What is Bitcoin ETF (Exchange Traded Fund)?
Bitcoin has gained a lot of popularity after the 2017 price boom. There has been a lot of talk about the regulations after the boom of 2017. In Dec 2017 CME Group and CBOE have launched their cash-settled bitcoin futures contracts. Even after this, we don’t even see a single Bitcoin ETF (Exchange Traded Funds) in 2018 and 2019.
The crypto community is looking for a Bitcoin ETF eagerly and the Bitcoin ETF is closer than we think. There are many pains and problems in launching a Bitcoin ETF, Bitcoin is the world’s largest cryptocurrency by market cap and still highly volatile and unregulated.
What is a Bitcoin ETF?
An Exchange Traded Fund (ETF) is a type of investment fund that keeps tracks of the price of the underlying assets such as Gold, Silver, Oil, an index or basket of stocks. An ETF is traded on exchanges in the same way as stocks mean any retail or institutional investor can buy and sell the ETF to other market participants.
ETFs are cheaper than mutual funds as they set up the passive index-tracking funds. ETFs allow everyone, even private investors to invest in assets that are very difficult to buy/sell and store.
A Bitcoin ETF would have the digital currency Bitcoin as an underlying asset. When an investor is buying Bitcoin ETF that means they are buying Bitcoin indirectly. As we have explained above an ETF keeps track of the price of the underlying assets. There are many investors that prefer investing in an ETF without actually buying the asset.
Bitcoin is a digital currency and some people think it is difficult to store their BTC for a long time. Bitcoin ETF makes this easy, investors can include Bitcoin in their portfolio without actually buying it. The investors don’t need to aware of the technical process of storing and transferring Bitcoin.
The Bitcoin ETF is traded on major exchanges and there is a very small price difference between the actual market and ETF market. The investors can just buy and hold the ETF and sell it when the price increase. The ETF is regulated by the United States Securities and Exchange Commission (SEC), which means investors can invest hesitating.
Why Bitcoin ETF?
As we have explained an ETF keeps the track of the price of the underlying assets, just think it is a mirror of the real asset so why not buy the asset in this case Bitcoin directly instead of the ETF?
There are many reasons why people prefer ETFs over the assets. One reason we have explained above that investor don’t bother to learn and manage the security procedures associated with holding Bitcoin.
Another reason is that investors don’t want to engage with the cryptocurrency exchanges. The Bitcoin ETF is listed on the traditional exchanges and markets so it is very easy to buy and sell an ETF.
There is some crucial advantage of a Bitcoin ETF than Bitcoin itself. As an ETF is an investment vehicle, investors have an option to short sell shares of the ETF if they think that the price of the underlying asset Bitcoin will go down in the future. This is something that the Bitcoin traditional market not offers.
Most importantly ETFs are much better understood by the investors than Bitcoin and other cryptocurrencies, even the digital currencies have gained a lot of popularity in the past few years. An investor that wants to invest in Bitcoin without knowing the technical ins and outs, just want to ride the price wave. The investor will choose the ETF investment vehicle that he understood better.
Benefits of ETF for Bitcoin
We have explained the advantages of Bitcoin ETF over the asset Bitcoin itself. The ease of purchasing and storing a Bitcoin ETF will open up the gates of the world’s largest cryptocurrency for new investors such as Hedge funds, Mutual funds, and pension funds.
The approval of a Bitcoin ETF would likely boost the Bitcoin price to new highs because of the limited supply and increasing demand. You can read 7 reasons to buy Bitcoin to know that better why Bitcoin is the assets of the decade (2010-2020). The institutional and private investors as mentioned above are not much aware of the technology can easily and safely invest in Bitcoin by buying the ETF from traditional exchanges.
You can see the effect of ETF on a market. The gold market is the best example of this. The ETF for gold is launched in the early 2000s, that time gold price is trading around $250. The ETF brings private and institutional investors and starts a bull rally that will touch a peak in 2011, the peak price of the rally is $1900.
A similar situation will happen in Bitcoin after an ETF. The price will reach new all-time highs because of the massive demand from private and institutional investors. This will create a Bandwagon effect because everyone is talking about the potential high return of Bitcoin can give in the future.
How to Invest in Bitcoin ETF?
There is no Bitcoin Exchange Traded Fund (ETF) available on the U.S exchange, there are Exchange Traded Bitcoin financial products available on the European exchanges and Over the Counter (OTC) Bitcoin trust in which investors can trust.
Bitcoin ETN (Exchange Traded Notes) by XBT Provider can be traded on the Nasdaq Stockholm stock exchange in Euros and Swedish Krona since 2015. They give a chance to private and institutional investors to invest in the regulated exposure of Bitcoin.
U.S investors can also buy and sell the Bitcoin ETN on the exchange but they have to expose themselves to currency risk as the ETN is only tradable in EUR and SEK.
Road to Bitcoin ETF Approval
The Bitcoin ETF has faced a lot of problems in the past couple of years. The firms that have tried to launch Bitcoin ETF are faced many problems from the regulatory bodies. Winklevoss brothers filed an application for Bitcoin ETF for their Gemini digital currency exchange in 2017.
Winklevoss brothers are not the only crypto enthusiast to bring a Bitcoin ETF, there are many that have filed their ETF requests to the SEC. The U.S. Securities and Exchange Commission has rejected more than dozens of the Bitcoin ETF.
The CME Group and CBOE have launched their regulated Bitcoin futures contracts in 2017that will bring some interest to institutional investors in the Bitcoin market. Recently, Bakkt a regulated exchange and backed by the ICE (NYSE) launched in 2019, that is now getting very good liquidity. The futures exchanges will increase the understanding and liquidity of the Bitcoin market and there will be more chance of a Bitcoin ETF.
The crypto community is very optimistic even after a lot of rejection from the SEC. The crypto enthusiasts believe that the chance of getting a Bitcoin ETF approval is increased after the Bakkt exchange launch. Regulators are closely watching the Bitcoin market and hopefully, they will happily welcome Bitcoin to the regulated assets class.
“So, for miner having majority of hash rate (more computational power) can easily add new block of its own transactions as well as can prevent other miners from mining new blocks (due to low computation power they can’t even find the solution to the problem before him) which leads the 51% attack on the blockchain.”
How does Bitcoin prevent a 51% attack?
Bitcoin is designed in such a way that 51% attack seems to be not likely to occur on the bitcoin blockchain and if 51% attack performed successfully on bitcoin then it would not be profitable for an attacker.
Bitcoin Hash Rate Distribution
- Bitcoin is the only cryptocurrency having the support of enough hashing power from a large number of miners throughout the world.
- The Majority of Hash power on the bitcoin network is not controlled by a single entity and all hashing power is distributed globally in small ratios. BTC.com pool has maximum of 18.9% hash-rate. Check-in picture above.
- As bitcoin transactions are time-stamped on the blockchain and every single transaction is related to the previous transactions mathematically, which makes them irreversible and impossible to tamper with.
- Due to the very high hash rate of bitcoin blockchain attacker need to spend a lot of money to perform a 51% attack on bitcoin blockchain which is more likely to be failed.
A 51% attack would be helpful in double the spending of coins on the blockchain.
An attacker would not able to destroy the blockchain or the whole network as it is the short-term attack on blockchain.
More powerful blockchains like Bitcoin not likely to be suffering from 51% attack.
Bitcoin Hash Rate Distribution