TLDR: An exchange-traded fund (ETF) is a type of security that represents a pool of assets, typically tracking a particular sector, index or commodity. Unlike mutual funds, which are traded at the end of the day based on their net asset value, an ETF share can be traded throughout the day like individual stocks. Investors can buy and sell ETF shares at any time during market hours, at prices reflecting real-time supply and demand. A Bitcoin ETF is simply an ETF that tracks the value of bitcoin, a digital currency.
On June 15th, 2023, BlackRock, the world’s largest asset manager, rocked the world when it filed for the U.S. Securities and Exchange Commission (SEC) to approve a spot Bitcoin ETF. This announcement spurred a bump in the crypto markets thanks to buzz in the ecosystem, with bitcoin closing up 2% after the announcement. In addition to generating buzz, BlackRock’s move signals tremendous validation from traditional finance (TradFi) institutions that bitcoin and other digital assets are legitimate investment vehicles.
As an old boss of mine used to say, “When BlackRock builds, Wall Street follows”. But WTF is a Bitcoin ETF?
An exchange-traded fund (ETF) is a single security that represents an entire investment fund and can be traded on exchanges, akin to individual stocks and/or other assets. ETFs are designed to track the performance of a specific index, sector, commodity, or a basket of assets. They allow investors to gain exposure to a wide variety of assets with a single share, thereby diversifying their portfolios without having to own each individual asset outright.
Unlike more complex investment approaches (such as those of hedge funds that try to aggressively beat the market), ETFs are passively managed. This means managers take a much more hands-off approach, often with the goal of matching or tracking the market to benefit from its long-term appreciation. In the case of ETFs, they typically aim to mirror the performance of specific indices or assets rather than trying to outperform the market entirely.
If you have a 401k, IRA or Roth IRA account, it is likely you already have exposure to ETFs (think SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index). These types of funds are a commonly employed security for retirement accounts with long-term time horizons due to their wide exposure to the market, highly liquid nature (meaning they can be easily traded for cash), relatively consistent longitudinal upside and generally low-risk profile.
The Bitcoin ETF works much like a traditional ETF, the obvious difference being that the underlying asset on which the ETF is tracking is bitcoin. This means that the Bitcoin ETF’s price will attempt to ride in-step with bitcoin’s price swings.
Similar to how traditional ETFs are held and traded through a brokerage, a Bitcoin ETF is managed by a firm that buys and holds the actual Bitcoin. As explained in Decrypt, "The firm lists the ETF on a traditional stock exchange, and the investor trades the ETF just as they would any other stock."
So why invest in the Bitcoin ETF when one could simply trade Bitcoin directly via an exchange like Coinbase? For non-crypto native investors, the Bitcoin ETF allows retail investors to gain exposure to Bitcoin’s upside without having to manage their own investments, crypto wallets and security measures needed to safeguard their assets.
Additionally, bitcoin (and cryptocurrency in general) carries a stigma for most retail investors. According to a national survey commissioned by Coinbase in February, 2023, only 20% of Americans hold cryptocurrency. This alone signals that many retail investors are still wary of digital asset ownership, and this wariness remains pervasive due to the ambiguous regulatory landscape, security issues, and absence of comprehensive user education.
Thanks to the Bitcoin ETF, investors can avoid the complexities of private key management or digital wallets while still having a financial stake in Bitcoin’s growth. A win-win for crypto.
Needless to say, filing for SEC approval represents substantial validation for the cryptocurrency industry. It shows that TradFi institutions are taking digital assets seriously, say industry pros.
“A real ETF product is a massive tailwind for the (crypto) industry because it gets us exposure to passive 401k flows," explains crypto investor Eric Fang. “When the best asset managers in the world are handling distribution, the inbound demand is going to be substantial”.
Mainstream acceptance of the Bitcoin ETF may also indicate wider progress to be made on the regulatory front, hopes Fang: “Despite everything, regulatory clarity around crypto in the U.S. continues to improve and institutions are beginning to dig deeper and invest in the space. If we have a favorable outcome on the Bitcoin ETF, I think it's only natural that Ethereum follows," he says. If demand for BTC and ETH — the two leading digital assets by market cap — grows, Fang says such a resurgence might reignite interest from broader retail investors.
As of July 19th 2023, the SEC has accepted six applications from firms (including BlackRock) to create a Bitcoin ETF. Should the applications be approved by the SEC, bitcoin will officially have practically entered Wall Street, signaling positive momentum for Web3.
That said, it's too early to know anything for sure: According to Reuters, the SEC has previously rejected dozens of Bitcoin ETF applications because the proposals failed to meet anti-fraud and investor protection standards. No matter the outcome, Bitcoin ETFs (like Web3 as a whole) still have a long way to go before widespread adoption.
Isabel Doonan is the CEO and cofounder of Girls Gotta Eth and Sacreage, a Web3 startup working to expand tooling for crypto philanthropy. With a background in Fintech and ESG, she is deeply passionate about the intersection of blockchain and climate funding, as she works to build a better, more equitable future in which everyone can participate in philanthropy.
This article and all the information in it does not constitute financial advice. If you don’t want to invest money or time in Web3, you don’t have to. As always: Do your own research.
