Cryptocurrencies are becoming increasingly popular in the lives of investors. However, many investors are still unaware of the differences between ETFs and the differences between spot and futures ETFs
Cryptocurrencies are becoming increasingly popular in the lives of investors. However, many investors are still unaware of the differences between ETFs and the differences between spot and futures ETFs. The lack of such knowledge has led to confusion about the possibility of the SEC approving Bitcoin ETFs.
What is an ETF?
ETFs (Exchange Traded Funds) are investment products similar to stocks that allow investors to buy and sell on exchanges. These funds have underlying assets, which can be stocks, commodities, or cryptocurrencies. For example, ETF issuers can create a Danish food ETF by collecting stocks of Danish food companies. This is similar to owning a basket of stocks of the issuer company.
To provide a real-life example, let's consider S& P500ETF. This ETF holds stocks of companies listed on the S&P 500 Index, aiming to replicate the performance of the index. If there are changes in the composition of the index, the ETF manager will adjust the fund assets to reflect these changes and continue to track the composition and performance of the index.
What is Bitcoin ETF?
Bitcoin ETFs allow investors to directly invest in Bitcoin while relying on the issuing company. The ETF price fluctuates based on the price performance of Bitcoin, allowing investors to invest in Bitcoin.
What is a spot Bitcoin ETF?
Spot Bitcoin ETFs directly hold Bitcoin (BTC) as the underlying asset. The issuer company holds physical BTCs corresponding to the ETFs it issues. When you purchase an ETF, the selling company must actually purchase and hold Bitcoin (through a hosting partner).
For example, let's consider Bitcoin ABC spot ETFs. The ETF was launched by issuing companies such as BlackRock. If the issuer claims to hold 10000 Bitcoins and issues 1 million shares, theoretically each share represents 0.01 Bitcoins.
Some benefits of spot Bitcoin ETFs include:
- Allow for BTC investment without the risk of storing BTC.
- When Bitcoin is traded on traditional exchanges, it brings more liquidity to Bitcoin.
- Legitimate Bitcoin and alleviate concerns among institutional investors.
- Attract recognized institutional investors and push up the price of Bitcoin.
- As interest in issuing companies and ETFs increases, the fund's BTC reserves grow proportionally to the market size of ETFs, resulting in scarce supply.
Some drawbacks of spot Bitcoin ETFs include:
- High volatility.
- Negative pricing occurs due to ETF fees and cyclical pressures. The value of the fund may be lower than its expected value. Insufficient demand is an important issue here.
- The ETF fee increases the investment cost of Bitcoin. The maximum cost can reach 2.5%, thereby increasing the cost of ETFs. However, due to competition from the upcoming ETF approvals, it is expected that the fees will be significantly reduced.
What is Bitcoin Futures ETF?
In such funds, BTC is not directly held. On the contrary, it invests in Bitcoin futures contracts, which are agreements to buy and sell Bitcoin at predetermined prices on future dates. As we mentioned earlier, volatility increases at the end of the contract period.
Therefore, most experts consider Bitcoin futures ETFs as paper Bitcoin. Due to their lack of scarcity, their contribution to prices is not significant. Coin An provides a great example to explain this:
Let's imagine a Bitcoin futures ETF called 'BitFutures', whose main purpose is to track the future price of Bitcoin by purchasing Bitcoin futures contracts. A financial institution establishes and manages a BitFutures ETF. Suppose BitFutures plans to purchase 1000 Bitcoin futures contracts, each representing the right to purchase one Bitcoin for $55000 within three months.
In order to raise funds to purchase these contracts, BitFutures issued 10 million shares, representing claims for potential profits (or losses) from these futures contracts. This means that each share represents 0.0001 portion of each futures contract.
Investors can purchase BitFutures stocks, just like buying any other company's stock on a regular exchange. If the market believes that the value of Bitcoin will exceed $55000 within three months, its stock may trade at a premium. On the contrary, if the market is pessimistic, stocks can be traded at a discount.
Assuming the trading price of BitFutures is $10 per share. Investors who believe that Bitcoin prices will rise in the next three months can purchase 1000 shares for $10000. If futures contracts are profitable, the value of BitFutures stocks may increase. If investors' beliefs are correct and the price per share rises to $12, their investment will be worth $12000, resulting in a profit of $2000
Essentially, when you purchase Bitcoin futures ETF stocks like BitFutures, you indirectly bet on the future price of Bitcoin without actually holding cryptocurrency or futures contracts
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