Bitcoin ETFs- essential things to know

Bitcoin ETFs is an exchange-traded fund that tracks the value of this digital currency and trades on traditional market exchanges rather than cryptocurrency exchanges.

These ETFs allow investors to invest in this electronic money without the hassle of using a cryptocurrency exchange while providing leverage to its price. 

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How ETFs work

An ETF, an exchange-traded fund, is an investment fund that tracks the price of an underlying asset or index.

Today, ETFs are available for several purchases and industries, from commodities to currencies. 

In addition, a Bitcoin ETF would work the same way, whereby the price of one share of the exchange-traded fund would fluctuate with the cost of this virtual asset.

If this virtual asset increases in value, so do the ETF and vice versa.

Rather than trade on a cryptocurrency exchange, the ETF would trade on a market exchange like the NYSE or TSX.

Advantages of Bitcoin ETFs

Although anyone can buy this electronic currency from an exchange platform or through a Bitcoin ATM, an ETF would offer various benefits, which include:

Convenience

Investing in Bitcoin ETFs provides leverage to this digital money’s price without learning how Bitcoin works, signing up for a cryptocurrency exchange, and taking on the risks of owning Bitcoin directly.

For instance, Bitcoins are in a wallet, and if an investor loses the password to the wallet, their Bitcoin gets lost forever.

A Bitcoin ETF, on the other hand, simplifies the process of investing in this digital asset.

Diversification

An ETF can hold more than one asset. For instance, a Bitcoin ETF would compromise Bitcoin, Apple stocks, Facebook stocks, and more.

Therefore, providing investors with the chance to mitigate risk and diversify their portfolios.

Similarly, a Bitcoin ETF allows investors to diversify their existing equity portfolios by trading on a regulated market exchange.

Thus, a Bitcoin ETF would allow investors to diversify their existing equity portfolios.

Tax efficiency

Given that this digital asset is unregulated and decentralized, most of the world’s tax havens and pension funds do not allow for purchases of Bitcoin.

On the other hand, a Bitcoin EFT trading on traditional exchanges would likely have regulation by the SEC and be eligible for tax efficiency.

Disadvantages of Bitcoin ETFs

Even though the benefits of a Bitcoin ETF are significant, a Bitcoin ETF can only do so much.

There are some disadvantages of ETFs, and they include:

ETF inaccuracy

While ETFs track the underlying asset’s price, they can also have multiple holdings in a bid to diversify the portfolio.

However, this suggests that Bitcoin users may offer a 50% rise in the price of Bitcoin, which may not reflect accurately on the exchange-traded fund’s value due to its other holdings.

Therefore, an ETF provides leverage to Bitcoin’s price. However, it may or may not be an accurate tracker of its price. 

Limits to cryptocurrency trading

A Bitcoin ETF wouldn’t be eligible to exchange for other cryptos as it is not a cryptocurrency but simply an investment fund that tracks the price of Bitcoin.

Lack of Bitcoin ownership

Bitcoin is a hedge against central banks, fiat currencies, and other equities. By being independent of major banks, this digital money can mitigate risks associated with the financial system.

This virtual money protects users and investors by providing privacy through the Bitcoin blockchain.

On the other hand, a Bitcoin ETF would be regulated by the government, eliminating these benefits.

The bottom line

Bitcoin ETFs are gaining popularity as more people familiarize themselves with the cryptocurrency space.

Nevertheless, take the time to understand Bitcoin ETFs before investing in them.

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