What is the Bitcoin ETF and Why is it Significant?

Beginner Dec 6, 2021 · 5 min read

Key Takeaways:
— Bitcoin ETFs are one of the most recent developments in the cryptocurrency sphere 
— Exchange-traded funds, or ETFs, are a type of fund that owns the underlying assets of the stock market, such as companies and dividends, and trades.
— A Bitcoin ETF allows investors to indirectly invest in the growth of bitcoin through traditional stock exchanges like the NYSE.
— Bitcoin ETFs open up bitcoin to many people who were previously deterred by the complexity of buying and securing it themselves.
— Countries like Canada already use Bitcoin ETFs but this was the first of its kind to be admitted within the New York Stock Exchange

If you keep hearing about the new Bitcoin ETF, but aren’t sure what it means, keep reading.

The release of the Bitcoin ETF on the New York Stock Exchange was billed as a watershed moment for Bitcoin, and saw a record-breaking first day of trading.

There’s a lot to know about this product – and also some insights we can take from its launch. Why the excitement for the new Bitcoin ETF…and why not just buy Bitcoin?

Here, we cut through the hype to take a clearer look at what it all means.

What exactly is this new product?

Before we discuss the product itself, we need to unpack a few key terms.

An ETF – or Exchange Traded Fund – is a financial instrument designed to be traded on the stock exchange. It’s a fund that owns an underlying asset, which is useful because it allows investors to get involved with a particular market (in this case Bitcoin) without having to directly buy the asset. 

As you might guess then, part of the appeal of the Bitcoin ETF is that it allows institutional investors who don’t fancy the hassle of buying and storing their own Bitcoin get in on the action.

But to what extent? This has been a crucial question in relation to the recent launch.

It’s important that we start by clarifying one key point: the Bitcoin Futures ETF does not invest directly in Bitcoin – instead, it invests in bitcoin futures contracts. Let’s discuss that in more detail.

Futures ETFs: a bet on a bet

Some types of ETF are backed directly by an underlying asset; these are known as spot ETFs. The Canadian Bitcoin Spot ETF, for example, is backed by actual Bitcoin. However, the Bitcoin fund recently launched in the US was a Futures ETF, and that’s a completely different beast. 

Futures ETFs do not track the underlying commodity directly – instead, they are backed by futures contracts relating to that commodity.

Wait, what’s a futures contract?

Glad you asked. Let’s say, for example, John agrees to sell Rachel a barrel of oil in six months time for 1000 USD – Rachel thinks that by then, the barrel will be trading for more, and she just got herself a bargain. But meanwhile, John thinks he knows something Rachel doesn’t –  he’s sure the oil market is just about to crash – so he just locked in a good price for his barrel in a bad market, and he’s happy.

The point is that both parties are basing their price on the future of the market, and how they feel about it.. So a futures ETF doesn’t really track its underlying asset – more accurately, it tracks the market sentiment about that asset, which might tell a completely different story.

What does that mean for the Bitcoin Futures ETF?

Right, let’s get back to the main story. The new Bitcoin product is a Bitcoin Futures ETF, which means – you guessed it – it invests in futures contracts, but not Bitcoin itself. 

For crypto-curious institutional investors, this may well be an exciting new product – but what they’re really investing in is regulated futures contracts, not Bitcoin.

So why is the Bitcoin ETF causing so much excitement?

If you’re already down the crypto rabbit hole, you might be wondering why the Bitcoin Futures ETF caused so much hype; as the OG of crypto, Bitcoin’s number one premise was to provide an alternative to centralized finance

Yet the product caused a sensation when it launched via…a centralized platform! Why?! There are a couple of reasons for that.

First let’s tackle the backstory of this development. The Proshares Bitcoin Strategy ETF is not a world first; a number of countries, including Canada, already had their own Bitcoin ETFs. However, it is the first ETF involving Bitcoin to make it to the New York Stock Exchange, and that made it a big deal. 

Why?

It was considered a hard-won breakthrough

Approval of this fund came after nearly a decade of failed applications for a similar product, all of which were shanked by the Securities and Exchange Commission. This was a long awaited development for both investors and securities issuers.

The New York Stock Exchange is considered a global agenda setter

With the NYSE perceived as the global epicentre of finance, it functions as a barometer for new norms. Because of this, the entrance of the Bitcoin ETF into that arena had been billed as a sort of “turning of the tides”, with much of that excitement stemming from a belief that a new wave of institutional Bitcoin acceptance was on the horizon.

It appeals to a new audience

Another reason for the hype was that the new product enables a completely new demographic to have their first interaction with crypto. Who are we talking about exactly? Why not just  buy some Bitcoin?

You know it, I know it – crypto is a tricky asset to store and secure, and for many investors, that was enough to deter them from buying in. By allowing people to get involved from within a familiar ecosystem, without worrying about hacks, blockchains or private keys (what are those again?), a whole new audience could be reached. Their appetite for crypto was evidenced by the huge success of the launch.

OK so now we’ve discussed the key features, limitations and selling points of the new ETF, let’s take a look at the bigger picture.

What does this mean for crypto?

Legitimacy has been a key theme in the story of Bitcoin, during which many, many people have written it off as a scam, a bubble or simply too volatile to be considered viable. Yet the admission of a Bitcoin-related product on the world’s premier exchange suggests crypto has reached a sort of critical mass that cannot be ignored, even by the central structures it was designed to challenge.

If you can’t beat them, join them, right? 

So although the Bitcoin Futures ETF won’t actually buy you any Bitcoin, it suggests that even the giants of centralised finance know it’s here to stay. And that alone is a very big step.

What does it mean for you?

So after all the fuss, is the new ETF the game-changer it’s cracked up to be?!

Well, it depends on your perspective. Are you already using crypto? Then you’re likely comfortable with blockchain and the idea of self-custody. If that’s the case, the appeal of the new ETF might seem limited.

But if crypto’s caught your eye – but concerns over self-custody have come between you and your first foray into the world of blockchain – this fund might seem a safe entry point, giving some exposure to the buzzing crypto ecosystem without the worry of learning its intricacies.

If this sounds familiar, just remember: nobody starts out as a crypto expert!

But here’s the good news: it’s never been easier – or more rewarding – to start getting to grips with cryptocurrency. Looking beyond Bitcoin, crypto offers a huge range of possibilities that traditional finance simply doesn’t: from the freedom and high returns of DeFi, to the expanding universe of NFTs and even the socially disruptive potential of DAOs, buying cryptocurrency has expanded beyond simply owning coins. Instead, it’s become a gateway to new ways of investing, interacting and creating that are gauranteed to change our norms.

So if you’re thinking of taking your first steps into crypto, and you’re trying to figure out your approach, bear in mind that it’s not just about making money; crypto is the life-force of an expanding ecosystem that’s moving power away from central entities and giving it back to people like you and me. And that seems like something worth learning.

Knowledge is power.

Trust yourself and keep on learning. If you’re interested in the vast options of DeFi, check out our highly entertaining School of Block episode, where Robin explains it in plain English.

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