Bitcoin ETFs have hit the market and they’re all the rage. Why though? Let’s find out.
ETF stands for Exchange Traded Funds. As an investor, you can either go for a short-term investment — where your investments can be converted into cash easily in a short span of time, or you can go for long-term investments like stocks and commodities, where you hold your investments for long and wait for them to grow to a targeted value. Through ETFs though, one can buy or sell funds throughout the day. These are basically a basket of marketable securities that can be used as an investment. The value of ETFs depend on their market index, and the person investing in ETF owns a share in the underlying assets within that particular index. ETFs are similar to mutual funds but traded like a common stock on the stock exchange.
What are Bitcoin ETFs?
Bitcoins, with their increasing value, have recently started attracting a lot of attention from investors. Currently, bitcoins are traded through exchanges. But what if a person wants to hold Bitcoins as a long-term investment? Like a share, or a deposit. People interested in the future valuation of Bitcoins, or do not understand the technical details as much, or even worry about online thefts from their crypto-wallets now have a way to enter the crypto market through Bitcoin ETFs.
Bitcoin ETFs allow investors to make a long-term investment in bitcoins. Once a Bitcoin ETF is created, it can be divided into units of shares. The division can range from 10,000 to 6,00,000 units depending on the number of bitcoins that have been used to create the ETF. Someone like the Winklevoss twins, who have a billion dollars in Bitcoin, can create a larger number of units. A larger number of units essentially means the shares can be bought by a larger number of people when they are sold to the public in the open market.
How would ETFs help Bitcoin?
- Investors today are skeptical about the situation of Bitcoin because it is not traded on a standard exchange. If Bitcoin ETFs are created, then it would attract more investors due to the increased reliability guaranteed by standard trading.
- The responsibility of the underlying bitcoin would get transferred to the ETFs. Currently, if a person buys Bitcoins, they hold them themselves. If any theft or fraud occurs, then the person faces the challenge himself. But with ETFs, it would be the responsibility of the entity offering the ETF to secure the investment, not the investor. Hence this would help create a sense of security for investors.
- ETFs would make Bitcoin investments available to common investors. There have been high price swings in Bitcoin after it reached $1000 which is swaying it away from common investors. ETFs would allow fractional investments which would help make Bitcoin investments affordable for general investors.
- Exchanges would get access to large-scale or institutional investors which would help the liquidity of Bitcoin. The cash flow would get increased and hence, the exchange of cash to Bitcoin or vice-versa would become more steady.
Conclusively, the Bitcoin ETFs would bring liquidity, security and a much-needed legitimacy to the system. Also, the availability of Bitcoin opportunities to common investors would increase. Therefore, a lot of new customers would get attracted, ultimately, boosting the crypto assets.