Wednesday, October 5, 2022

Introduction to Exchange Traded Fund (ETF)

An Exchange Traded Fund (ETF) is a straightforward and quick alternative to trading assets. ETFs are an ideal instrument for traders looking to diversify their portfolios while simultaneously maintaining risk control. This is due to the fact that they represent a basket of underlying financial assets.

ETFs function by distributing a percentage of the fund’s profits to its shareholders. This allows investors to purchase, sell, and trade ETF shares just like a firm’s stock. Although ETFs and mutual funds work similarly, there are often questions as regards their differences, which are primarily in the purchase and sale mechanism of these two investment vehicles.

Bitcoin ETFs

A Bitcoin ETF combines the advantages of two popular investments including the simplicity of investing in an ETF and exposure to Bitcoin, one of the popular cryptocurrencies. A Bitcoin ETF would primarily invest in the purchase of the underlying quantity of genuine Bitcoin and then distribute that money to its shareholders in the form of shares. 

The Securities and Exchange Commission (SEC), the United States securities regulator as at the time of this writing, is yet to authorize a single application to launch a Bitcoin exchange-traded fund (ETF).

Cameron and Tyler Winklevoss, founders of the Gemini exchange, submitted the first application for a cryptocurrency exchange-backed BTC ETF in the United States of America in 2013.

The SEC rejected this application and maintains that trading volumes and liquidity on Bitcoin Futures contracts are insufficient to serve as a Bitcoin price signal. This is despite the fact that Bitcoin Futures contracts directly track spot prices on Bitcoin trading on cryptocurrency exchanges.

Since this first move by the Winklevoss twin, the clamor for a Bitcoin spot ETF has increased the more over time.

Why do investors want a Bitcoin ETF? 

Bitcoin ETF establishment makes it easier for investors who will have more window of opportunities to harness the crypto space.

This is made possible as ETFs can be purchased straight from an investor’s brokerage account. Despite the fact that major crypto exchanges have made it easy for anybody to acquire and sell digital assets, investors may still be able to obtain ETFs through more traditional channels.

The Process of Investing in ETFs 

ETF investors should first establish what they hope to gain from their holdings. Do they desire steady progress of portfolios? Is there a particular emphasis on cutting-edge technology in mind? Are there investment considerations in firms that are environmentally and socially conscious? This is because there is a diverse range of ETFs available, each focusing on a certain area of interest.

Buying and selling ETFs is made easier by popular trading platforms such as eTrade, Fidelity, and Robinhood, among others.

Here are a few steps to begin with.,

Create a brokerage account as the initial step

Before you will be able to purchase or sell ETFs, a brokerage account is required. The majority of internet brokers now offer commission-free trading on stocks and ETFs. Here, the cost is no longer a significant factor. Comparing the features and platforms becomes the optimal line of action for each broker. 

Choose your first ETFs

Generally speaking, passive index funds are the greatest option for novices. The reality is that most actively managed funds do not outperform their benchmark index over time. This is owing to the fact that index funds are less expensive than their actively managed counterparts. 

Let your ETFs grow

It is crucial to remember that ETFs are primarily designed to be investments that require little upkeep. Typically, novice investors have a terrible habit of reviewing their accounts excessively frequently, thus reacting emotionally to large market movements. 

To avoid this, once you have purchased shares of any ETFs, the best course of action is to leave them and allow them to do what they are designed to do: provide excellent investment gains over extended time periods.

Bitcoin ETF futures and how it works

While it works in the same way as a Bitcoin ETF, it tracks the price of Bitcoin futures rather than the price of Bitcoin on the open market. The ETF value is mostly influenced by the price movements of Bitcoin futures contracts, which are traded on the exchange. As a result, the issuer of the ETF is required to hold positions in the Bitcoin futures market, with ETF price pegged to the price of the Bitcoin futures contracts.

Futures contracts allow users to place bets on the price of Bitcoin by agreeing to buy or sell the coin at a specific price on a specific date in the future.

This ensures that customers can participate in digital assets and Bitcoin futures contracts without having to go through exchanges. Additionally, this strategy offers lower fees than the majority of what is on offer on cryptocurrency exchanges.

Bitcoin spot ETF and how it works

In contrast to a Bitcoin futures ETF, a spot Bitcoin ETF offers the same streamlined investment options as a Bitcoin futures ETF.

However, it only allows users to invest at the current spot price of Bitcoin, rather than at its future value. It implies that buyers would own Bitcoin within the fund, much like they would with stock purchases.

Since spot exchange-traded funds hold Bitcoin, cryptocurrency aficionados consider them to be more respectable investment vehicles. However, a Bitcoin spot ETF does not exist at the moment due to the drag-feet nature of the SEC. Still, it is believed that once established, the markets will treat Bitcoin as a legitimate asset.

Bitcoin ETF Benefits 

  • Investments are readily accessible via the stock market 
  • It provides transparent pricing
  • Navigation is easy for individuals who favor investing via conventional brokerages 

Cons of Bitcoin ETFs 

  • Significantly, it can be more expensive than directly purchasing Bitcoins 
  • Futures exchanges are extremely speculative and you can’t sell off whenever you want 
  • It might be difficult to outperform the Bitcoin market 

Bitcoin ETFs alternatives

Investment opportunities in cryptocurrencies can be immediately accessed just by owning Bitcoins. If you do not want to put money into Bitcoin ETFs, you can put money into other cryptocurrencies like Bitcoin (BTC), Ether (ETH), or Avalanche (AVAX) directly through exchanges like Binance and Coinbase. 

Conclusion

Regarding Bitcoin and other cryptocurrencies, there are a variety of investment choices to explore. However, few of them are appropriate for the typical investor, and this includes a Bitcoin ETF. If and when the Securities and Exchange Commission (SEC) approves the first Bitcoin exchange-traded fund In the United States, it will signal the beginning of the crypto market’s transition to the next level of maturity.

As evident, spot ETFs may not be available in the United States, but the products are already available in Canada, Brazil, Dubai, and other nations across the world. It will be intriguing to observe the future performance of the products on the market and their strides can serve as a basis for the SEC to approve a similar product in the United States.

Ayo Alabi
Ayo Alabi is an experienced writer and Fintech enthusiast, passionate about educating people and helping businesses that want to see their Google search rankings surge. Her articles have appeared in a number of e-zine sites, with focus on balancing informative with SEO needs–but never at the expense of providing an entertaining read.

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