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What Is Bitcoin And Blockchain ETF?By Krishna Vishwakarma | Aug. 8, 2018, 3:51 p.m. GMT
While it’s common knowledge that that Bitcoin Futures contracts already exist, are you familiar with Exchange Traded Fund (ETF)? Here, we take a closer look at the Bitcoin ETF and how it’s different from Blockchain ETF.
Presently, Bitcoin enjoys several Futures markets offered by the likes of the CBOE (Chicago Board Options Exchange) and the CME group; however, the leading cryptocurrency has yet to achieve another financial milestone: inclusion in an Exchange Traded Fund (ETF).
What is an ETF (Exchange Traded Fund)?
An ETF, in simple terms, is a marketable security that tracks either an index of funds, a commodity, or a basket of assets.
Rather than serving along the lines of a mutual fund, ETFs trade somewhat like a common stock on a stock exchange, next to other listed companies or assets; for example, Microsoft (MSFT), Apple (AAPL), or Gold. Since ETFs trade like stocks, they do not have a net asset value (NAV) calculated at the end of every day. However, ETFs enjoy higher liquidity and usually employ lower fees than a professionally managed mutual fund.
An ETF holds the underlying assets that consist of the fund (either share of stock, foreign currency, or gold assets) and splits the possession of these assets into shares. Stockholders in an ETF do not directly own these assets; instead, they have to claim shares of the ETF itself. Simply put, asset ownership in an ETF is what we call ‘indirect’.
Additionally, an ETF can be considered as a distributed fund that can be traded in portions on a currency exchange. An ETF functions by offering stockholders a denomination of the profits the fund rakes in. Given that the fund’s value is distributed through shares, stockholders can easily buy, sell, or trade shares of the ETF just as they would, the stocks of a company. Should an ETF be liquidated, stockholders can still keep remaining value.
What are blockchain ETFs?
While we are waiting to see a major Bitcoin ETF, there are already several small ones that have hit the stands.
However, a notable difference is that the so-called ‘blockchain ETFs’ do not invest in actual blockchain-based cryptocurrencies or altcoins. Instead, they invest in companies involved with the blockchain technology, regardless of whether the firm is a startup creating new fundamentals with blockchain or an older firm introducing blockchain to its core practices.
Blockchain ETFs are seen as a more ‘stable’ form of investment compared to Bitcoin ETFs, given that the former does not precisely track Bitcoin’s market volatility and is, instead, invested in the performance of companies themselves.
So, what is Bitcoin ETFs?
While several Bitcoin ETFs have been proposed, we have yet to see one accepted by the United States Securities and Exchange Commission (SEC).
Mainly, a Bitcoin ETF would purchase an underlying amount of actual Bitcoin and distribute those funds into shares, further distributed to stockholders.
Many proposed Bitcoin ETFs have proposed tracking the price of Bitcoin through Futures contracts rather than through the listed price of Bitcoin on cryptocurrency exchanges. Other proposals may, in time, invite the idea of tracking Bitcoin’s price through other listings.
At the time this piece was conceived, the SEC has rejected most of the Bitcoin ETF proposals, citing issues with liquidity and valuations. The SEC has argued that the trading volumes and liquidity on Bitcoin Futures contracts are too low to serve as a Bitcoin price indicator, given that Bitcoin Futures contracts themselves follow spot prices on Bitcoin and cryptocurrency exchanges.