Learn what bitcoin ETFs are, their types, how they work and the potential of the newly sec-approved 11 spot bitcoin ETFs on the value of bitcoin.
Recently, there has been a lot of buzz around Bitcoin ETFs in the finance and investment world following the Securities and Exchange Commission's (SEC) approval of 11 Bitcoin spot ETFs. The concept of Bitcoin ETF isn’t entirely new, over a decade ago in 2013 the Winklevoss twins tried to list one but were rejected by the regulatory body.
In 2021, Bitcoin futures ETFs were approved in the US. What distinguishes this recent approval, and how might these financial instruments influence the broader adoption and value proposition of Bitcoin?
This article delves into these questions and more, aiming to demystify the intricacies surrounding Bitcoin ETFs. Let’s get the party started already!
What are ETFs?
To comprehend the significance of Bitcoin ETFs, let's first establish a foundational understanding of EFTs. ETFs are an abbreviation for Exchange-Traded Funds. They are investment funds traded on stock exchanges, providing investors with exposure to a diversified portfolio of assets.
It’s a way for investors to get exposure to the value of the underlying asset without directly owning it. ETFs trade on traditional stock exchanges, and their value should rise when the underlying asset increases in price, or fall if it decreases.
Unlike traditional mutual funds, ETFs are traded throughout the day on stock exchanges, and they typically track the performance of a specific index, commodity, bond, or basket of assets.
Investors can buy and sell shares of an ETF just like individual stocks, offering a convenient and liquid way to invest in a variety of markets.
Bitcoin ETFs
Just as defined above, the only difference is that the underlying asset here is bitcoin. Therefore, Bitcoin ETFs are investment funds traded on stock exchanges providing retail or institutional investor exposure to bitcoin without holding the digital currency.
These funds hold bitcoin on behalf of investors, issuing shares that represent ownership in the fund. The ETF's value corresponds to the value of the underlying bitcoin it holds.
The approval of Bitcoin ETFs has stirred discussions about the institutionalization of bitcoin as an asset class, despite lingering SEC scepticism regarding crypto-associated risks. It is worthy of note that Bitcoin spot ETFs commenced trading on January 11, 2024, on prominent exchanges such as NYSE and Nasdaq, amassing a substantial trading volume of approximately $4.6 billion on the inaugural day.
A notable advantage of Bitcoin ETFs lies in their ability to introduce familiarity and accessibility to traditional investors who may have reservations about directly engaging with digital currencies.
Additionally, these ETFs streamline the investment process, enabling investors to seamlessly integrate bitcoin into their portfolios.
Types of Bitcoin ETFs
There are two types of Bitcoin ETFs, namely, Future Bitcoin ETFs and Spot Bitcoin ETFs.
Future Bitcoin ETFs invest in derivatives rather than the digital asset itself, deriving their value from the anticipated future price of Bitcoin. They gained approval and commenced trading in October 2021, with an example being the Bitcoin Strategy ETF (ticker: BITO).
Spot Bitcoin ETFs, on the other hand, directly invest in Bitcoin itself. My emphasis will be on spot bitcoin ETFs as they are the new kids on the block with different investment funds like Blackrock, Fidelity and Grayscale on board.
The newly approved 11 spot bitcoin ETFs are; Grayscale Bitcoin Trust, Fidelity Wise Origin Bitcoin Trust, iShares Bitcoin Trust, ARK 21Shares Bitcoin ETF, Invesco Galaxy Bitcoin ETF, Hashdex Bitcoin ETF, Bitwise Bitcoin ETF, Franklin Bitcoin ETF, Wisdom Tree Bitcoin Fund, Valkyrie Bitcoin Fund.
The excitement surrounding spot Bitcoin ETFs revolves around the anticipation of mainstream adoption. Institutional investors, previously held back by regulatory concerns, now have an avenue to invest in Bitcoin.
Potential Effect of the Spot ETFs on Bitcoin Value
Analysts are abuzz with various views on the potential impact of spot ETFs on the market. Two noteworthy perspectives stand out for me.
Firstly, there's a comparison to the first-ever spot gold ETF, SPDR Gold Shares ETF, introduced in 2004. The total gold market was valued at around 1-2 trillion dollars before the ETF's approval, and after some years, it surged to $16 trillion. Some anticipate a faster and more substantial adoption of Bitcoin compared to gold, hinting at Bitcoin truly living up to its moniker of "digital gold."
Secondly, a reflection on the market's reaction after the approval of future Bitcoin ETFs. Bitcoin soared to a six-month high, its highest price point at that time before the $69k ATH in November 2021.
The first Bitcoin futures ETF experienced a 4.8% surge, closing at $41.94 per share on its debut trading day. Bitcoin's price also surged to $64,157, surpassing its previous all-time high, reaching $66,909.15.
While historical events don't guarantee future outcomes in the financial market, these observations offer valuable insights. However, it's crucial to avoid relying solely on timing or sentiment when navigating the bitcoin market.
There's no perfect time to buy bitcoin, and every day presents an opportunity to accumulate sats and bitcoins. Embracing the power of Dollar-Cost Averaging (DCA) provides a great strategy to kickstart your bitcoin journey, the concept is similar in operation to the conventional ajo/esusu/adashe practised in Africa. Learn more about when is the right time to buy bitcoin.
Final Words
The SEC approval of a spot ETF is a significant milestone in the mainstream adoption of bitcoin. These financial instruments provide a bridge between traditional finance and the world of digital currencies, offering investors a regulated and accessible avenue to gain exposure to bitcoin's potential.
As the landscape continues to evolve, monitoring the impact of ETFs on bitcoin's value will be a fascinating journey, reflecting the maturation of the digital currency market and its integration into the broader financial ecosystem.
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