The Bitcoin ETF (Exchange-Traded Funds) applications, rejections, and rumors of possible approval have been affecting price action in the past few weeks. While the SEC is yet to approve a Bitcoin ETF that follows its requirements and addresses crucial security issues, some people are still confused regarding the technicalities and definition of what a Bitcoin ETF really is. Here are some basics on what an ETF is and how it works.
What is a Bitcoin ETF?
According to Investopedia,
An ETF is an investment vehicle that tracks the performance of a particular asset or group of assets. ETFs allow investors to diversify their investments without actually owning the assets tracked by an ETF. For those individuals looking to focus only on gains and losses, ETFs provide a simpler alternative to buying and selling individual assets. Further, because many traditional ETFs target larger baskets of names with something in common (a focus on sustainability, for instance, or stocks representing the video game industry and related businesses), they allow investors to easily diversify their holdings.
A Bitcoin ETF allows more investors to buy into the ETF without undergoing the complicated Bitcoin trading process. Also, the investor will not have the responsibility of securing and storing the cryptocurrency because the responsibility will lie with the ETF provider.
Why Not Invest Directly in Bitcoin?
There are four major reasons why a Bitcoin ETF might be more appealing to investors than directly investing in Bitcoin.
- Security and Storage. As mentioned above, Bitcoin ETF investors will not have to worry about the storage of their investments as the provider will be the one to store and secure the Bitcoin.
- Cryptocurrency Exchange Process. Bitcoin ETF investors will not have to deal with the complicated process of cryptocurrency exchanges since their investments will be with the ETF provider.
- Short selling. Since the current cryptocurrency market does not do short selling, a Bitcoin ETF will allow its investors to short sell shares of the ETF and make profit on downward price actions.
- Basic Investment Knowledge. Investors of Bitcoin ETF need not understand every technical and fundamental analysis of the cryptomarket since they will just need basic investment knowledge about the ETF as a trading vehicle.
If the Bitcoin ETF gets approved in the coming months, it could potentially boost Bitcoin price to huge recovery. Hopefully, the SEC would approve the pending Bitcoin ETF applications currently in line.