You’ve probably been hearing a lot about Bitcoin ETFs in the news lately. But, what exactly is a Bitcoin ETF? Simply put, it’s a new way to trade and invest in Bitcoin. This new investment vehicle, when approved, might precipitate massive inflows of institutional cash into the worldwide cryptocurrency markets. It might even offer very attractive tax advantages, compared to investing in Bitcoin on its own.

ETFs Explained

The first exchange-traded fund (ETF) was SPY, which began trading on the AMEX in January 1993. SPY now boasts a market cap of $259 billion. This is more than 1.25 times more than the current worldwide market cap of all cryptocurrencies. To create a new ETF, a bank or other custodian takes investor funds and purchases shares in either the underlying asset or its futures contracts. Each ETF investor becomes a shareholder of the fund. They do not actually own the underlying assets that the ETF is tracking. 

All Day Long

ETF’s normally trade during retail trading hours (9:30-16:00 EST). You can buy, sell, and short sell them all day long. There are small management fees, but these aren’t directly charged to investors. Instead, the net asset value (NAV) of the fund is adjusted to compensate for the fees. Some ETF investors are subject to the same onerous wash sale tax rules that govern stock trading. Other ETFs are taxed as futures contracts, and these receive favored tax treatment.

Today, thousands of ETFs are listed on the US and worldwide stock exchanges. They offer equity, bond, forex, and commodity investors a myriad of convenient, safe, and liquid vehicles for financial speculation and/or hedging purposes. Some ETFs (like SPY) track the performance of a major stock index (the S&P 500 index). Others like GLD track the spot price of a specific commodity (gold). 

Rejection Hurts

Over the past eighteen months, numerous proposals for Bitcoin ETFs have been gunned down by the US Securities and Exchange Commission (SEC). Regulators cited concerns over low Bitcoin futures trading volumes and significant disparities in worldwide Bitcoin bid/ask spreads as two of the main reasons for the rejections. Another SEC concern was that the vast majority of Bitcoin transactions occur on non-US exchanges. The price of Bitcoin reacted badly with each new “no” uttered by the regulatory body. Certainly, the road leading to ETF approval has been a rocky one.