Bitcoin ETF gets approval in the United States’ Securities and Exchange Commission (SEC) on Wednesday approved investing in Bitcoin through ETF. As a result, investors can now invest in Bitcoin through traditional investments. According to Reuters news, this approval is a landmark event in the world of cryptocurrency.
But this approval was not given easily. Since 2013, asset management companies have been trying to get approval for Bitcoin through ETFs. But the regulatory agency SEC has not given the approval for so long due to lack of regulation of the Bitcoin market.
Then in August 2023, a US court ruled that the SEC had rejected Grayscale Investments’ application citing wrong reasons. The court ruled in Grayscale’s favor, forcing the SEC to reconsider their petition. Following this, the SEC approved this yesterday. Yesterday, the court approved applications by ARK Investments, BlackRock and Fidelity, along with Greyscale.
ETF stands for Exchange-Traded Fund. It is a sort of investment fund and exchange-traded product having shares that are tradeable on a stock exchange. ETFs are designed to track the performance of a particular index, commodity, bond, or a basket of assets, and they give investors access to a diversified portfolio without requiring them to purchase each asset individually.
Important aspects of exchange-traded funds (ETFs )
Diversification:
ETFs typically hold a basket of assets, providing investors with diversification across multiple securities within a single investment.
Liquidity:
ETFs are traded on stock exchanges like individual stocks, making them relatively easy to buy and sell throughout the trading day at market prices.
Transparency:
ETFs disclose their holdings on a daily basis, allowing investors to see the assets the fund holds and their respective weights.
Low Costs:
ETFs often have lower expense ratios compared to traditional mutual funds, as they are passively managed and aim to replicate the performance of an index.
Tax Efficiency:
ETFs are generally structured in a way that makes them tax-efficient. Investors can incur capital gains taxes when they sell their ETF shares, but the structure of ETFs can help minimize the capital gains distributions.
ETFs types
There are different types of ETFs, including equity ETFs, bond ETFs, commodity ETFs, and sector-specific ETFs. Some ETFs aim to replicate the performance of a broad market index (e.g., S&P 500), while others may focus on a specific sector or industry.
Investors can buy and sell ETF shares through brokerage accounts, and the market price of an ETF share is determined by supply and demand on the stock exchange, similar to individual stocks.
Benefits and Drawbacks of ETFs
Here’s a table summarizing the advantages and disadvantages of Exchange-Traded Funds (ETFs):
Advantages of ETFs | Disadvantages of ETFs |
| Diversification: By retaining a variety of assets, ETFs offer immediate diversification. | Tracking Error: There may be a slight difference between the ETF’s performance and its underlying index. |
| Liquidity: ETFs are traded on stock exchanges, providing liquidity for buying and selling. | Trading Costs: When purchasing and selling ETF shares, investors may be subject to brokerage costs. |
| Transparency: Holdings are disclosed daily, allowing investors to see the fund’s composition. | Premiums/Discounts: The market price of an ETF may deviate from its net asset value (NAV). |
| Lower Costs: ETFs often have lower expense ratios compared to actively managed funds. | Limited Active Management: Most ETFs passively track an index, limiting active management strategies. |
| Tax Efficiency: ETF structures can be tax-efficient, minimizing capital gains distributions. | Complexity: Some specialized ETFs may be complex and carry higher risks. |
| Flexibility: Investors can trade ETFs throughout the trading day at market prices. | Overemphasis on Popular Sectors: Investors may overweight sectors that are popular rather than based on fundamentals. |
| Accessibility: ETFs provide easy access to various asset classes, including stocks, bonds, and commodities. | Lack of Voting Rights: ETF shareholders usually don’t have voting rights in the companies held by the fund. |
It’s important to note that the advantages and disadvantages can vary depending on the specific ETF and the investor’s goals and preferences.
How ETF-Backed Bitcoin Works
The ETF-backed bitcoins of the aforementioned companies will be listed on major stock exchanges such as Nasdaq, New York Stock Exchange and CBOE. As a result, investors who are used to trading on familiar platforms will find it convenient to invest.
Exchange Traded Funds or ETFs are a type of investment that can easily be traded in the stock market. Instead of directly owning a specific stock, commodity, or security, investors can buy and hold ETFs, which again track asset price movements. The ETF will monitor the price of Bitcoin, so those who want to speculate on the price of Bitcoin, can do so without owning Bitcoin.
The question is why people don’t buy Bitcoin directly. The reality is that Bitcoin and cryptocurrencies are still too risky for the vast majority of mainstream investors and traders. Bitcoin trading regulations are still unclear. Also owning Bitcoin requires a Bitcoin wallet, which is still quite intimidating for people unfamiliar with crypto. ETFs are fiduciary parties in this case. It can be managed by them.
Bitcoin ETFs are expected to bring a new level of trust and acceptance to the world of cryptocurrencies. SEC approval means that institutional investors can trade and invest in Bitcoin. Through this, it is now easy to invest and exchange Tesla shares, US bonds, gold, oil or any other traditional asset.
Meanwhile, the price of Bitcoin has been increasing since the beginning of this year; Prices of other cryptos are also rising. Bitcoin reaches its highest price in 22 months. As of Wednesday morning, it had crossed $46,000. Bitcoin price reached this level for the first time since April 2022.
Earlier, in November 2021, the price of Bitcoin reached a record high of $69,000. As a result, crypto is still far from peak levels. Bitcoin has been bullish since the start of the year on hopes that US securities regulators may approve bitcoin ETFs. It is expected to increase after this approval.
summary
The approval of a Bitcoin Exchange-Traded Fund (ETF) marks a significant breakthrough in the cryptocurrency space. This development allows investors to gain exposure to Bitcoin through traditional investment channels, potentially increasing the accessibility and legitimacy of the cryptocurrency market.
FAQs
- What is the significance of the approved Bitcoin ETF?
The Bitcoin ETF approval is a breakthrough, linking traditional finance with the crypto market, making Bitcoin accessible through regulated means.
- How does a Bitcoin ETF work?
A Bitcoin ETF tracks Bitcoin’s price movements and allows investors to buy and sell shares on traditional stock exchanges, offering a mainstream investment route.
- What impact does the approval have on the crypto market?
The approval could bring more institutional interest and acceptance, potentially stabilizing Bitcoin’s value and fostering market maturity.
- What benefits do investors gain from a Bitcoin ETF?
Investors can access Bitcoin’s price movements without managing private keys or dealing with crypto exchanges, using a familiar and regulated investment environment.
- Are there risks associated with a Bitcoin ETF?
Yes, risks exist, including price volatility and exposure to market sentiment. Investors should be mindful of potential fluctuations in the fund’s value.
