Key Takeaways
- If you don’t want to deal with crypto directly, trade it through Bitcoin exchange-traded funds (ETFs).
- Bitcoin ETFs track and mirror the performance of Bitcoin.
- Some individuals and institutions find it easier to buy Bitcoin through an exchange-traded fund than investing in it directly.
As soon as the US Securities and Exchange Commission (SEC) approved the first Bitcoin ETFs, the global cryptocurrency market experienced a surge of new individual and institutional investors coming into cash in on the development. This article explains what Bitcoin ETFs are, and how to trade them safely.
What is an ETF?
An exchange-traded fund (ETF) is an investment tool that enables investors to track the performance of an existing asset or group of assets. The fund can physically buy the asset it monitors or use other complex investments to imitate the underlying asset’s movement. Investors buy or sell ETFs just like they do regular stocks, and they can be traded via CFDs (Contracts for Difference) or through share-dealing platforms.
What are Bitcoin ETFs, and How Do They Work?
Bitcoin ETFs, or Exchange-Traded Funds for Bitcoin, allow investors to track and benefit from the price movements of BTC without managing or owning the cryptocurrency directly. When the price of Bitcoin goes up, so does the price of the Bitcoin ETF; the exact correlation exists when cryptocurrency prices fall. Many traders, especially those with little experience in crypto, have come to prefer this kind of exposure. For example, Bitcoin ETFs pool investor money and buy BTC directly, but the investment firm manages the ETF listed on a traditional stock exchange.
Bitcoin ETFs are created mainly by established financial institutions or Authorized Participants. The fund buys the cryptocurrency, stores it with a custodian, and issues shares. The fund’s shareholders don’t need to use digital wallets or face the challenges associated with the complex cryptocurrency space, as would have been the case when they purchased Bitcoin directly.
While some investors can find trading directly via a crypto exchange a challenging task, the introduction of Bitcoin ETFs has somewhat simplified the crypto investing process. Bitcoin ETFs hold BTC or contracts tied to the price of Bitcoin and trade them on regular stock exchanges. As knowledge about them increases, the market has experienced surging interest, especially towards Spot Bitcoin ETFs and Derivatives-based Bitcoin ETFs, each of which thrives on varying investment strategies and risk appetites.
Who Can Invest in Bitcoin ETFs?
Investing in Bitcoin ETFs is a good option for any individual who wants more than just the traditional way of investing in cryptocurrency. If you are interested in crypto investment but find that investing directly is complicated and you don’t want to deal with buying and storing BTC, Bitcoin ETFs are for you. That’s because with ETFs, you remove all complexities. Moreover, the simplicity of the ETF structure has made it possible for more institutional investors to enter the cryptocurrency market and indirectly increased the demand for Bitcoin.
The Difference between Bitcoin ETFs and Buying Bitcoin Directly
There’s a significant difference between using Bitcoin ETFs and owning Bitcoin directly. Some of these differences include the following:
Bitcoin ETFs
- You don’t own the Bitcoin since you trade using leveraged derivatives such as CFDs.
- You own ETF shares via stock trading rather than the actual digital asset.
- You won’t need a digital wallet since the ETF provider is responsible for the funds held.
- Bitcoin ETFs are less technical and, therefore, more accessible to everyone.
- They are regulated via a centralized stock exchange
Buying Bitcoin
- You own the actual Bitcoin cryptocurrency as an investment.
- You must manage and secure your digital wallet using encrypted private keys.
- Access to your Bitcoin holdings can be technical for a very new person.
How to Trade or Invest In Bitcoin ETFs
You can choose between trading spot Bitcoin ETFs by speculating on the asset’s price through a short-term position or stock trading, which involves buying and owning ETFs over the long term. Since no technical expertise is involved, you can choose from different types of crypto ETFs based on your financial goals and risk tolerance. The following are the steps to take to trade in Bitcoin ETFs:
Select a Brokerage Firm: Since many traditional brokerage firms offer Bitcoin ETFs, take the time to choose a reputable, regulated firm you can trust.
Open a Trading Account: Opening an account will involve providing identification documents and personal information. Some platforms have questionnaires to assess users’ suitability to trade Bitcoin ETFs.
Fund Your Account: Most brokerage firms support credit cards, bank transfers, and other regular payment methods. Carefully read the terms and conditions to understand the applicable fees for funding your account.
Choose a Bitcoin ETF: The next step involves choosing a Bitcoin ETF to invest in. Research the different types of ETFs, considering factors like liquidity, fees, and performance as you choose.
Place Your Order: Now, you can specify the number of shares you intend to buy and the price you will pay. Since Bitcoin ETF prices fluctuate, you need to carefully assess your investment and make any necessary adjustments.
Monitor your Investment: Bitcoin ETF investment requires regular monitoring by staying updated with industry news and market trends.
Conclusion
The launch of Bitcoin ETFs opened a new chapter for crypto investors who don’t want to own Bitcoin directly. Investors can diversify their strategies and get exposure to cryptocurrencies by using Bitcoin ETFs to benefit from the asset’s underlying prices. However, note that Bitcoin ETFs have some risks and complexities you should be aware of before you begin trading them.
