How do I choose the best ETF overall, and how does it impact the price of Bitcoin?
Well…stick around! In this episode of Crypto Whiteboard Tuesday, we’ll tackle these questions and more.
Introduction
Hi, I’m david and welcome to Crypto Whiteboard Tuesday, where we take complex cryptocurrency topics, break them down, and translate them into plain English.
Today’s topic is the Bitcoin Spot ETF.
Buying Bitcoin: The Traditional Process
Until recently, bitcoin purchases have changed in that you can actually buy bitcoins and hold them in your own bitcoin wallet or allow someone else to hold them, which is true in a bitcoin exchange game.
However, if you don’t want to store real money and you tend to just bet that bitcoin spends money quickly, this option is more than a little overkill, as it requires you to store your money safely.
What is a Bitcoin ETF?
Now you can measure the value of Bitcoin without actually buying Bitcoin by investing in a Bitcoin ETF. An ETF stands for exchange traded fund, and is an investment instrument that aims to create the musical amount of a particular asset or asset prestige—in this case, bitcoin.
In simple terms, it’s a note that you buy from a company that aims to track the price of Bitcoin, and you can sell that note when you want to get out of your investment.
Understanding the ETF Abbreviation
Let’s break down the ETF abbreviation into its components to see how it works:
- The E or Exchange in ETF means ETFs are bought and sold like any other stock on an exchange.
- The T or Traded means ETFs are traded and experience price changes throughout the day.
- The F or Fund means that ETFs generally hold a collection of assets in one fund in order to effectively track the price it’s aiming to track.
One important feature is that the Securities and Exchange Commission (SEC), an independent federal agency, regulates ETFs in the United States. This means the government oversees the trading of ETFs to ensure investor safety and prevent fraud.
What is a Bitcoin Spot ETF?
You may have heard the term Bitcoin Spot ETF. This refers to a note or financial instrument that tracks the current price of Bitcoin, as opposed to a Futures ETF that tracks bets or contracts to buy or sell Bitcoin at a future date.
How to Buy a Bitcoin ETF
You can find an online broker such as Robinhood, eToro, Fidelity, WeBull, and Charles Schwab. You can also ask for a Bitcoin ETF to be included in your traditional IRA, Roth IRA, or 401(k) plan.
Does an ETF Track the Price of Bitcoin Exactly?
The answer is: not exactly. While the ETF aims to mirror the performance of Bitcoin, ETFs always experience tracking errors, creating a gap between the ETF’s price and Bitcoin’s actual price. These tracking errors can occur due to market conditions, the ETF management’s strategy, or the fees associated with the ETF.
Comparing Bitcoin ETFs to Actual Bitcoin
Let’s summarize how buying an ETF compares to buying Bitcoin:
- Accessibility: ETFs are much more accessible to the general public, as acquiring them doesn’t require much technical know-how. You don’t have to worry about getting a Bitcoin wallet, creating a backup of your seed phrase, or keeping your wallet safe.
- Ease of Trading: ETFs are easier to trade and can be done through many popular platforms. They are also regulated, adding a layer of protection.
- Market Hours: ETFs aren’t available 24/7 like Bitcoin on cryptocurrency exchanges, so you can’t trade them when the markets are closed.
- Volatility Protection: During extreme price swings, ETFs may not be available for trading, unlike Bitcoin.
- Fees: ETFs come with management fees, making them more expensive to hold than actual Bitcoin, which has no holding fees.
- Tracking Error: As mentioned, ETFs will never track Bitcoin’s price with 100% accuracy.
- Cash-Only Trades: ETFs can only be traded for cash, while Bitcoin can be used to pay for products and services.
- Risk: Holding an ETF means you don’t have full custody of Bitcoins, leaving you vulnerable to the ETF issuer’s potential default.
Choosing the Best Bitcoin ETF
If you still want to buy a Bitcoin ETF, here’s how to choose the best one for you.
At the time of this video, there are 11 different Spot Bitcoin ETF options available in the US. Here’s what to consider:
- Management Fees (Expense Ratio): Lower fees mean better returns.
- Reputation of the Issuer: Look for ETFs from reputable issuers with experience in managing funds, particularly crypto-related assets.
- Assets Under Management (AUM): Higher AUM indicates greater investor confidence and better liquidity, making it easier to buy and sell shares.
How Does the Bitcoin Spot ETF Impact Bitcoin’s Price?
The approval of a Bitcoin Spot ETF affects Bitcoin’s price because the companies issuing the ETFs must hold actual bitcoins to back up the notes they issue. This creates buying pressure, pushing Bitcoin’s price higher.
Additionally, the availability of a Bitcoin Spot ETF allows institutional investors, such as pension funds and hedge funds, to invest in Bitcoin, potentially driving prices even higher.
Combine this with the 2024 halving event, which will cut Bitcoin generation in half, and you have a scenario of increasing demand with tightening supply, likely resulting in price increases.
Conclusion
To sum up, a Bitcoin ETF is a good solution if you want to bet on Bitcoin’s price without the technical hassle of securing and managing your Bitcoins. However, during extreme market conditions, you may not be able to trade your ETF, and you’ll always be at the mercy of the ETF issuer.
Final Thoughts
That’s it for today’s episode of Crypto Whiteboard Tuesday. Hopefully, by now, you understand what a Bitcoin Spot ETF is—a note issued by a company that holds Bitcoin for its investors and attempts to accurately track Bitcoin’s price.
Still have questions? Leave them in the comments section below.
