U.S. regulators are on the verge of deciding whether to approve the first bitcoin exchange-traded fund (ETF), a potential development that could propel the once niche and nerdy world of cryptocurrency further into the financial mainstream. The much-anticipated regulatory approval has coincided with a roughly 70% surge in bitcoin’s price since October.
However, a recent incident involving a fake tweet from the Securities and Exchange Commission (SEC) briefly claimed the approval of bitcoin ETFs, causing a momentary spike and subsequent dip in the cryptocurrency’s value. As investors await the SEC’s decision, here are some key points to consider about bitcoin ETFs:
Why the Excitement?
An ETF, or exchange-traded fund, provides an accessible way for investors to participate in the potential gains of a particular asset or group of assets, such as gold or junk bonds, without physically owning the assets. Unlike traditional mutual funds, ETFs trade on stock exchanges, offering flexibility for buying and selling throughout the trading day.
In the case of bitcoin, a spot bitcoin ETF could simplify the investment process, opening doors for investors who may be hesitant to navigate the complexities of crypto trading platforms or cold wallets. The anticipation of SEC approval has already driven up bitcoin’s price, reaching $45,280 on Wednesday, compared to approximately $27,000 in mid-October.
How Would the ETF Work?
While the Bitcoin Strategy ETF (BITO) has been trading since 2021, it primarily holds bitcoin futures rather than the cryptocurrency itself. The new bitcoin ETF is expected to function similarly to ETFs like SPDR Gold Shares (GLD), allowing investors to gain exposure to bitcoin without the need for physical ownership or storage.
Number of Bitcoin ETFs in the Pipeline
The SEC has received applications for 11 bitcoin ETFs, with a deadline for the joint venture application, including Ark Investments, set for Wednesday. The regulatory body could choose to approve or reject multiple applications simultaneously or take an intermediary course of action.
Disadvantages of an ETF
Some long-time cryptocurrency enthusiasts may resist the idea of ETFs, as they introduce Wall Street as an intermediary between investors and the decentralized nature of cryptocurrencies. Additionally, ETFs come with fees, albeit relatively low compared to other financial instruments, expressed as an expense ratio indicating the annual percentage of a fund’s assets used to cover costs.
When is Owning Actual Bitcoin Preferable?
Investors seeking the advantages of anonymity and direct ownership may find holding actual bitcoin more appealing than investing in an ETF. An ETF does not provide users with actual cryptocurrency in their accounts and lacks the privacy features associated with traditional crypto investments.
As the potential approval of a bitcoin ETF hangs in the balance, investors must weigh the convenience and accessibility against the decentralized principles that underlie the cryptocurrency ecosystem.
Featured Image: Freepik
