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What are the advantages of investing in Bitcoin ETFs instead of actual Bitcoin?

What are the advantages of investing in Bitcoin ETFs instead of actual Bitcoin?

Explainers Trading

18 Jul 2022

For years now, there have been several attempts by various companies to obtain approval from financial regulators and launch an exchange-traded fund (ETF) dedicated to Bitcoin. An ETF that tracks the value of Bitcoin would be an interesting way to give a broader mainstream investor audience exposure to the OG digital asset.

ETFs aren’t a new product. They have been available in traditional finance (TradFi) for a long time and are a way for investors to access a basket of assets that represent different industries, commodities, currencies, or even theme-based selections such as shares in environmentally-friendly companies.

Currently, there are some Bitcoin ETFs available across different jurisdictions including Canada, Europe, and Brazil. While there isn’t a spot bitcoin ETF in the US, there are Bitcoin Futures ETFs that mimic the price of Bitcoin futures instead of the market price of Bitcoin. The company issuing the ETF must hold positions in the Bitcoin futures market and anchor the price of the ETF to those Bitcoin futures contracts.

Why would investors buy Bitcoin ETFs instead of Bitcoin?

For investors completely new to crypto, it might be overwhelming to learn how to use crypto wallets, protect seed phrases, and transfer assets using addresses on the appropriate networks. These investors are simply looking for exposure to the most established cryptocurrency in the market. They are generally less interested in the crypto industry and they are not necessarily looking to learn how to participate in the decentralized economy.

The barrier to entry is lowered even further when you consider most people buying into BTC ETFs do so from an existing brokerage account. So there’s no need for this particular wave of retail to go through the steps of creating a trading account to buy into crypto. They also don’t have to worry so much about securing their BTC holdings and fending off hackers, sophisticated phishing scams, or misplacing their seed phrases. That’s because they don’t actually own any Bitcoin. All they have is shares in an ETF that tracks the price of Bitcoin.

Cons of investing in a Bitcoin ETF

However, there are downsides to buying a Bitcoin ETF as well. For starters, these funds are managed by fund managers and they all take a cut of the profits. The fees for maintaining ETFs are bulit into the price and quoted on the prospectus under the expense ratio. The pricing of the ETF is also often inaccurate and fluctuations of the actual BTC markets on crypto exchanges are not immediately reflected in the ETF value. Lastly, crypto markets never sleep, but your ETF fund manager does. So you won’t be able to respond to significant Bitcoin price movements after Close of Business or on the weekends.

Will the U.S. approve a Bitcoin spot ETF in 2022?

The launch of a Bitcoin ETF has been a highly anticipated event for the crypto industry, as many people believe it will bring in a new wave of retail investors for all the reasons stated above. The mother of all retail trading markets is in the US, so as a result all eyes are on the first successful launch of a spot Bitcoin ETF.

However, obtaining approval from the SEC has proven to be a challenge, with numerous applications rejected over the last 5 years. Hopes were up when the SEC approved the Bitcoin Futures ETF in October 2021, however the recent application filed by Grayscale to convert the publicly traded Grayscale Bitcoin Trust (GBTC) into a spot ETF was rejected on June 29, 2022.

The SEC stated in its decision that the application failed to answer the SEC’s questions about preventing market manipulation, as well as other concerns. Which doesn’t explain at all why a Futures ETF tracking the Bitcoin market did get approval.

Grayscale has since filed a petition for review with the U.S. Court of Appeals in Washington, D.C., asking the federal court system to take a look at the SEC’s decision. The company is asking it to take another look at the application and review its process as to whether or not the rejection complied with the appropriate internal processes.

Investment giant VanEck is also not giving up after its spot Bitcoin ETF was rejected back in 2021. The company filed a new application just a day after the regulator denied the spot bitcoin ETF applications of Grayscale Investments. “Spot commodities and currency markets for which it has previously approved spot ETPs are generally unregulated and that the Commission relied on underlying futures market as the regulated market of significant size that formed the basis for approving the series of Currency and Commodity-Based Trust Shares, including gold, silver, platinum, palladium, copper, and other commodities and currencies,” VanEck noted in its filing.

There may not be a spot Bitcoin ETF available in the US markets any time soon – but it looks like the companies attempting to launch one aren’t giving up either.

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