sell quickly.

  • Transparency – Investors get full transparency regarding the underlying holdings of the ETF.

  • Tax Efficiency – Due to being treated as securities rather than currency, ETFs offer tax efficiency benefits.

  • Diversification – By holding multiple assets, an investor reduces risk exposure.

  • Portfolio Management – An investment manager manages the portfolio of the fund.

  • Cost-Efficiency – The expense ratio of ETFs is lower than most other types of investments.

How Bitcoin ETF Works

Creating a new type of financial product like an ETF begins when someone comes up with an idea for one. In the case of Bitcoin ETFs, these ideas come from Wall Street firms who want to invest in bitcoins without dealing directly with the technology behind the digital currency. Once such a firm came up with the concept of using futures contracts to create an index tracking the price of bitcoins. 

Then, once the contract was made, the company would buy and sell future shares according to the rules laid out in the agreement. These companies then issue shares that represent ownership rights over those futures contracts. When the time arrives to settle the contract, the buyer receives his share of the profits made during the contract’s life. 

If there were no profit, he would lose nothing. On the flip side, the seller must deliver her portion of the agreement at settlement time. So, she has to pay whatever amount is owed to the buyer.

Benefits Of Bitcoin ETF

There are several reasons why Bitcoin ETFs have become popular among institutional investors. Here are just a few of those reasons:

  • Liquidity - When you invest in a stock, you own part of a company whose shares trade publicly on a stock exchange. You can sell your share anytime you like, without having to worry about finding someone who wants to purchase your shares. With Bitcoin, however, you need to find someone willing to accept your money. That means waiting days or weeks until enough people agree with you that you can make a deal happen. For this reason, many large institutions prefer to avoid buying Bitcoins outright because it takes too much time and effort to move their cash into BTC. Instead, they would rather put their money into something where they can immediately convert it back into USD. Enter the Bitcoin ETF. Once approved, the ETF allows anyone to buy or sell Bitcoins through a brokerage account instantly.

  • Taxation - As mentioned above, when you invest in stocks, you pay capital gains taxes every year based on the difference between what you paid for the asset and what you eventually sell it for. However, since Bitcoin isn’t considered property under U.S. law, it doesn’t fall under any taxation laws. So, once again, you simply receive dividends instead of paying taxes on profits earned from selling Bitcoins.

  • This is especially beneficial if you plan on keeping your coins long-term.

  • Diversification - Since Bitcoin is not backed by anything tangible, it offers diversification opportunities beyond stocks and bonds. It also protects against inflation, which is another benefit of investing in physical currencies such as dollars.

  • Portfolio management - While some may argue that cryptocurrency exchanges aren't regulated, others believe that the lack of regulation helps them operate efficiently. Because of this, an increasing number of financial firms are looking to get involved in the space. Some even offer services specifically geared towards managing portfolios made up entirely of digital currency assets.

  • Security - Finally, unlike traditional banks, cryptocurrency exchanges don’t hold customer funds in reserve accounts. They keep everything stored online, making them less vulnerable to hackers.

Cons

While most benefits of Bitcoin ETFs outweigh its drawbacks, here are three things that could potentially cause problems down the road:

  • Volatility - The most significant problem facing all cryptocurrencies right now is volatility. Unlike other investments, the value of Bitcoin fluctuates wildly due to supply and demand issues. Sometimes prices will skyrocket, while other times they'll plummet. Investors who choose to use Bitcoin ETFs take on the risk associated with volatile markets.

FAQs

How much should I expect to pay per unit?

There isn't really a standard cost associated with buying Bitcoins through Coinbase. However, since each coin represents 1/100th of a cent, you may end up spending anywhere from $0-$10 depending on where you live. As mentioned above, the minimum fee charged by Coinbase is 0.25%. That said, many people report receiving their coins within 24 hours after making a payment.


What happens if my bank freezes my account? 

Some banks don't allow customers to withdraw large amounts of cash because of security concerns. While this shouldn't affect you too much, it's always best to check beforehand so that you aren't caught off guard. Another thing to keep in mind is that while your bank may freeze your account temporarily, they usually give you plenty of warning before doing so. So, if you notice anything suspicious going on with your account, contact customer service immediately.

Why am I getting different prices than others?

 Because everyone uses different exchanges, it's possible that you're seeing slightly different rates. Also, remember that fees vary based on location. Fees tend to be higher in countries outside North America. Lastly, some exchanges charge additional fees for withdrawals.

Is it safe to use my credit card or debit card online? 

Yes, as long as you know how to protect yourself against fraud. Most major websites will ask you to verify your identity via the email address or phone number prior to allowing you to complete transactions. This way, even if somebody gets hold of your username and password, they can't easily perform fraudulent activities. Additionally, you can also set up 2FA on your login credentials.

 This adds another layer of protection by requiring you to input your password AND a code sent to your mobile device. It's important to note that setting up 2FA requires extra steps beyond verifying your identity. Therefore, we recommend following our guide on protecting your cryptocurrency wallet first.

Conclusion

If you want exposure to Bitcoin but don’t have access to direct ownership, then using an Exchange Traded Fund might be just what you're looking for. One out there is called Bitwise Asset Management Inc., which regulators have already approved in Canada and Europe. But before you decide whether or not to go ahead with your investment plans, remember that these products come at a cost.

 If you do end up choosing to invest in Bitcoin via an ETF, expect to see fees ranging anywhere from 0.25% to 1%. And depending on how often you wish to liquidate your holdings, those costs could add up quickly.

So, should you invest? Well, only you know the answer to that question. Ultimately, though, I think it comes down to two factors: How comfortable are you with taking risks? And how necessary is liquidity to you?