Brought to you by the Liquid team to help you make sense of crypto.
What is a Bitcoin ETF?
ETF = Exchange Traded Fund.
An ETF is a tradable investment fund that can be found on exchanges and traded just like stocks and cryptocurrencies.
At present, cryptocurrency ETFs, specifically Bitcoin ETFs, are highly anticipated. No investment product is perfect, but for a subset of the community, an ETF may be very attractive. Furthermore, ETFs may attract additional investors to the space.
But what is an ETF?
An ETF is an asset pool that combines a number of assets into one entity. So, an ETF is a managed fund, the price of which depends on the assets involved and their performance.
In other words, when you invest in an ETF you are effectively investing in a number of assets.
An ETF can be built around any underlying assets. For example, a cryptocurrency ETF could be made up of Bitcoin, Ethereum and XRP. The exchange that is issuing the ETF would have to place a large number of these three cryptocurrencies in a custodial solution.
With the underlying assets locked away, the issuing exchange could then sell shares of the ETF based on the value of the underlying cryptocurrencies stored. The market price correlates to that of the underlying asset.
For an ETF to be tradable it has to be approved by regulators.
Why would you trade an ETF?
Now that we know what an ETF is, let’s take a look at some of the reasons that people choose to trade or invest in ETFs.
There is always a degree of risk to investing. One of the most common investment tips is to diversify your portfolio to spread out your risk. With an ETF you are investing in a preselected, approved amalgamation of assets.
However, some ETFs focus on a particular niche, for example, technology stocks. If the technology sector were to suffer, the entire ETF would most likely perform negatively.
A lot of time goes into fundamental analysis for investments. While you should still understand the underlying assets and their value potential, an ETF is curated by professional fund managers. Therefore, you are able to save research time, although you'll pay fees for the privilige.
Imagine you wanted to invest in cryptocurrency supply chain projects. An ETF that focussed on this could pick the five most promising projects and potentially save you research time.
Investing an ETF also allows you to trade more than one asset at once. In return you would have reduced flexibility and likely pay higher fees.
ETFs aren’t for everyone
While there are some great benefits to ETFs, they only appeal to a subset of traders and investors. Some investors would rather not be channeled into restrictive diversification options.
When you invest outside of an ETF you are able to freely pick your investments. You can choose your level of diversification and therefore more freely control risk.
Investing in an ETF can also incur additional fees. Many investors would rather avoid these.
The Bitcoin ETF
Several firms have tried and failed to get approval for a Bitcoin ETF. The latest efforts are being carried out by VenEck and SolidX, who have partnered together on this venture. The two partners are aiming to list a physically-backed Bitcoin ETF that will have insurance against the loss of the Bitcoin.
Interestingly, this proposed ETF doesn’t share the same benefits as other ETFs because it is only based on one underlying asset. However, the benefit here is that investors would be able to invest in Bitcoin without owning it, with the knowledge that their funds are insured against theft. Something that is all too common in cryptocurrency.
Security is something that we believe in at Liquid. That’s why we store 100% of customers assets in cold storage, which is one of the safest means of storing digital assets.
This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.
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