Home Bitcoin Bitcoin Teach Me! What is a Bitcoin ETF?

Teach Me! What is a Bitcoin ETF?

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An Exchange-Traded Fund (ETF) is a type of financial asset that does not consist directly of a particular commodity, share of a company, or currency. What is it, then?

 

An ETF is actually a modern kind of security that behaves like any stock. However, instead of being a direct asset itself, an ETF is an indirect asset that tracks a particular index or a direct asset. ETFs are in many ways similar to mutual funds, however they are listed on stock exchanges. In fact, you can buy ETFs in a similar way that you buy stocks, as one more type of an open-market regulated asset. It is usually said, though, that an ETF tracks the movements of a given investment good. ETFs are paper assets that track real world assets.

WHAT KIND OF ASSETS ARE TRACKED BY ETFS?

ETFs are used in many types of investments, for example stocks, commodities, bonds, shares, debt, IOUs, and even on currencies. Since an ETF is legally an asset itself – like a certificate representing a possession of some intangible valuable thing – it is a marketable security.

Buyers and sellers can trade in an ETF freely speculating on its price just like with any other real world asset or currency. An ETF is similar to the paper avatar of any assets that behaves like the asset it tracks. For example, you can purchase the metal gold in the market or ETF gold. The first one is solid gold. The second one is just a certificate on paper that represents gold.

SO BY OWNING AN ETF, I DON’T OWN THE ASSET?

A short answer is: yes, that’s what it means. A more precise and elaborated answer would be: well, you do not own the real-world asset, but you do own a valuable asset, the signed paper. Your paper or certificate is the asset. The market accepts it for the same price of the real-world asset it represents, so in practice it should be the same if you just want to speculate in the market.

ARE BITCOIN ETFS FALSE BITCOINS?

Again, yes and no. It depends. A Bitcoin ETF is not a Bitcoin. You can imagine a Bitcoin ETF as a written document, like a financial letter, certificate or share. Its value, by definition, is tied to that of Bitcoin’s market price. If you own a Bitcoin ETF, in a sense, you are investing in Bitcoin, even if you do not really possess any Bitcoin.

One cannot say, nevertheless, that an ETF is a false instrument or that it is like a scam, at least those that are issued by legal entities under proper regulation because the release of instruments is highly transparent. Investors are exposed to the truth and detailed information. If they choose the ETF instead of the real Bitcoin, it is because for them the latter sounds more convenient.

DO ISSUERS NEED TO BACK BTC ETFS?

Absolutely! Actually, ETFs that are regulated by competent authorities, such as the SEC in the USA, must prove to be sound investments, to be above certain level of dangerous volatility, and to include visible backing mechanisms. In the case of Bitcoin ETFs, you can back them with US dollars, with some other currency, or naturally with real Bitcoin.

For those crypto investors who are loyal believers in decentralization and the original values of Bitcoin, perhaps the only ETF that is tolerable is a BTC-backed ETF. This kind of backing implies that you, as an ETF issuer, will have in your reserve one real Bitcoin for each BTC-ETF you sell to the open market. However, legally speaking, issuers could back with other valuable assets.

WHAT’S SO GOOD ABOUT BTC ETFS?

Maybe not so much as we crypto fans expect, but ETFs might have a positive impact depending on some other factors. If companies start offering more and more BTC-backed ETFs, then they will become active consumers of real Bitcoin. As their ETF business grows, the demand for Bitcoin would increase. This is empowering for Bitcoin, obviously. Many investors consider ETFs important, in general, because they denote popular acceptance and regulatory victories.

The impact of a massive ETF market could be bad, too. Let’s not forget that companies may see the US Dollar-backed ETF as more profitable and convenient. In this case, each BTC-ETF that a company sells to the open market, in a certain way, represents one non-real Bitcoin that is playing a role in the real market. Some people argue that this is like increasing Bitcoin’s supply indirectly. This other kind of ETF also takes advantage of the name “Bitcoin” and its popularity, but is not really associated to Bitcoin at all. It’s 100% paper speculation.

ETFS IMPLY MASS ADOPTION

One thing is true and nice. If big corporations are eager to launch ETFs – we hear of many of them in the news – then this means Bitcoin and crypto are making strides in adoption. More and more people are experimenting with cryptocurrencies and blockchain technology. The more news we hear on ETFs, the closer we are to a potential global adoption of sound crypto.

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