ETFs are popular with investors who want to diversify their portfolios at a lower cost and with tax advantages. An exchange-traded fund (ETF) is a collection of assets that can be purchased and sold on the stock exchange. They combine the benefits and characteristics of mutual funds, equities, and bonds into one product.
Like individual stocks, ETF shares fluctuate in value throughout the day based on the market’s supply and demand. Bitcoin ETFs track the worth of BTC and trade on standard stock exchanges rather than cryptocurrency ones, so they are not a type of ETF for cryptocurrencies. As a bonus, they make it easier for investors who don’t want to deal with cryptocurrency exchanges to invest in Bitcoin.
In most Bitcoin ETFs, futures proxy the cryptocurrency’s actual value. By ensuring that they can purchase or sell a particular cryptocurrency at a specific price in the future, investors can use futures contracts to protect themselves against volatile markets.
ETF monitors an underlying asset or index price. Similar would be a Bitcoin ETF, where the fee of one share changes in lockstep with the price of one BTC.
There is a direct correlation between Bitcoin’s value and the ETF. A stock exchange like the NYSE would host the ETF’s trading. Commodities, currencies, and other industries can now benefit from ETFs.
Bitcoin Futures And Bitcoin Spot ETFs
You can buy or sell a futures ETF based on the terms of a contract, which represents the value of a cryptocurrency. However, when you buy or sell futures, you do not own the underlying crypto asset. Some contracts offer to acquire or sell cryptocurrencies at a later date.
As a result, market volatility and price movements do not affect futures contracts. On the other hand, unlike if you owned the currency entirely, you cannot use your futures coins to invest or vote.
One-time purchases of digital assets, as opposed to futures contracts, make it possible for buyers and sellers to take immediate possession. It functions in the same way as any other crypto exchange.
There are many criticisms hinged on Bitcoin futures ETFs for holding lots rather than spot Bitcoin can result in underperformance Futures often trade at a more excellent price than the underlying asset is another reason traders despise them. However, lots can also sell at a lower price.
Derivatives (in this example, Bitcoin forward contracts) underpin futures ETF investments, but real Bitcoin does not. It makes the spot-based ETF the superior choice for investors who want to gain exposure to Bitcoin without using derivatives.
Investors’ emotions can cause the price of Bitcoin futures contracts to stray from the current market price, but it can also track the cost accurately. This risk does not exist, however, in the case of a spot-based ETF.
How Bitcoin Futures ETF Work
To buy or sell BTC at a certain price on a specific date, independent of market conditions, means investing in Bitcoin exchange-traded funds (ETFs). The contract expiration date or settlement date is the agreed-upon deadline for both parties to their responsibilities.
Buying Bitcoin at a discount or a premium at the end of a Bitcoin futures contract is required. When the futures price trades higher than the Spot price, the market is said to be “premium”.
When the spot price is greater than the futures price, a “discount” occurs. Equities have a word called discount, whereas commodities have a term called backwardation. Futures prices that are converging toward today’s price are considered normal.
An ETF’s price will typically follow the price movement of its underlying asset, making it possible for investors to arbitrage away a vast difference between the ETF’s price and that of the underlying asset.
Problems Associated With Bitcoin Futures ETF
The biggest issue with Bitcoin futures ETFs is that their price trackers are often inaccurate. “Contango” is the term used to describe a situation where the price of Bitcoin futures exceeds the spot price, implying that the ETF is wrongly tracking the price of Bitcoin. “Backwardation” occurs when the futures price is lower than the current Bitcoin price.
Contracts designed to expire will not be enough money to acquire contracts due to expire at a later date if the price of the new contract is higher than the Bitcoin futures contract price. Due to this scenario, the new contract would harm the ETF’s performance.
How Bitcoin Spot ETF Work
Though Australia will become the first to launch the FBTC, other countries, such as the UK, have yet to do so. The UK regulator has warned investors in crypto assets to “be prepared to lose all their money.”
There is a preference for futures ETFs over spot ETFs in the Bitcoin market since the Commodity Futures Trading Commission regulates the futures market and has massive trading volumes, which can be an important place for price discovery.
Investors would be able to have access to Bitcoin through a regulated and familiar ETF product without having to own the underlying asset, which is the actual BTC price. Spot-based investing also does not allow consumers to wager on price declines. Investors can profit from declines in the value of an ETF’s shares if one is available.
Bitcoin ETFs Investment
The Bitcoin Strategy ETF, listed on the Mercantile Exchange of Chicago, allows investors in the United States to purchase BTC exchange-traded funds. Investors can acquire exposure to Bitcoin without buying the famously volatile digital currency by investing in a fund with the ticker BITO.
Like any other ETF, you can buy BITO through online brokerages like any other. If you don’t already have a brokerage account, you need to open one with a platform like Robinhood or Fidelity. Once you have made an account, figure out how many shares of BITO you would like to purchase and at what price.
You can use a market order to buy mutual fund shares at the current market price. As opposed to this, a limit order enables you to designate the most excellent price at which you may buy stock.
Pros And Cons Of Bitcoin ETF
With a Bitcoin ETF, you don’t need a cryptocurrency exchange, you don’t need to understand Bitcoin, and you don’t have to take on the hazards of directly owning Bitcoin. Bitcoin futures and spot ETFs make investing in the cryptocurrency easier because you don’t have to worry about losing your wallet password.
An ETF is an excellent way for investors to diversify their portfolios and lower their risk exposure because it combines multiple securities, such as Google stock, BTC, and more. The SEC regulates Bitcoin futures ETFs, and they trade on regular exchanges. Thus, they qualify for tax efficiency as a result.
Because there are so many Bitcoin ETFs, the management costs are expensive. A spike or fall in the price of BTC may lead to price inaccuracy in an ETF because of the ETF’s many holdings.
Therefore, the government regulation of a Bitcoin ETF would negate the benefits of Bitcoin’s decentralisation and security provided by the Bitcoin blockchain.
Traditional investment vehicles and the volatile cryptocurrency market are not mutually exclusive, as Bitcoin ETFs show. You can buy and sell ETFs using your favourite brokerage, like trading stocks. This investment, on the other hand, appears to be in a state of flux.