Meet ETFs one of the most anticipated financial tools in the world of cryptocurrencies. This because ETFs would allow easier access for investors in the cryptocurrency markets. A situation that would increase its economic potential to unsuspected limits.

Unot of the events that many enthusiasts of the Bitcoin, and cryptocurrencies in general, they hope are the so-called Bitcoin ETF.

Bitcoin ETFs are a tool that has both potential benefits and potential risks. But there is no doubt that they will be a vehicle that will allow to bring investment in Bitcoin to millions of new investors. And this includes, institutional investment funds, allowing them to invest in Bitcoin without any complexity and under a reliable regulatory regime.

This tool could lead Bitcoin to a market capitalization never seen before. But it could also affect the bitcoin price negatively, as it would allow many new speculators to agree to determine its price.

In this Bit2Me Academy chapters we will explain Bitcoin ETFs in detail, as understanding them can help you position yourself strategically.

How do ETFs work?

Before talking about Bitcoin ETFs, with their potential benefits and risks, let's talk roughly about what an ETF is and how it works.

Listed investment funds, or Exchange Trade Funds (ETF, for its acronym in English), They are a useful investment tool that facilitate the process of exchanging securities on the stock market, as if they were ordinary shares. Its main feature is that it is traded on secondary securities markets, being very typical investment vehicles in the traditional financial world.

ETFs track the performance of one or a group of assets. That is, the asset itself is not purchased, but the value that marks the price. For example, a Bitcoin ETF would track the price of Bitcoin, and by buying a part of that vehicle, you would be winning if the price of Bitcoin goes up, or losing if the price of Bitcoin goes down. But you would not have bought bitcoins as such at any time.

Traditional exchange platforms allow trading with this type of vehicle, which enables ETFs to list in multiple markets. But without any of those platforms having to deal with the technical complexity of integrating the Bitcoin protocol, or other cryptocurrencies, or dealing with their management, security, or updates. In other words, the integration of the crypto ecosystem in traditional markets is simplified.

On the other hand, holders of a Bitcoin ETF also have no need to own a wallet to store them, nor worry that they may be hacked or stolen from the wallet. However, the latter is similar to operating with a traditional cryptocurrency exchange, as the cryptocurrency platform manages those things for you.

As for legality, for an ETF to function, it is necessary that the company that issues it is registered with the corresponding authority, which in this case is the Securities and Exchange Commission (SEC) of the United States, or the CNMV in Spain.

Why buy a Bitcoin ETF and not bitcoins directly?

The reasons why a traditional investor may want to buy a Bitcoin ETF instead of the bitcoin itself can be many and varied, we are going to highlight 4 that we consider to be the ones with the greatest weight:

  • For a traditional investor, accessing and learning how a cryptocurrency platform works is a very important psychological access barrier. This type of investors uses platforms and tools that they have known for years, oriented to high frequency, being able to connect various trading algorithms, and even roboadvisors with artificial intelligence.
  • Cryptocurrency platforms do not usually have the legal backing of the height that a regulated national exchange has, supervised and with the licenses that the government issues to have liability insurance if some type of unforeseen disaster occurs: such as robberies, exit scams, market manipulations, ...
  • Adding an ETF to a trading platform simplifies life, well you don't have to deal with complex integrations. This means that, in turn, they have lower operating costs, passing on fewer service commissions, and therefore liking the end user more.
  • Currently, Bitcoin has a high level of speculation, not so much of actual use. For this reason and coming from a more traditional mindset, many users do not perceive the advantage of having the ability to withdraw their bitcoins to wallets where they control the keys, so they only need a service to speculate on.

ETF Characteristics

As we have already mentioned, ETFs function as an action and not so much as a fund or that their management is passive and not active. In this sense, we can mention some of the most relevant characteristics of ETFs.

  1. Transparency. One of the great characteristics of ETFs is that being a listed asset, it is possible to know their value at all times.
  2. Flexibility. An ETF can be purchased at any time and the purchase will be effective based on its current price. This means that there will be no need to wait until the end of the session and there will be no exit windows as with certain funds.
  3. Liquidity. An ETF can be bought and sold at any time, like a stock. They are 100% liquid.
  4. Diversification. A traded fund is an already diversified instrument in itself. When investing in a basket of stocks there will always be some degree of diversification. And is that with an ETF you can "buy" a whole index without having to invest in each of its shares.
  5. Commissions. ETF management fees are lower than those of a traditional fund. Although as with any action, you will have to add the purchase-sale commissions if you dedicate yourself to make a very active operation with these funds.

How to create a Bitcoin ETF

ETFs associate all investments made by participants in the same fund, to subsequently carry out operations on the stock exchange with said investments, as if they were bonds or stocks. This allows investors to carry out operations in the market and obtain short, medium or long-term remuneration or profits generated from the interests produced from said investments.

For example, if a company wants to issue a Bitcoin ETF, it will divide its ownership into bitcoins into shares. These will subsequently be bought and sold by investors in the stock market. The objective of this is to obtain profits derived from said operations, and from the volatility of the bitcoin implicit in the process. Something very similar to managing an investment portfolio, with a much simpler and more comfortable way of handling for investors. So any investor with or without experience will be able to benefit from trading with Bitcoin.

By the time investors get a Bitcoin ETF, they are acquiring shares, which make up the index of a specific security. That is, the evolution of the prices and quotes of bitcoins for a given moment.

Bitcoin ETF For when?

For some years now, there have been many actors looking to create a Bitcoin ETF. In fact, the United States SEC has already received several formal and complete requests for Bitcoin ETFs. But despite this, none of these requests have been accepted.

Some of them are the famous billionaire twins Cameron and Tyler Winklevoss, whom the SEC rejected in 2017 the ETF called Winklevoss Bitcoin Trust.

The reason why many companies and major financial players seek to create a Bitcoin ETF is, logically, for a very large potential economic benefit. However, in addition, this would imply that this tool can help increase the liquidity of the Bitcoin markets and take them to a level never seen before.

However, the SEC has refused to approve these tools on the grounds that the Bitcoin markets are unregulated, something that at the same time prevents the SEC from giving it a definitive no. Undoubtedly a situation that puts more and more pressure to regulate the bitcoin market and thus open the doors to financial expansion.

The same situation is repeated in other countries, which has prevented the takeoff of Bitcoin ETFs, something that, if it occurs, aims to greatly improve Bitcoin's image in the markets, making many new investors access this "new" asset. .

How much do you know, cryptonuta?

Can ETFs allow Bitcoin to start regularizing once and for all?

TRUE!

Bitcoin ETFs will undoubtedly be Bitcoin's gateway to a regularized investment market, but this does not have to curtail the nature of Bitcoin, that of a decentralized, secure and private currency for all.

Advantages and risks of investing in ETFs

All types of investments that are made have their pros and cons, and ETFs are no exception. Although it can be highlighted that this type of investment is low risk.

Pros

  1. Without a doubt, the main advantage of a Bitcoin ETF would be, the possibility of capitalizing investment in highly liquid markets, for example the New York markets.
  2. Any market that wants to implement a Bitcoin ETF is not going to have to do any technical implementation, or worry about the security of managing cryptocurrencies.
  3. ETFs allow novice or expert investors to trade cryptocurrencies easily, simply and without complications. Furthermore, they avoid the risks that funds can be withdrawn or hacked from accounts or wallets. Because to manage an ETF it is not necessary to have or store cryptocurrencies.
  4. By managing cryptocurrencies and tokens from an ETF, the need to control multiple wallets, wallets or exchange platforms, which require administration and time, is avoided. Since ETFs allow you to trade multiple crypto assets at the same time in a simple and secure way.
  5. Being passive tools, ETFs significantly reduce operating costs for investors. So they will not have to make payments to cover administration or management fees.
  6. Listed investment funds allow buying and selling operations throughout the stock market. That is, as long as the market remains open. Furthermore, these operations are carried out in real time, and help to diversify investment portfolios.

Cons

  1. Bitcoin ETFs and other cryptocurrencies have not been approved by the SEC or the CNMV, so at the moment they have a very limited offer.
  2. Due to the volatility that cryptocurrencies still suffer, sudden value changes could play an unfavorable role for ETF investors.
  3. The offer in currently existing cryptocurrency ETFs does not diversify risk levels as traditional ETFs do. This is because ETFs currently only provide access to a limited number of cryptocurrencies.
  4. Depending on the regulations in each country, ETFs could generate the application of foreign taxes if purchased in another country. In addition, that commission rates may apply for the purchase and sale of these funds.

Differences between ETFs and index funds

The objective of ETFs and index funds are very similar tools in terms of their purpose: to create a representation of some index. However, the way ETFs and index funds do this is different. In that case we can mention the following differences:

  1. An ETF works like a stock and can therefore be bought and sold at any time. An index fund on the other hand, works like a traditional investment fund, which can be subscribed and redeemed once a day.
  2. The funds within an ETF must be invested 100% within a market. While on the other hand, an index fund must keep a percentage of its funds as a mandatory liquidity section.
  3. ETF replication is usually more accurate than that of an index fund.
  4. ETF management fees are usually lower, although purchase and sale fees will also have to be paid later. This is because ETFs are a passive management tool.
  5. Taxation is different. An index fund is subject to the taxation of investment funds, while the taxation of Spanish ETFs will be that of shares (another different issue is foreign ETFs).
  6. Monthly purchases versus monthly contributions. To invest in a listed fund you will have to buy that fund month by month, thus increasing your position in it. With an index fund you can also make regular contributions, which will be used to buy units.