Bitcoin ETF: What Is It and Why Is It Necessary?

What Is Bitcoin ETF? 

An Exchange Traded Fund (ETF) is a financial instrument that combines different assets (for example, securities of different companies) into one fund and launches it on an exchange. When you buy shares in an ETF, you are investing in multiple assets at once without buying them separately.

Bitcoin ETF is a special type of spot exchange-traded fund that invests in the first cryptocurrency. It tracks the price of Bitcoin and sells its shares. Investors who buy them can make or lose money depending on how the cryptocurrency’s exchange rate changes without purchasing it directly. 

How Bitcoin ETF Works 

Bitcoin ETF shares are listed on US, Australian, and Canadian stock exchanges. They are available to buy and sell during trading hours. The value changes throughout the day and depends on the exchange rate of the underlying asset (Bitcoin). 

While the number of shares of companies in the fund changes rarely, Bitcoin ETFs can fluctuate every day. This is because crypto funds regularly create new securities or redeem already issued ones, assessing investor demand.  

Buying and selling shares of cryptocurrency funds is done through licensed brokerage firms. 

Advantages and Disadvantages of Bitcoin ETF 

After figuring out what is Bitcoin ETF, a novice investor may have difficulty figuring out what is better to buy: the digital coins or shares of crypto funds.   

Let’s consider the advantages of ETF first: 

Convenience and security 

Dealing with Bitcoin ETF shares through brokers simplifies the process for those used to traditional investments.  

Easy to buy and sell 

Dealing with Bitcoin ETF shares through brokers simplifies the process for those used to traditional investments. 

Control 

Bitcoin ETFs are assets regulated by the authorities, which adds credibility when compared to owning cryptocurrency directly. 

Now, let’s discuss the cons of Bitcoin ETFs: what are the risks, and how can they affect the investment? 

Price gap  

Despite the mechanism of creation and redemption of ETF shares, the market value of the fund’s assets may deviate from the BTC exchange rate. This increases the risk of making a deal at an unfavorable price.  

Regulatory risks 

Sudden changes in regulations can adversely affect the value of Bitcoin ETFs or even lead to fund closures. 

Fees 

Users are charged certain fees for managing the fund, which can reduce long-term returns. 

How to Use Bitcoin ETF for Investing? 

An investor who knows what is Bitcoin ETF and how it works should find the right strategy to multiply their capital. Here are a few options to consider: 

Long-term investing 

This strategy is for those who believe in the long-term growth of Bitcoin’s price but want to avoid the risks associated with holding the cryptocurrency. Its main principle is buy-and-hold, the essence of which is to buy shares of the fund and hold them while waiting for a significant appreciation.  

Portfolio diversification 

By buying shares of Bitcoin ETF, you are adding an asset to your portfolio that is weakly correlated with other financial markets. This helps reduce your overall risk, as Bitcoin and traditional assets can move in different directions. Moreover, ETFs provide a hedge against the inflation that fiat currencies are prone to. 

Speculation on short-term fluctuations 

You can buy and sell fund shares, capitalizing on changes in their price. This is a riskier strategy, but it can bring quick profits with the right predictions. 

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