The Bitcoin exchange traded fund, hereinafter ETF is a kind of investment vehicle that uses Bitcoin as an underlying asset. ETFs, in general, are financial derivatives, which track the value of an underlying asset or several assets and are tradable during the working hours on a stock exchange.
They have two major uses: the first one is to provide investors with a basic return at minimal cost. This return comes from the long-term increase in the value of the underlying assets. The second opportunity for profit comes from day trading. Any ETF’s value changes during the day, mimicking the movement of its fundamental assets and short-term traders are able to speculate on that.
The underlying assets may be commodities, such as gold or oil. An ETF provides an easy way to capitalize on the value of those commodities in a convenient environment of a stock exchange, where the investors don’t have to deal with actual gold ounces or oil barrels.
When it comes to Bitcoin ETFs in particular, there is one more major advantage: they provide investors access to the advantages of Bitcoin without having to deal with the associated technical difficulties, like managing wallets and ensuring sufficient security of the private keys.
There is one Bitcoin ETF that has already been approved and is traded on the NASDAQ Nordic exchange, the Bitcoin Tracker One. There are also several funds put up for approval, like the COIN by the famous Winklevoss twins and GBTC by Barry Silbert’s Digital Currency Group.
These ETFs are already traded in an unregulated environment on online exchanges. In that state, they offer little advantages over trading or holding Bitcoin directly.
However, if approved by the US Securities and Exchanges Commission (SEC), the new Bitcoin ETFs will be officially tradable on stock exchanges - GBTC on the New York Stock Exchange and COIN on Bats Global Markets. As such, they will serve as major gateways into Bitcoin investment for the people who don’t really care about the technology but would like to benefit from its financial performance.
Importantly, ETFs are assets regulated by government authorities, such as the SEC. The result is a higher level of consumer protection than that offered by Bitcoin itself. The lack of government regulation on the market of Bitcoin is a major deterrent for some of the potential investors - a problem which Bitcoin ETFs solve, to a degree.
The fact that ETFs provide an easy way for a large pool of regular investors to enter the market of Bitcoin may drive the demand for the cryptocurrency up and thus have a positive effect on its price. However, an adverse effect is also possible, in case a regulatory body refuses to approve a proposed fund.
Overall, the result of a slight panic preceding the SEC’s ruling on any of the ETFs is an increased volatility. That is what we are seeing right now, as the decision on the Winklevoss’ COIN is just hours away.