The crypto markets are an incredible ecosystem, where digital assets can be used to gain active and passive income. People can trade cryptos for one another, stake them on networks for steady income, or even access complex trading instruments like the ones found on Bitlevex.
Whenever the cryptocurrency market slows down a bit, we always hear about Bitcoin ETFs being submitted for approval. A Bitcoin ETF approval is always presented as some of the hottest and bullish news in the space. Experts seem to agree that a Bitcoin ETF approval could actively contribute toward the adoption of cryptocurrencies followed by an incredible price rally.
But what does this mean in the grand scheme of things? What are these Bitcoin ETFs and why do they present such a bullish perspective on the market? We will attempt to answer all of these questions in this article, and give a thorough overview of Bitcoin ETFs and their importance in the crypto ecosystem.
What is an ETF?
An Exchange-Traded Fund or ETF is a financial instrument that mimics the price of a certain asset, commodity, or market index. These financial products can be purchased and sold on traditional exchanges similar to stocks and commodities.
ETFs can be set to track the price of a single commodity like gold or Bitcoin or include a wide variety of assets simultaneously. For instance, an ETF could be issued to track the stocks, bonds, and commodities all of the same time and allow traders to speculate on this amalgamation of financial products. And because ETFs can hold multiple assets, they are often a great choice for investors that wish to diversify their portfolio.
What is a Bitcoin ETF?
A Bitcoin ETF would be able to track the price of Bitcoin and allow traders to trade this asset on traditional exchanges without having to go through cryptocurrency exchanges. This helps individuals and institutions to invest in Bitcoin, without having to worry about managing a wallet or securing their assets. This is because when they invest in an ETF, they never actually own any of the cryptocurrency. Instead, they purchase a tradable fund that represents the price of BTC.
How would a Bitcoin ETF work?
For a Bitcoin ETF to be possible, the following steps need to be fulfilled:
- An authorized custodian needs to purchase a large number of bitcoins with funds provided by various investors. This custodian can be a bank, a crypto exchange, or an asset management company.
- Then, a corresponding number of ETF shares is distributed to the investors, proportional to the value of the assets they provided to the custodian.
- The ETF needs to be approved by a regulatory body such as the SEC before it is legal to trade it on traditional stock exchanges. This is the step where we are currently stuck at, as the SEC has refused to do this multiple times in the past.
- Once Bitcoin ETFs are approved and present on exchanges, investors can buy and sell shares of the fund. They could also apply different trading strategies such as shorting or buy and sell futures and options contracts.
Worth noting that there have already been more than a dozen attempts by various custodians to get a Bitcoin ETF approved in the past. However, every proposal has been negatively reviewed, as the SEC still news Bitcoin as too volatile and unregulated to approve an ETF on its price.
Why is a Bitcoin ETF approval considered to be a bullish event in the market?
Many agree that a Bitcoin or crypto ETF could have a significant impact on the price of cryptocurrencies in a positive way. There are quite a few reasons for this, including:
- Institutional investors would gain direct exposure to investing in cryptocurrencies, without having to worry about security or storage.
- Bitcoin would get institutional validation in the markets, presenting it as a sound investment, instead of being high-risk and unpredictable.
- Bitcoin ETFs could make the buying and selling of cryptocurrencies much easier for less technically savvy investors.
- With Bitcoin ETFs being approved, it could be a step towards accepting Bitcoin as an asset that can be used by institutions (pensions, credits, loans, etc.)
- It would help governments keep the cash flow local. Crypto investors tend to send money to cryptocurrency exchanges that are situated abroad. A Bitcoin ETF should allow investors to purchase BTC locally.
- A Bitcoin ETF could protect investors from scams and hacks that occur frequently on cryptocurrency exchanges.
In this article, we explored the reason why Bitcoin ETFs can be rather beneficial to the crypto market as a whole. These financial instruments can help investors speculate on the price of Bitcoin more easily and securely than it is currently possible. Additionally, it can help pension and mutual funds legally diversify their portfolios with cryptocurrencies.
All in all, Bitcoin ETFs will allow a larger demographic of investors to access these assets, which should, in turn, stabilize the crypto markets even further.