A Bitcoin ETF Could Signal a New Wave of Institutional Investors Taking a Big Stake in Bitcoin

Bitcoin ETFs provide investors with a convenient way of diversifying their portfolio without directly experiencing price volatility. As different ETFs carry various fees, it’s essential that investors do their due diligence when investing.

BlackRock’s application to create a spot Bitcoin ETF has reignited interest and given cause for optimism that one may soon be approved, though multiple firms still face obstacles in doing so.

Physical-backed ETFs

Physical-backed ETFs differ from futures-based ETFs in that they hold actual Bitcoin in a safe custody account, an important distinction as Bitcoin markets are vulnerable to manipulation and price volatility, necessitating sophisticated measures for investors to detect this activity and verify whether their underlying asset really is Bitcoin. Furthermore, physical ETFs require an experienced custody provider.

There are currently several physical-backed Bitcoin ETF proposals underway, such as one proposed by VanEck in partnership with SolidX. This ETF would track the price of cryptocurrency globally rather than on an illiquid market such as dark pools. Furthermore, its shares would be listed on an national securities exchange and investors could buy or sell shares through their brokerage accounts.

Many investors favor physical-backed ETFs due to their higher degree of liquidity compared to futures-based alternatives. Unfortunately, however, these products come with their own set of disadvantages; for instance, investors must trade them during traditional trading hours on regulated exchanges – something smaller investors often can’t wait until after market closes to buy or sell an ETF.

Physical-backed ETFs tend to be more costly than their futures-based counterparts, yet still provide an ideal investment solution for investors who wish to gain exposure to blockchain but lack the time or resources for managing an individual portfolio.

Recent court rulings supporting Grayscale and BlackRock’s applications for spot Bitcoin ETFs has reignited hope that the SEC may approve them soon. Unfortunately, this process may take several months until their applications have been reviewed by regulators and an official decision made on each case.

Investors looking for short-term returns may invest in futures-based ETFs which track bitcoin. Such funds use algorithms to track its price as it compares it with indexes of other cryptocurrencies; additionally they look at transaction volumes, mining power and other indicators when making their decisions.

Futures-based ETFs

An ETF that tracks bitcoin futures contracts instead of actual bitcoin can cause problems if their price differs significantly from that of bitcoin itself, a phenomenon known as contango that can negatively impact performance of funds.

Futures-based ETFs can be an excellent way to diversify your portfolio without taking on the risks associated with bitcoin ownership. But it is important to keep in mind that futures contracts prices can change quickly, meaning your return could be less than anticipated if you’re not careful.

Futures-based ETFs also present specific tax implications, unlike stocks which typically attract a maximum capital gains tax rate of 20%, the profits from futures-based ETFs typically only incur an ordinary income rate tax bill, regardless of how long you hold onto their shares. If you buy futures-based ETFs then sell them, this could result in an unexpectedly large tax bill.

Many investors remain wary of investing in cryptocurrency markets, so Exchange Traded Funds (ETFs) offer an easy way to gain exposure without the hassle of buying and selling individual assets. Before purchasing one of these Bitcoin ETFs however, be sure to consider all associated risks carefully.

The SEC has rejected over 30 spot bitcoin ETF applications so far, but may soon approve one based on whether futures markets provide enough stability and liquidity to prevent big investors or the ETF itself from stacking positions and distorting prices.

Grayscale has claimed that its ETFs won’t distort the bitcoin market because they will only track futures contracts on CME exchange. However, this claim has been challenged due to concerns regarding CME’s ability to monitor spot prices and detect manipulation.

Grayscale ETF opponents note that its creation will create a new asset class not backed by physical commodities, raising potential regulatory concerns. Furthermore, funds must pay management fees and expenses associated with running the fund – these expenses could prove substantial if poorly administered.

Regulations

An ETF would signal institutional investors’ readiness to increase their bitcoin exposure, leading to wider acceptance and integration of this digital asset. Unfortunately, however, there remain several barriers preventing its success; such as concerns over market manipulation and security. But industry players have taken steps towards solving these problems; BlackRock launched its private bitcoin trust while Fidelity submitted an unsuccessful petition with the SEC for an ETF. These efforts may provide support for further applications being submitted – possibly helping sway SEC decision.

An ETF ruling for spot bitcoin could have significant ramifications on the bitcoin ecosystem. Investors will be able to trade it just like stocks, bonds, or commodities; and it would further bring Bitcoin into mainstream investment circles – potentially opening up a whole new market and leading to significant price gains for its asset class.

The Securities and Exchange Commission could choose from among nine applications for bitcoin ETFs that have been filed, which include Grayscale, Ark/21 Shares Bitcoin Trust, Bitwise, VanEck, Invesco IVZ +0.3%/Galaxy Digital and ARK Invest. Alternatively, they could appeal a court’s ruling and further delay proceedings.

Although the SEC is concerned about potential market manipulation in spot bitcoin trading, recent court decisions indicate that these concerns may not be as pressing. Furthermore, as bitcoin evolves and develops its liquidity and security standards over time, these could help alleviate concerns regarding manipulation in this sector and lead to approval of an ETF for this spot market.

Courts have determined that the SEC’s rejection of Grayscale ETF was arbitrary and capricious, failing to explain why futures and spot markets were treated differently by it. Furthermore, its proposed trading strategy does not comply with exchange-traded funds regulations – leaving an important decision facing them going forward. This ruling puts SEC at an important juncture.

ARK Invest

ARK Invest has applied to the Securities and Exchange Commission (SEC) for approval of an exchange-traded fund tracking the price of bitcoin using an index created by S&P Dow Jones Indices LLC and which would feature weighting to reflect its volatility. If approved, this could become the first of its kind in America.

Cathie Wood, CEO of ARK Invest is confident that their application to the SEC will be approved. She anticipates that approval of a spot bitcoin ETF will open up access to investors from across all backgrounds; additionally she expects other companies to apply for similar ETFs soon afterward.

Ark Invest stands out from most ETFs by targeting secular growth trends instead of pure value-based trends. It uses several tools to predict which trends will take hold and identify which companies stand to benefit from them, while also taking into account scale efficiencies via Wright’s Law which says that increasing production by double means reducing costs by an agreed percentage.

Artificial Intelligence and machine learning technologies are integral parts of making investment decisions for this firm, aiding it to identify the best opportunities and increase returns on capital. It has already employed this technology when creating various funds such as the ARK SRI Global Diversified Equity Fund – this fund boasts a beta value of 1.55 and annualized volatility of 30%.

As opposed to other ETFs, this one will not hold physical assets or derivatives on its balance sheet; its holdings will instead be managed on behalf of the fund by an external subadvisor, enabling it to avoid regulatory issues and safeguard its future growth.

The new fund will offer exposure to Ethereum, the second-largest cryptocurrency by market cap. It uses a model that evaluates trends and market movements; furthermore, its investment team will have full discretion regarding allocating bitcoin futures contracts to futures contracts.

ARK’s filing is just the latest development in the race to launch a spot bitcoin ETF on the market. Other ETF issuers, including BlackRock and Bitwise, have filed similar products. In these applications from BlackRock and others there are agreements in place with market information sharing agreements in order to assist SEC authorities in rooting out possible manipulation in spot bitcoin markets.