Most Bitcoin users know what a Bitcoin ETF is. But if you still don’t know what it is, don’t worry, in this article we will tell you all about how it works. In a nutshell, Bitcoin ETFs are financial tools that facilitate access to traditional investors in virtual currency markets.
These instruments offer countless opportunities although they also have some risks. The most important thing is that these tools bring investment and use of cryptocurrencies closer to thousands of users. ETFs stand out for taking complexity out of the use of cryptocurrencies and making it easier for institutional funds to invest in them.
The goal of Bitcoin ETFs is to bring the cryptocurrency to a higher market capitalization, although it could affect its price in a negative way. This is because as it makes way for new investors who can increase its price, it will increase the number of speculators.
How do Bitcoin ETFs work?
The main purpose of ETFs or Exchange Traded Funds is to facilitate the exchange of assets on the stock exchange as if they were ordinary shares and omitting all the processes of exchanges, wallets and others.
ETFs are based on tracking the performance of a series of assets. We do not buy the asset itself, but rather we buy its value and track its price.
Example of ETF
To understand it better let’s take an example: If Alberto wants to buy Bitcoin, but does not know how to enter an exchange or does not want to create wallets and so on, he decides to invest in a Bitcoin ETF. Alberto invests 200 euros in the Bitcoin ETF, but Alberto does not have Bitcoin, he simply has bought a link to the price of the cryptocurrency. If the Bitcoin price drops 20%, Alberto will lose 20% of his €200. On the other hand, if the Bitcoin price rises by 30%, Alberto will gain 30% of his investment.
These links can be found on traditional exchange platforms where ETF trading is allowed. Therefore, these tools can be enlisted in multiple markets without any of its users, whether individuals or companies, having to deal with complex processes such as integrating cryptocurrency protocols, managing them, worrying about their security and so on. In short, it makes it simpler to integrate the crypto ecosystem into traditional markets.
One of the most important qualities of ETFs is that bondholders do not need to download or set up wallets to store their assets or worry about their assets being hacked or funds being stolen from the wallets. However, when we take a closer look at how it works, we can see how the operation of an ETF is very similar to that of a cryptocurrency exchange. This is because in an exchange the platform manages the cryptocurrencies for the user, although this entails some risks.
You are probably asking yourself: Are ETFs legal? The answer is yes. ETFs need the issuing company to be registered with the appropriate authority in their territory in order to operate. For example, in the United States a Bitcoin ETF would have to be registered with the U.S. Securities and Exchange Commission or if the ETF was in Spain it would have to register with the Spanish CNMV.
What characterizes ETFs?
When it comes to investing our assets, what every user is looking for is security and transparency. These are some of the characteristics of ETFs. Below we will look at the most important ones.
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- Liquidity. ETFs will allow users to buy and sell at any time as in the case of stocks.
- Flexibility. When buying and selling shares we have to wait until the end of the session for exit sales. ETFs allow buying at any time and the purchase or sale will be effective instantly.
- Transparency. Since it is a listed asset, we can know its value at all times. We do not have to wait for a company to tell us or trust it.
- As for fees, which is a subject of interest to all of us, ETFs have lower fees than traditional funds. However, we must bear in mind that, like any stock, buying and selling expenses will be added.
- Diversification. ETFs themselves are exchange-traded funds that function as a diversified tool. In ETFs we can buy a complete index without the need to invest in each of the stocks it presents.
Why do users buy into ETFs?
This is one of the main questions that comes to mind when talking about ETFs – why buy into an ETF and not Bitcoin directly? Many investors see more advantages in ETFs and fewer complications. This is because it is more difficult for a traditional investor to learn how cryptocurrency platforms work which makes them opt for ETFs. These investors tend not to move away from the classic mechanisms they have been using for years.
Another element that drives them to invest in ETFs is that these tools have legal backing, something that cryptocurrency platforms lack. In the eyes of this type of investors, this feature provides more security and guarantees the stability of their assets. In ETFs, the government is responsible if there is any theft or hacking of the platform, as well as if there is market manipulation, etcetera.
Trading platforms offer ETFs, as it is much easier for them to add this platform than to perform complex integrations. By implementing ETFs, trading platforms decrease their operating costs significantly which leads to lower commissions on the services they offer and thus gaining new investors.
As we all know, Bitcoin, above all, has a high level of speculation, since users do not know the thousands of real uses that can be given to it. Therefore, more traditional users do not see the advantages of storing their coins in wallets where they themselves will be the custodians of their assets. They feel more attractive the idea of relying on a platform that does everything and do not need much more than an interface where it is easy to carry out speculation.
