In-depth analysis of Bitcoin ETF, is it really worth investing in?

It has been ten years since Bitcoin was born. At first, only a small number of cryptography geeks participated in it. Later, more and more people became involved in blockchain and popularized Bitcoin after learning about Bitcoin. More than ten years after its birth, the price of Bitcoin has fluctuated in the middle. Since the plunge in March 2020, the price has continued to rise. However, behind this time the Bitcoin bull market is no longer just a carnival of retail investors, but a boost from large institutional investors.

With the diversification of investments, Bitcoin Trust ETFs have gradually emerged. These funds provide investors with an indirect way to enter the Bitcoin market. Since 2014, a total of dozens of institutions have applied for Bitcoin ETF funds. Of course, they have all been rejected by the SEC, but each application will be hyped by the market.

What is a Bitcoin ETF, and what is the difference between buying Bitcoin directly? What are the advantages of Bitcoin ETF over buying Bitcoin? This article will conduct an in-depth analysis around the Bitcoin ETF.

Simply put, the Bitcoin Exchange Traded Fund (ETF) allows traders to gain exposure to BTC through the traditional stock market without the need to directly buy and sell digital assets on the cryptocurrency exchange.

1. Why buy Bitcoin ETF?

For traditional users who want to buy bitcoins, cryptocurrency exchanges are often not the first option. They think that buying bitcoins by themselves is inherently risky, and holding bitcoins is not absolute. Safety. To buy Bitcoin, one must find a highly reputable exchange, complete the verification process, and expose certain payment information. Although this approach also applies to the stock trading market, traders do not trust the cryptocurrency industry 100%.

And attracting these users to buy and use Bitcoin often requires an intermediate solution, so Bitcoin ETFs are born. Bitcoin ETFs provide exposure to changes in Bitcoin prices. Users do not need to open an account at a cryptocurrency exchange to buy a Bitcoin ETF, and understand how the exchange works and the potential dangers. In addition, users don’t need to understand how the private key works, don’t have to worry about losing or being stolen, don’t need to understand the risks of hot wallets, and don’t need to buy and learn how to use cold wallets.

On the other hand, Bitcoin ETFs can also increase the liquidity of mainstream digital currencies in the global market. More institutions and ordinary investors can trade this asset safely and efficiently without worrying about violating local laws and regulations. In short, ETFs have greatly reduced the barriers to entry of digital currencies.

2. Regulated Bitcoin ETF

In the eyes of many bystanders, it seems that the cryptocurrency industry still does not comply with regulations. This is not the case. Every service provider needs to obtain a financial license to operate. All companies need to provide the same solutions as traditional institutions, such as verifying user identities and preventing money laundering.

In other words, Bitcoin ETFs will push this even more powerfully. Since every exchange-traded fund is fully regulated before listing on major platforms such as Nasdaq or the New York Stock Exchange, Bitcoin ETFs have created a legal halo. Although Bitcoin is legal by default, many people need this "additional guarantee" before making a financial commitment.

If the Bitcoin ETF can gain widespread attention, it can allow many people to switch to cryptocurrency, but obtaining the authority is not so easy. Although many attempts have been initiated over the years, the US Securities and Exchange Commission continues to refuse to try. Whether this situation will change soon is still uncertain at this stage.

3. Bitcoin ETF custody issues

Bitcoin ETF can solve the problem of digital asset custody. Users who buy bitcoin directly need to store their funds in a wallet, but the extra steps of cold wallets and hardware solutions currently on the market are backing most investors.

Bitcoin ETFs can also prove useful in this regard. It negates the need for custodial or storage solutions, and investors cannot access BTC itself. When dealing with large institutions that handle large amounts of money, intermediary tools such as ETFs will prove to be an indispensable part.

Since Bitcoin ETFs eliminate multiple "troubles", they are a viable tool to expand the investor base. Many people want to be exposed to prices without hassle, which makes exchange-traded funds a more attractive option. The problem now is to get this investment tool approved in the United States and other regions. Unfortunately, for such a decision, the world counts on the United States to set the tone.

4. Bitcoin ETF moves forward with weight

As mentioned earlier, many institutions and individuals in the United States have tried to create Bitcoin ETFs. Despite seeking approval from the US Securities and Exchange Commission, none of the companies succeeded. According to public information, from 2016 to 2019, the US SEC received at least 13 applications for Bitcoin ETFs, most of which were rejected and revoked, and a few were postponed.

Therefore, the United States is a key market for exchange-traded fund activities, and a foothold in this region is crucial. This is also the biggest obstacle that service providers need to overcome.

For some, it may not be clear why the SFC has been refuting these efforts. With so many suppliers trying to achieve this goal, there must be good reasons to reject the application. Unfortunately, this is not a problem that people can quickly solve with Bitcoin.

For the US SEC, continued volatility and market manipulation are still issues that continue to be resolved. Volatility will never disappear, and market manipulation tends to affect all financial instruments, which makes this reasoning a bit strange.

With the increasing interest of institutions in Bitcoin in the past few years, more ETFs are entering the market. As for whether it will appear in the United States or elsewhere, it is still difficult to determine. Those who are actively seeking access to the world's leading cryptocurrencies will find a way, because acquiring Bitcoin has become more straightforward.

5. Are Bitcoin ETFs worth investing in?

Those who have access to Bitcoin ETFs want to figure out whether it is worth it. Similar to buying Bitcoin directly, the answer to this question will never be straightforward. For some people, it seems to be a worthwhile investment tool, while others like to ignore it. Every investment opportunity has advantages and disadvantages, which should be carefully considered.

Before making any decision, one must fully understand the consequences of investing in Bitcoin ETFs. As mentioned above, ETF portfolios are bound to be exposed to huge fluctuations in Bitcoin prices.

Those who evade financial risks may not see the future risks of ETFs at this time. Unlike other markets, the price of Bitcoin is changing 24/7/365, even if people can only trade the ETF itself during stock market hours. No one knows what to expect from the price of Bitcoin in the short or long term, so analyzing risks and rewards is crucial.

In addition, not every ETF allows investors to exit or enter positions at will. When choosing a service provider, carefully review the terms and conditions, as there may be certain restrictions and requirements that need to be addressed. If the funds need to remain invested for a period of time, be aware that the value of your investment will change significantly in the process.

6. Are Bitcoin ETFs more advantageous than buying Bitcoin?

The advantages of Bitcoin ETF are mainly reflected in the following three points:

(1) Convenience

Bitcoin ETFs do not need to understand how Bitcoin works, do not need to register with a cryptocurrency exchange, and do not need to bear the risk of directly owning Bitcoin.

(2) Diversification

The ETF holds more than one asset. For example, Bitcoin ETFs can include Bitcoin, Apple stocks, Facebook stocks, etc., which provide investors with opportunities to reduce risk and diversify their investment portfolios. Similarly, by trading on regulated market exchanges, Bitcoin ETFs will provide investors with opportunities to diversify their existing stock portfolios.

(3) Tax efficiency

Given that Bitcoin is unregulated and decentralized, most authorities in the world are not allowed to buy Bitcoin. On the other hand, Bitcoin ETFs traded on traditional exchanges may be regulated by the US Securities and Exchange Commission and are eligible for tax incentives.

Are Bitcoin ETFs more advantageous than buying Bitcoin? 

This will be a difficult question to find an answer. On the surface, Bitcoin ETF is easier to invest because it does not need to deal with exchange authentication. From the perspective of convenience, Bitcoin ETF is a better choice. But the biggest disadvantage of investing in Bitcoin ETFs is that you can never control Bitcoin itself.

In addition, people cannot diversify their investment portfolios through Bitcoin ETFs. More specifically, if users like other cryptocurrencies or stablecoins, it is impossible to use this tool to obtain these investment options. All they can do is hold ETF stocks and hope that the price will rise. Of course, this is a viable long-term approach, but for those seeking short-term wealth, this option is not ideal.

In the final analysis, it all depends on what you expect from your Bitcoin ETF investment. If there is no friction or the ability to control funds, which is very attractive for Bitcoin prices, then Bitcoin ETFs will prove to be worthy assets. For others, buying Bitcoin or other cryptocurrencies directly through traditional methods is a better choice.

Concluding remarks

For some time, the concept of Bitcoin ETF has proven to be an asset worth buying. Unfortunately, progress in the United States is not going well, and this is not because of lack of experimentation or the company's attempt to convince the US Securities and Exchange Commission that this investment tool can be worthwhile. Whether the US Securities and Exchange Commission will change its mind in the future is still uncertain.

Providing institutional investors with bitcoin risk in a regulated manner can stimulate greater interest in cryptocurrencies. Although institutional clients are already seeking exposure to Bitcoin, not all of them will achieve this through traditional means. The Bitcoin ETF is a worthwhile option, but it may take several years to be approved in a specific region.

Reference materials:

1. JP_Buntinx: An Introduction To Bitcoin ETFs

2. Bitcoin ETFs