Home / Bitcoin / What is a Bitcoin ETF: Complete Beginner's Guide

What is a Bitcoin ETF: Complete Beginner's Guide

The funds traded on an exchange (ETF) are investment vehicles that allow potential investors to immerse the tip in a given market without the risk of buying the asset. These so-called ETFs are classified by the US Securities and Exchange Commission as securities and track the movements of a particular investment – a commodity such as gold or a certain type of company stock – without the investor having to buy gold or shares directly ETFs are extremely useful for mitigating risk while offering appropriate exposure to hot markets and have long been recognized as an essential tool for prudent investors.

Bitcoin ETF

The ETFs therefore appear to be tailor-made for new cryptocurrency investors. The cryptocurrency is notoriously unstable and unstable and the barriers to entry for new investors may be quite high. There is a need, at least, to create an account on an exchange, and cryptographic exchanges are practically unregulated. If an investor does not want to risk putting his money in an unregulated and perhaps unscrupulous exchange, then he must face the difficulty of creating a wallet and keeping it safe.

A Bitcoin-based ETF could potentially eliminate all these problems, giving investors a good exposure to Bitcoin in a familiar and regulated environment. However, Bitcoin ETFs encountered several regulatory barriers. We will take a look at how a Bitcoin ETF could work, because there is demand for them and what regulatory challenges they must overcome.

Basics on bitcoin ETFs

The first thing to understand about ETFs in general is that they are passive investment instruments. There are no commissions to manage or track them, even if they are actively traded on public markets. Each ETF is linked to an index and the performance of the ETF tracks the performance of the underlying index. In the case of a cryptocurrency or a Bitcoin ETF, the index could consist of a portfolio of mixed cryptocurrencies or only an index linked to the price of Bitcoin. The main difference between keeping a Bitcoin ETF and just keeping Bitcoin is that you do not need to worry about the security or storage of that Bitcoin – the ETF adds a layer of isolation and protection since the investor's money is tied to the price and not to the digital resource itself. There is no exchange to hack, no phishing portfolios: just money on the market following the price of Bitcoin.

Bitcoin for Dummies

Read: Bitcoin for Dummies

One thing that makes ETF attractive for common investors is that there is no minimum investment. While Bitcoin is (almost) divisible to infinity, most exchanges require certain minimum purchases to cover their commissions when buying or selling Bitcoins. Since an ETF does not mean ownership of the asset – just a bet on its price – these can largely be eliminated.

ETFs can also be set up to pay dividends to their investors. If you try to create a similar scheme with actual Bitcoins, this would mean paying someone to look at the wallet and sell some of the coins at regular intervals to pay "shareholders". Since no real Bitcoin is bought and sold when investing in an ETF, the process is greatly simplified. Perhaps the most important thing is that the payment mechanism for these dividends is part of the "similar" tax legislation of the United States, so fiscal liabilities barely enter the picture. In contrast, cryptocurrency is generally subject to short and long-term capital gains in the United States, regardless of whether the trades are crypto-to-encrypted or encrypted-a-fiat. These fees can be quite heavy – up to 40 percent in some short-term cases.

Thus, the key argument for Bitcoin ETFs is that they provide investors with a safer and more stable way to take advantage of the Bitcoin market without entering the Wild West, an unregulated Bitcoin purchase world. ETFs are a long-standing financial instrument for risk management and simplification of the investment process and their automatic exposure to US laws would seem to turn them into a desirable alternative to allow investors to go crazy in the "physical" market of the Bitcoins.

Unfortunately, Bitcoin ETFs have been persecuted with controversy since their inception.

Challenges of the ETF

The key player in Bitcoin's drama of ETF is SEC. Since ETFs fall under the definition of security, as in the so-called Howey Test, the SEC has regulatory authority over them.

In short, the Howey Test is a measure to determine if a particular financial instrument is a security. It comes from a case of the Supreme Court of 1946 that involves actions in a citrus grove. The court ruled that a particular financial instrument is a security – and therefore under the supervision of the SEC – if it meets three criteria: an investment of money, in a joint venture, with the expectation of profits linked to shares of others.

What is Howey's test?

Read: What's the Howey's test?

In the course of 2018, the SEC repeatedly banned the entry of various ETF applications onto the market.

In a ruling of August 22, the committee specifically denied that two Bitcoin ETFs would operate in the Ark exchange of the New York Stock Exchange. The exchange itself, in collaboration with the proposed ETF provider ProShares, originally submitted its application in December 2017. The ProShares case was not the only decision taken by the Bitcoin Financial Instruments Committee in 2018, but it is probably the most recent and relevant – and certainly the most representative.

The commission began by saying that it was not considering the validity of Bitcoin, alone. His decision was closely linked to the creation of Bitcoin-based ETFs. This was considered by some as a misstep, because the commission did not have to directly declare Bitcoin a security or a non-security, which is a secondary issue that the market on which the market has sought clarification.

Instead, the commission focused almost entirely on the threat of fraud and market manipulation within the broader Bitcoin market.

C & # 39; is a small silver coating for this representative case of Bitcoin financial instruments. The commission shortly thereafter issued a suspension of its August decision for a further review. Furthermore, the refusal itself was based on the need for greater guarantees, in particular a large Bitcoin futures market. If the market develops, according to the thought, Bitcoin ETFs could still be on the table in the future.

Bitcoin progress

Bitcoin has come a long way from the famous white paper of Satoshi Nakamoto in 2008, moving from a cypherpunk niche toy to a mainstream financial instrument. However, the market is not yet fully matured and repeated SEC judgments seem to suffocate it. Circularly, the committee stated that the market is not yet completely isolated from fraud and manipulation and therefore can not use financial instruments that could help protect investors from fraud and manipulation.

However, the acceptance of Maincoin and Wall Street of Bitcoin is growing, and some market observers predict that it is only a matter of time before Bitcoin ETFs become just another tool in the encrypted investment toolkit.


  1. https://www.fool.com/investing/2018/09/14/why-are-there-still-no-bitcoin-etfs.aspx
  2. https://www.cryptocompare.com/coins/guides/what-is-a-bitcoin-etf/
  3. https://www.manhattanstreetcapital.com/faq/for-fundraisers/how-determine-if-token-security-howey-test
  4. https://money.usnews.com/investing/cryptocurrency/articles/2018-10-09/approval-of-bitcoin-etfs-by-sec-appears-murky
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