Bitcoin ETFs Explained: Impact and Outlook

Bitcoin and the crypto market have come a long way. Just ten years ago, 10,000 BTC could buy you two pizzas, and back then Bitcoin was used only within a small community.

Since then, the crypto industry has changed significantly: countless companies have emerged, numerous crypto projects have launched, and DeFi was born. Institutional adoption has also grown rapidly. MicroStrategy, for example, has converted more than $2 billion of its balance sheet into Bitcoin (BTC), and soon you may even be able to buy the latest Tesla with BTC.

For Bitcoin to become a major asset in the global macroeconomy, a few things are needed. One of them is a regulatory framework that makes Bitcoin more accessible to institutions and mainstream investors. Some say the best way to achieve this is a Bitcoin ETF.

What Is a Bitcoin ETF?

Before we look at Bitcoin ETFs, let's first go over what an ETF is. An ETF is an exchange-traded fund, an investment fund that tracks the price of an underlying asset.

ETFs exist across a wide range of industries and asset classes. For example, gold ETFs, which have been around for decades, track the price of gold. By investing in a gold ETF, investors can gain exposure to gold without holding it directly, and can also diversify across the various individual assets the ETF holds.

A Bitcoin ETF is an exchange-traded fund made up of Bitcoin or assets tied to the price of Bitcoin. ETFs are regulated financial products. So once approved, Bitcoin and crypto ETFs trade on traditional markets such as Nasdaq or the New York Stock Exchange (NYSE), not on crypto exchanges like Binance.

Why Do Bitcoin ETFs Matter?

Bitcoin is easy to access, but it isn't an easy asset to manage. For large institutions, for example, managing Bitcoin can be a real headache. Think about it: would Goldman Sachs plug a hardware wallet into a laptop and transfer $2 billion worth of Bitcoin?

Large financial institutions manage assets differently from individual investors, and they need precise regulatory frameworks and financial tools to do so. ETFs can play an important role in helping institutional investors increase Bitcoin adoption among traditional financial market participants and expand the potential investor base.

Another feature of ETFs is that buyers can add Bitcoin to their investment portfolio without owning the coins directly. Besides Bitcoin, a Bitcoin ETF can also include a variety of assets such as Ethereum, Tesla stock, and gold, offering the benefits of diversification.

A History of Bitcoin ETFs

When the community talks about Bitcoin ETF approval, it usually means ETFs listed on the US market. But ETFs exist not only in the US but in many markets around the world. For example, the first Bitcoin ETF, the Purpose Bitcoin ETF, was launched on the Canadian stock market and trades on the Toronto Stock Exchange under the ticker BTCC.

For a long time, however, market participants focused on whether US regulators would approve a Bitcoin ETF. In October 2021, the US Securities and Exchange Commission (SEC) finally approved the application to list the ProShares Bitcoin ETF (BITO) on the New York Stock Exchange. Other ETF applications, however, have been rejected. Bitcoin ETFs were turned down due to concerns over volatility, unclear regulation of the Bitcoin market, and market manipulation.

Spot Bitcoin ETFs vs. Futures Bitcoin ETFs

Not every Bitcoin ETF holds spot BTC stored in wallets as its reserves (these are also called physical Bitcoin ETFs). Bitcoin ETFs such as BITO use BTC futures contracts as their underlying asset. This is easy to understand if you know the difference between Bitcoin spot and futures trading.

So far, the US market has favored futures ETFs tied to Bitcoin futures on the Chicago Mercantile Exchange (CME), which are regulated financial securities. Bitcoin futures ETFs use CME's Bitcoin Reference Rate (BRR) rather than the spot price. In other words, the difference between spot and futures Bitcoin ETFs lies in where the Bitcoin price is derived from.

Should You Invest in a Bitcoin ETF?

Is a Bitcoin ETF a good financial product for investing in Bitcoin? If you want to hedge against currency devaluation caused by inflation, buying Bitcoin directly may be the better choice.

Holding and managing Bitcoin yourself takes effort, but if you hold ultimate ownership of the asset, there are many ways to earn income or take out loans with your Bitcoin.

However, if this process feels complicated or difficult, a Bitcoin ETF can be a good investment option.

Wrapping Up

That covers the concept of Bitcoin ETFs and their impact. Bitcoin ETFs allow investors in traditional financial markets to invest in Bitcoin within a regulatory framework. They can go a long way toward bringing crypto into traditional markets as an asset class and drawing stable capital into the market through institutional investors.