In 2021 first Bitcoin ETFs got validated. The interest in these products keeps rising. They are exchange-traded funds that follow the value of BTC and the trading process is held on traditional markets in the place of cryptocurrency exchanges. So, BTC exchange-traded funds enable investing in the cryptocurrency by contributing leverage to its cost.
The first country having authorized a Bitcoin ETF is Canada. On February 16, 2021, the Ontario Securities Commission validated Purpose ETF.
How do Bitcoin-based exchange-traded funds work?
In finance, ETFs are means of investing that follow the rate of a certain asset or cluster of assets. These funds enable investors to make their holdings diverse without really possessing the subject of investment. ETFs can represent various fields, for example, commodities (gold) or currencies (dollar).
A significant part of traditional ETFs offers bigger baskets the components of which have something mutual. It can be a goal of sustainability or stocks introducing the real estate sector and relevant businesses. ETF baskets suggest reaching diversification.
Bitcoin ETFs imitate the rate of the first cryptocurrency. This means the price of one share will change along with BTC's ups and downs. A thing to note is that Bitcoin ETFs perform on centralized exchanges.
What are the benefits and shortcomings of Bitcoin ETFs?
There may raise a question if Bitcoin ETFs reflect the rate of the cryptocurrency, how an investor will decide whether to invest in the coin itself or choose a Bitcoin ETF. Here are some advantages of a Bitcoin ETF:
Bitcoin ETFs can be a good option if an investor doesn't want to open an account in cryptocurrency exchange and store BTC himself/herself. In this case, an online broker ensures the security of the deal.
- Having diversified portfolio
An ETF can include more than one asset. So, Bitcoin ETF can represent BTC, Paypal stocks, Microsoft stocks, etc., thus decreasing possible risks.
As a Bitcoin ETF is a traditional financial product, the regulatory authorities manage its taxation.
However, Bitcoin ETFs also have shortcomings, like:
While getting exposure to Bitcoin via ETFs, the investor will need to pay management fees.
- Possible incorrectness
Bitcoin ETFs may not reflect the exact price of the asset because of possible tracking errors.
- No access to cryptocurrency swapping
Unlike the coin itself, Bitcoin ETF can't be traded for other crypto-assets like Ethereum, Tether, etc. It is just an investment fund that traces BTC price.
- No Bitcoin ownership
Holding BTC has several benefits such as reducing risks relevant to the economic system. Running on the blockchain, the coin offers privacy to investors. Bitcoin ETFs are government-regulated, so they don't have these advantages.
Which countries have confirmed Bitcoin ETFs?
So far, there are two countries that have authorized Bitcoin ETFs: Canada and Brazil. The total number of the approved funds is four.
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The primary country that validated the Bitcoin ETF was Canada. Till now Canadian regulatory body allowed three such funds:
- Purpose Bitcoin ETF
The regulatory agency of Ontario authorized the product formed by Purpose Investments on February 12, 2021. Purpose Bitcoin ETF, with direct custody, is launched on Toronto Stock Exchange (TSX) under the sign BTCC. In two days its assets under management (AUM) crossed $421.8 M. Now, this indicator stands above $1 Billion.
- Evolve Bitcoin ETF (EBIT)
On February 16, that is a few days after confirming the first fund, Brazil authorized the second BTC ETF from Evolve Funds. The product is now on the Toronto Stock Exchange below the symbol EBIT. The ETF invests immediately in BTC, which is stored in a cold wallet. The custodians of the fund are Gemini Trust Company and Cidel Trust Company, while CIBC Mellon Global Securities Services Company is the fund’s administrator.
- CI Galaxy Bitcoin ETF
The third Bitcoin ETF introduced by CI Global Asset Management was launched on TSX on March 9 under the ticker BTCX. The fund uses the Bloomberg Galaxy Bitcoin Index (the “BTC”) to measure the performance of one bitcoin traded in U.S. dollars. Investment manager Bloomberg Index Services Ltd owns and manages the index.
Brazil is the second country worldwide and the first in Latin America to validate a Bitcoin ETF. On March 19 the Brazil Securities and Exchange Commission (CVM) verified the request of fintech firm QR Capital to launch a Bitcoin ETF. The fund is supposed to be listed on B3 (a Bolsa do Brasil), the main stock exchange of the country by June under the ticker symbol QBTC 11.
Will the US become next to enable a Bitcoin ETF?
Previously the US SEC has declined a number of Bitcoin ETF requests, including that of Bitwise Asset Management, Wilshire Phoenix, and Winklevoss Bitcoin Trust. In 2021, when Bitcoin has reached new highs, the demand for institutional investments is high and there are approved BTC exchange-traded funds, the chances of the SEC approving the funds is higher.
Several companies applied to get the agency's authorization. They are VanEck, Bitwise, Valkyrie Digital Assets, NYDIG, WisdomTree, and Fidelity. The SEC started to review investment management company VanEck's submission filed on December 30, 2020. This is the second application of the company. The first one was rejected in 2018. On March 15 the SEC issued a notice informing that in 45 days it will declare if VanEck's application got approved, declined, or extended.
Along with the demand for cryptocurrency investments being high, new products appear in the market. It is expected that the number of countries approving Bitcoin ETFs will grow. Additionally, there may appear ETFs based on other cryptocurrencies.
Evolve Funds Group and CI Global Asset Management already filed to Canadian securities regulators for Ethereum ETFs.