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Bitcoin ETFs: The New Opportunity

JCoverFinally, a cash Bitcoin ETF has been approved by the SEC but what does it mean for the adoption and price of cryptocurrencies?

Bitcoin ETF Gets Approved

The approval of a Bitcoin ETF today signifies a significant milestone in the cryptocurrency market. This decision allows for the creation of an exchange-traded fund (ETF) based on Bitcoin, providing investors with a new, regulated way to invest in Bitcoin without directly purchasing and holding the cryptocurrency. 

The ETF is expected to increase the accessibility and appeal of Bitcoin to a broader range of investors. The open question is whether the news is already priced in. Bitcoin hit new highs but flattered slightly on profit-taking following a 60% rally since September.

 

Refresher: What is an ETF?

An ETF (Exchange-Traded Fund) is an investment fund type and a traded product, which means that they are traded on stock exchanges, just like a stock. ETFs are similar to mutual funds as they give investors the opportunity to pool their money into a fund that invests in stocks, bonds or other assets like cryptocurrencies and consequently receive participation in the investment pool. 

ETF can be created to track anything from the price of one commodity to a large collection of various securities. Even specific investment strategies can be tracked by an ETF. 

A favorite among FlowBank investors is to invest in Index ETFs: These track specific indices such as S&P 500 or NASDAQ.

 

Why put Bitcoin into an ETF?

Advantages of ETFs include lower costs associated with reduced operating expenses compared with invesing in mutual funds. They are also highly liquid because you can buy and sell them as if they were ordinary shares. ETFs also provide a way for potential investors to gain access to wide range of assets or strategies.

In the case of Bitcoin, having an ETF removes the signifcant barrier to entry to investing in cryptocurrencies. Baffled by a 'cold wallet' or 'on chain transactions'? It no longer matters because you can invest in Bitcoin through the familiar arcitecture of an ETF. Bitcoin ETFs are an easier and more regulated way for investors to take positions on Bitcoin.

 

Bitcoin ETF

Source: Shutterstock | Bitcoin ETF - Sadi-Santos

Pros and Cons of a Bitcoin ETF

Technical Expertise:

The process of investing in cryptocurrencies directly can sometimes be very technical. This means that it requires a certain level of competence. Investors have to know how to use cryptocurrency exchanges, handle digital wallets, and protect their private keys. All these steps are simplified by a Bitcoin ETF.

Investors can trade this ETF via their FlowBank account just as they can buy other stocks or ETFs. This allows for a wider audience for potential investors who might otherwise refrain from direct trading in cryptos.

 

Regulation:

These funds are overseen by regulatory authorities. A Bitcoin ETF ordinarily has some kind of regulation thereby adding a degree of safety and legitimacy which may not exist in the cryptocurrency market. This is especially comforting to institutional investors and retail customers who may be worried about possible regulatory unknowns typically associated with direct cryptocurrency investments.

 

Custody:

It involves keeping passwords secure, avoiding theft or forgetting your wallet keys that lead to your loss of permanent access to the holdings you own. The risk of doing so is reduced in the case of an ETF (Exchange Traded Fund). Unlike the individual investor holding cryptocurrencies directly, it would mean that the exchange traded fund would be run by professionals who will reduce operational risk such as hacking or mismanagement of private keys.

 

Diversification:

Some bitcoin ETFs invest not only in bitcoin but also in other blockchain related assets or companies. Rather than putting all their money into one digital currency, this can give them exposure to a larger number of coins within the sector.

 

Tax and accounting:

For many investors, particularly those from institutions, one challenge could be dealing with tax issues surrounding their cryptocurrencies investment. Existing securities taxation and accounting frameworks are able to accommodate an EFT solution making it simple for that matter.

 

Good liquidity:

Due to their high volume buying and selling can be done with ease when market is open. For those who are interested in turning their money into Bitcoin as soon as possible, and leaving the market for digital assets without going through all numerous affairs and problems taking place on them.

 

Volatility risk:

It should be noted that a bitcoin ETF still carries the inherent risks associated with bitcoin price volatility. Consequently, investors should consider Bitcoin’s volatile nature in light of their overall investment strategy and risk appetite. Also, a bitcoin ETF is designed to track movements in the price of Bitcoin itself, however it may not do so exactly, especially during periods of high volatility.

 

Ethereum Next after Bitcoin ETF Approval?

One place the news didn’t seem to be priced in yet was Ether. Following the approval of the Bitcoin ETF, the value of ether — Ethereum's associated cryptocurrency — surged to its highest level since May 2022. 

 

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Source: FlowBank / TradingView

 

Naturally now that Bitcoin has been approved, investors are looking forwards to a possible upcoming approval of an Ether (ETH) ETF by the SEC. The SEC is expected to start reviewing applications for spot ETH ETFs from May onwards. Leading financial firms such as BlackRock, Invesco, Ark, and VanEck, along with Grayscale are among the applicants awaiting approval. Looking further out, Solana has a market cap of $50 billion, still way off its lofty 2021 peak of $250 billion. 

 


*The information contained on this page does not constitute a record of our prices, nor does it constitute an offer or solicitation for a transaction in any financial instrument. FlowBank SA accepts no responsibility for any use that may be made of these comments and for any consequences that may result therefrom.  Any person who uses it does so at their own risk.

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