The value of crypto assets skyrocketed shortly for a couple of days in mid August after a US court cleared a path for the nation’s first Bitcoin exchange-traded fund.
The ruling is a breakthrough moment for crypto investors and a setback for the Securities and Exchange Commission, which has been trying to rein in the digital asset space.
The judge panel for the DC Court of Appeals overruled an SEC decision denying Grayscale Invesments permission to launch a bitcoin-focused ETF.
So what exactly is a Bitcoin ETF?
First, let’s take a look at how a Bitcoin exchange-traded fund works. There are two types of Bitcoin ETFs — physically-backed and futures-backed. Although the underlying asset might be the same in this case, BTC, these two instruments are functionally quite different. Check the latest price of BTC here >> https://www.coinstore.com/#/spot
Physically-backed Bitcoin ETF
A physically-backed Bitcoin ETF — or any other crypto ETF — follows the concept of a traditional ETF where enterprises purchase BTC and hold it in their reserves. The company then creates a fund, lists it on a stock exchange, and issues shares. When you buy a share of the Bitcoin ETF, you get a stake in the BTC held in the company’s reserves.
Futures-backed Bitcoin ETF
Futures-backed ETFs are derivative instruments that react to future price movements in their underlying assets. Thus, a futures-backed Bitcoin ETF is not required to hold BTC. It trades on contracts that speculate on the price of BTC in the future, rather than the current spot price of BTC. These contracts have a finite lifespan, and the fund manager has to sell existing contracts and buy back the contracts at a later date. Due to this structure, there are often discrepancies between the actual price of Bitcoin and the price of a futures-backed Bitcoin ETF.
What do crypto ETFs mean for the market?
While some have speculated that a crypto futures-backed exchange-traded fund could bring about a buy-the-rumor-sell-the-news situation, the bullish market conditions seen at the time of writing seem to suggest otherwise. However, it is still too soon to tell.
If Bitcoin spot ETFs are approved, fund managers and institutional investors would need to buy actual cryptocurrency for their reserves in a spot ETF. This demand would typically result in positive price action. We saw this happen with GBTC as it significantly contributed to the BTC bull market in 2020 due to increased institutional demand.
The final words
If you’re thinking of choosing a Bitcoin ETF, it's important to understand that the risks associated with the crypto market still apply — and might even be higher in the futures market. Therefore, whether you’re direcly buying BTC through Coinstore https://www.coinstore.com/#/spot or an ETF, you need to have a long-term trading strategy based on those risks.
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