Many of the crypto-curious still view buying Bitcoin from a crypto exchange as an intimidating and opaque process. The technical aspects of holding Bitcoin—such as crypto wallets, Bitcoin addresses and private keys—are confusing to newcomers, and scare some investors away. All of this has intensified the appeal of a Bitcoin ETF, or exchange-traded fund. In the U.S., major financial institutions like Blackrock, Fidelity, and Invesco have applied with the U.S. Securities and Exchange Commission (SEC) to launch ETFs. As of August 2023, the Securities and Exchange Commission (SEC) has yet to approve a spot Bitcoin ETF. On the other hand, Grayscale’s two-year battle to launch a Bitcoin ETF may finally be turning a corner. On August 29, 2023, the United States Court of Appeals for the DC Circuit sided with Grayscale over the U.S. Securities and Exchange Commission (SEC) in the crypto firm’s quest to launch a Bitcoin ETF. The price of Bitcoin rose significantly following the news. Europe has had better luck, with London-based Jacobi Asset Management launching Europe’s first Bitcoin ETF on August 15, 2023.
An ETF is an investment vehicle that is publicly traded, like a stock, but tracks the performance of an underlying asset or index, rather than one company. ETFs trade on a traditional stock exchange, and their value should rise when the asset increases in price, and fall when it decreases. A Bitcoin ETF works in much the same way as any other ETF. Investors buy shares in the ETF through whatever brokerage they buy stocks, and can trade them the same way they’d trade shares in Apple or Tesla.
So, why wouldn’t investors just buy Bitcoin? For most regular retail investors, Bitcoin and cryptocurrencies in general still look risky. Besides having unclear regulations around them, owning Bitcoin requires keeping a Bitcoin wallet and trusting crypto exchanges, which are still uncharted territory for people unfamiliar with the space and require a certain level of self-education. Holding Bitcoin places the burden of security squarely on you, making you responsible for keeping your own private keys safe (unless you want to entrust them to the exchange). This may mean buying a hardware wallet to protect purchased Bitcoin, or storing private keys in a secure manner. You’d also have to work out how to file taxes for sales of Bitcoin that resulted in capital gains.
With a Bitcoin ETF, investors need not worry about private keys, storage, or security. They own shares in the ETF just like their shares of stock, and can gain exposure to the cryptocurrency market without having to go through the hoops of purchasing and holding crypto. And to put it plainly, that is an extremely appealing proposition for many regular folks—as well as sophisticated institutional investors. That’s why so many hedge funds and other investment firms have filed applications with the U.S. Securities and Exchange Commission (SEC) for Bitcoin ETFs.
A Bitcoin ETF tracks the current price of Bitcoin, and should act in lockstep with Bitcoin’s price swings. A Bitcoin ETF is managed by a firm that buys and holds the actual Bitcoin; the price is pegged to the Bitcoin held in the fund. The firm lists the ETF on a traditional stock exchange, and you, the investor, trade the ETF just as you would any other stock. Bitcoin ETFs also offer new types of trading opportunities, including short-selling, where investors can bet against Bitcoin.
A Bitcoin ETF in the U.S. is expected to bring a new level of mainstream trustworthiness and acceptance to Bitcoin investing. In 2020 and 2021, big publicly traded companies including Square and Tesla bought Bitcoin as an investment for their balance sheets, which spurred new adoption—but the cryptocurrency is still seen by many conservative investors as a risky bet or even a gimmick.
The approval of a Bitcoin ETF by the SEC would mean that institutional investors can more easily speculate on the price of Bitcoin. It would functionally bring Bitcoin to Wall Street, with the Bitcoin ETF traded through the same places as Tesla stock, bonds, gold, oil, or any other traditional assets. And it would likely be a huge boost to the price of Bitcoin.
This article provides an overview of Bitcoin ETFs, from their history of attempted approvals by the SEC to the potential benefits they offer to regular investors. The article also explains why a Bitcoin ETF would bring more mainstream acceptance and trust, and likely increase the price of Bitcoin.
You can read more about this topic here: Decrypt: What Is a Bitcoin ETF, and Why Does Everyone from Blackrock to Grayscale Want One?