BTC ETFs, what are they and why are they highly anticipated
2 min read
BTC ETFs are a product that allows people to invest in BTC without buying BTC.
To better explain what appears to be a play on words, it’s best to first understand what an ETF is. ETF stands for Exchange Traded Fund. These are stocks that replicate the value of an underlying asset.
Gold ETFs are very common: large companies buy large amounts of gold, but they don’t trade the gold, they trade ETFs: shares that replicate the price of gold are put on the market, while the actual gold is held and acts as the underlying. This makes gold trading easier.
BTC ETFs work in the same way: the issuer buys a certain amount of BTC as the underlying asset and then issues shares, ETFs, that replicate the value of BTC.
Why do institutional investors want BTC ETFs
Why buy an ETF instead of BTC? ETFs are better suited to an institutional audience for a number of reasons. Here are a few:
- ETFs are a regulated market, so consumers/investors are protected;
- ETFs do not need wallets, private keys and security systems to store BTC, which are as useful as they are tricky.
Having said that, the only thing left to understand is why the US SEC has not yet approved BTC ETFs. What worries the Securities and Exchange Commission is BTC’s volatility. These weeks have shown that BTC is able to gain and lose as much as 10-20% of its value in a single day. This prompts the SEC to be very cautious not to harm investors. However, BTC ETFs already exist. For example in neighbouring Canada, where they have been regularly listed for a few months, and also in Brazil.
The entry of institutional investors into the BTC market has increased the demand for specific products more suited to this target group. BTC ETFs meet this need. At a time of particular market hype, when inflation threatens the hold of cash, but when the technological skills are not yet sufficient to buy BTC directly from common exchanges, it is understandable why BTC ETFs are so important. It will remain to be seen whether these motivations will be enough for the SEC to come to a final approval that would lead to the launch of this instrument also in the United States.
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