What is a Bitcoin ETF?
Simply put, an Exchange-Traded Fund (ETF) is a security that tracks a particular index, commodity, sector, or asset. The major benefit to an ETF is that, unlike other securities like mutual funds, ETFs are able to be bought and sold on stock exchanges similar to other stocks. A Bitcoin ETF is one of these securities that tracks the price of Bitcoin and allows investors indirect exposure to its value as an investment option.
Benefits
The obvious benefit of a Bitcoin ETF is the liquidity from institutional investors that it would bring. This would almost certainly result in the price of Bitcoin exploding alongside any announcement. This is evident from the recent example when, on October 16th, 2023, Cointelegraph incorrectly reported that the SEC had approved its first Bitcoin ETF. The news alone caused the price of BTC to surge from $27,900 to over $30,000 in a matter of minutes, taking over $100 million in liquidations of long and short positions with it.
A Bitcoin ETF would allow traditional institutional investors to gain exposure to Bitcoin without needing to understand the underlying technology. An ETF would allow them to engage with it the same way they would with any other stock within their portfolio. This is a major selling point for those only interested in Bitcoin as a speculative asset.
Yet another and arguably more important benefit of a Bitcoin ETF is the legitimacy it would provide Bitcoin writ large. When the most influential institutional investors like Blackrock, with over $9.4 trillion of managed assets, talk about Bitcoin ETFs, the rest of the market takes notice.
Drawbacks
There are a few definitive drawbacks to owning a Bitcoin ETF. These become clear when you understand that an ETF operates similarly to other stocks on a stock market.
One main disadvantage to an ETF is that it operates on the same schedule as the rest of the stock market, which for the NYSE is 9.30 am – 4.00 pm ET. This can become an issue due to the volatile nature of Bitcoin’s price history.
As seen recently with the October 16th incorrect report, the price can swing violently in either direction quickly. Unlike the stock market, Bitcoin operates undeterred twenty-four hours a day, seven days a week. If one of these price corrections occurs outside stock market office hours, those holding ETFs instead of actual Bitcoin will be unable to adjust until the markets reopen.
Similarly, when you choose to gain exposure to Bitcoin via an ETF, you maintain a different degree of autonomy over that Bitcoin than you would by doing so directly. In a way, you are choosing to engage in a custodial activity with counterparty risk.
Yet, unlike utilizing other third-party custodians like centralized exchanges, you ultimately do not control the underlying asset. You cannot claim the Bitcoin in the ETF itself or utilize it as a potential means of exchange.
