In 2021, there was a great hype surrounding the approval of Bitcoin ETF. Finally, in April 2021, the first Bitcoin ETF was approved in the US. This could have several advantages for Bitcoin, like gaining legal validation and attracting more investors. However, even a lot of Bitcoin users didn’t know what a Bitcoin ETF exactly was and how it worked. In this article, we are going through what a Bitcoin ETF is, why we need a Bitcoin ETF, and what advantages and disadvantages it has. Stay with us.
What is an ETF and what is a Bitcoin ETF?
Before we could go through Bitcoin ETFs, we would better know what an ETF is in general. ETF stands for Exchange-Traded Fund. It is a fund including one or more assets, and people buying that fund, invest in the assets it includes. Buying and selling ETFs is done on the stock exchanges and its trading is like a normal stock. Therefore, its regulations are in accordance with the country’s regulations regarding stock exchanges. Today, all important assets like oil and gold have ETFs. So, someone who wants to invest in oil doesn’t have to buy the oil itself. He/ She can buy the corresponding ETF and invest in the underlying asset.
A Bitcoin ETF is also a fund containing a large amount of Bitcoin, or one connected to Bitcoin futures, depending on the type of the ETF. The value of this fund is in line with Bitcoin’s price. Instead of cryptocurrency exchanges, you should buy and trade this fund in stock exchanges. So, it’s obvious that you can trade a Bitcoin ETF only when the exchange is open.
As we mentioned earlier, a Bitcoin ETF has two types: Physical and Futures.
• Physical ETF: A physical ETF is completely backed by real bitcoins. This type’s main challenge is that holding this amount of BTC is difficult.
• Futures ETF: Instead of being backed by real bitcoin, futures Bitcoin ETFs use Bitcoin’s futures contracts. The Bitcoin ETF that has been approved in the US is of this type.
What are the advantages of a Bitcoin ETF?
Maybe after reading this text, you ask why shouldn’t we buy the real bitcoins and invest in a Bitcoin ETF instead? The answer is a Bitcoin ETF has many advantages. The first advantage is that a Bitcoin ETF is legally recognized and approved. This is while Bitcoin itself is not regulated in a lot of countries. A Bitcoin ETF can also be inherited after death, and this is a big opportunity that Bitcoin lacks.
A Bitcoin ETF is also appropriate for those investors who are familiar with the stock market but haven’t worked with cryptocurrencies. This way, they don’t need to deal with the complexities of cryptocurrencies.
And finally, investing in a Bitcoin ETF is a good way for diversifying the investment portfolio. An ETF may not be limited to one asset and it can include many assets. Investing in such an ETF lets you invest in different assets simultaneously.
What are the potential disadvantages of a Bitcoin ETF?
A Bitcoin ETF also suffers from some disadvantages. As you may have guessed, the main one is “centralization”. This centralized way of investing in a decentralized cryptocurrency like Bitcoin is paradoxical. Bitcoin fans are worried that a significant amount of the Bitcoin market gets dominated by centralized investment funds.
Besides, these fans also claim that by investing in a Bitcoin ETF, you don’t actually own those bitcoins. According to Bitcoin’s law, you only own your bitcoins when you have your private keys. Losing control of private keys equals losing control of your bitcoins. A Bitcoin ETF doesn’t provide its users with a private key and that is a challenge.
Investing in a Bitcoin ETF also requires passing KYC (Know Your Customer) and authentication. This issue is completely in contradiction with Bitcoin’s underlying principles. Buying real bitcoins does not need any form of KYC and users are not forced to reveal their personal information, while investing in a Bitcoin ETF necessitates passing this step.
Conclusion
After 8 years, finally Bitcoin ETF got approved in the US. It seemed like a completely good event at first, but now you have figured out that it has its own challenges. It definitely gives Bitcoin a better legal status and attracts more investors. Altogether, it is supposed to have a positive impact on the price, but what negative impacts it may have on Bitcoin is something that will be revealed in the long term. Do you think the advantages of a Bitcoin ETF will outweigh its disadvantages?