Bitcoin ETFs is to Bitcoin what Mutual Funds are to stocks.
You may have heard this advice at least once, that if you don’t know much about the markets and still want to dip your toes – invest in Mutual Funds. It’s the same logic with Bitcoin ETFs; investors invest in Bitcoin ETFs to get their feet wet with Bitcoin.
It allows them to relish the returns from Bitcoin’s growth without having to directly invest in it.
What’s the Difference Between Mutual Funds and ETFs?
The fundamental difference between a mutual fund and an ETF is that an ETF is more simplified. It allows you to invest in specific stocks and markets. In contrast, a Mutual Fund offers a broader range of assets under one bucket. It invests your money across industries and stocks and is actively managed, constantly revising the assets in the fund.
For instance, an ETF gives you the flexibility to invest in a TATA motors stock or the entire automobile sector. However a Mutual Funds allocates your money between varying stocks of different industries.
ETF cater to an audience that wants exposure to specific assets and sectors, while Mutual Funds is more scattered. Additionally, Unlike Mutual Funds, ETFs can be traded on the open markets.
How Different or Similar Is Bitcoin ETF from the Regular ETFs?
Before we jump the gun and move to explore Bitcoin ETFs, let’s take a step back and first learn what ETFs are.
What is an ETF?
ETFs or Exchange Traded Funds are investment tools mocking the value of its underlying asset or a group of assets.
The best example to understand this would be gold ETFs. Investing in gold ETFs allows you to put your money in a fund that replicates the movement of actual gold, and the same can be traded on the commodities market.
When you invest in an ETF, you aren’t directly investing in any asset but are investing in a fund linked to the asset.
How Does Exchange Traded Funds Work?
An ETF is managed by an investment firm that buys and holds the assets pegged to the ETFs.
In the above example, the firm issuing gold ETFs buys an equivalent amount of gold and stores it before listing the ETFs on the traditional markets. Once the ETF is listed, you can buy and sell it just like any other stock.
What Are Bitcoin Exchange Traded Funds ( Bitcoin ETFs)?
Similarly, Bitcoin ETFs also allows you to reap the high benefits of investing in Bitcoins without having to really invest in it.
The issuing company here buys and stores actual Bitcoins before going ahead and issuing Bitcoin ETF’s. Since these companies are trading on traditional markets, you need not go through an exchange to buy Bitcoin ETFs. You can easily buy, sell and trade Bitcoin ETFs on conventional markets.
Bitcoin ETFs also gives you the option to either invest in a fund holding Bitcoin only or be linked to a fund with a basket of investments, including Bitcoin. A hypothetical example of it would be; a Bitcoin ETF would consist, shares of companies like TATA and Reliance along with a portion of Bitcoin. It allows you to further mitigate the risk.
It lifts off the hassle from investors of owning, storing and protecting their Bitcoin investment.
Advantages and Disadvantages of Bitcoin ETFs
Let’s understand this entire concept of Bitcoin ETF in a more rational sense by weighing the pros and cons.
Advantages of Bitcoin ETFs
1. Better Than Traditional ETFs
In traditional ETFs, though the ETF is following an assets price, the dividend you receive from investing through an ETF would be comparatively less than what someone would get if they had invested directly.
While in Bitcoin ETFs, since it is decentralised, the question of splitting the profit does not arise. Your ETF will be valued equivalent to Bitcoin’s value, and you can redeem it anytime you want after selling. Check the everyday BTC to INR rate.
Bitcoin ETFs are comparatively more convenient than actual Bitcoin. You can leverage the asset without having to burden yourself with owning and storing it. Additionally, it can be sold on traditional markets without the assistance of a cryptocurrency exchange.
3. Helps you Diversify
As said above, some ETF funds allow you to either fully invest in Bitcoin only or diversify and mitigate your risk by having a scattered fund. Hence, you can either invest in Bitcoin only or allot a portion of the fund to Bitcoin and have stocks as well in the ETF, thus diversifying your investments.
Disadvantages of Bitcoin ETFs
1. Lack of Ownership
By being independent of third parties, Bitcoin is centred around being in charge of your own money. However, investing in ETFs takes that away from you. Thereby, blockchain’s anonymity and the ability to trade Bitcoin for services or other cryptocurrencies is out of your reach.
2. Higher Fees
Buying Bitcoin ETFs could be expensive; there’s no flat charge that you incur. Instead, your cost varies based on the sum you invest in ETFs and the funds you invest in.
3. Returns will Vary
Depending on the fund that you have invested in, if your Bitcoin ETF is diversified between stocks and Bitcoin, your ETF may not precisely replicate the returns of actual Bitcoin. For instance, if Bitcoin soars 30%, your ETF might not reflect a 30% growth. It will calculate your returns based on the share of Bitcoin in your ETF.
Now that you know the upsides and pitfalls of Bitcoin ETFs, it would be fair to question why have Bitcoin ETFs in the first place and why not directly buy Bitcoin.
Why Not Invest in Bitcoin Directly?
Bitcoin ETFs are for those who don’t want to have the responsibility of owning a Bitcoin. Otherwise, it doesn’t really stand out to be any better than owning actual Bitcoin.
However, an ETF could mean differently for different types of investors.
Bitcoin ETF for Retail Investors?
There is no reason for retail investors to think about taking the ETF route. They already have a very simplified way to invest in Bitcoin. They can set up their account in under 5mins on cryptocurrency platforms like CoinSwitch Kuber that allows them the convenience of storing their Bitcoin on the platform while promising the highest level of security.
Bitcoin ETFs would just make a simple path complicated and expensive for retail investors. Additionally, you would incur the management fees of ETFs, which might offset all your gains.
Bitcoin ETF for Institutional Investors?
However, for institutional investors, ETFs makes much more sense because they invest millions of dollars in Bitcoin. They would not want to risk its security, nor would they want to directly get impacted by its volatility. As a result, the fees and ownership aspect of it doesn’t bother them.
Secondly, the whole concept of ETFs is centred around giant investors and not everyday investors. Consequently, over 90% of the ETF’s market is dominated by institutional investors.
Where to buy Bitcoin ETFs?
Bitcoin ETFs are gaining popularity among legacy banks as more and more companies invest in Bitcoins. With the very first ETF being launched no more than two months back in Canada. Large financial companies and banks like Fidelity and Goldman Sachs have also filed a request with the SEC (Securities and Exchange Commission) for issuing Bitcoin ETFs. India still doesn’t have a Bitcoin ETF yet, but we may see banks offering Bitcoin ETFs pretty soon.
With so many financial institutions worldwide wanting to launch Bitcoin investment-related services, there could be an even large scale institutional adoption of Bitcoin, which will further push its mainstream adoption. It will bring a lot of credibility to Bitcoin and might also amplify its charts.
Know More: What are Bitcoins & How Do They Work
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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