What is the Bitcoin ETF?

RAY BROWN
After experiencing a high amount of volatility during the global pandemic, Bitcoin has officially made its Wall Street debut on the New York Stock Exchange (NYSE).

On October 19, the financial firm ProShares launched the first exchange-traded fund (ETF) linked to Bitcoin trading under the ticker symbol “BITO”. The creation of a Bitcoin ETF marked a long-awaited milestone for the crypto community as a whole, as crypto proponents have been trying to get Bitcoin-linked investment products approved for several years now.

It seems inevitable that two of the hottest areas of the investment world would meet up sooner or later. For those looking to capitalise on the growing popularity of ETFs, the possibility of an ETF that tracks Bitcoin is the best opportunity for this type of connection.

But what actually is BITO and how will it impact the crypto market and investors alike?

Breaking down BITO

BITO is an exchange-traded fund (regulated financial products that can represent a wide range of different assets) that doesn’t invest directly in Bitcoin, instead it allows people to gain exposure to Bitcoin prices without having to go out and buy the cryptocurrency directly, rather it is underpinned by Bitcoin futures contracts.

Bitcoin futures contracts are an agreement to buy or sell Bitcoin at a later date for a fixed price, generally traded on a commodities exchange. When those contracts mature, the ETF will buy up contracts for the next month.

Investors can purchase and sell shares of BITO just like they would stocks on exchanges or through a brokerage, however, unlike mutual funds, BITO’s shares can be bought and sold at any time during market trading hours.

The push for a Bitcoin ETF specifically began in 2013, and in the eight years since, anxious investors have watched the Securities and Exchange Commission (SEC) reject numerous applications.

Prior to BITO, SEC was hesitant to support an ETF which held actual Bitcoins due to concerns that Bitcoin trading wasn’t transparent enough to protect investors from fraud and manipulation, instead they were happier to accept the creation of the Bitcoin future product as it was deemed more safe.

BITO performance to date

Since its listing on the NYSE, BITO has been a roaring success to say the least.

Changing hands with more than 24 million shares, the ETF posted a 2.59% increase on its first full day of trading, closing at US$41.94 per share. It also gobbled up over US$570 million in assets under management (AUM) and by the second day of trading, the ETF toppled the billion-dollar mark and closed with USD$1.1 billion in AUM.

Marking the top ETF debut in history, BITO stole the glory from GLD, the dominant gold-tracking ETF, which took a whole extra day (three days total) to reach the milestone back in 2004.

On the same day of the BITO debut, the price of Bitcoin soared past its all-time high of US$64,895 to a new record of US$66,975, bringing its gain for the year to almost 130%.

It has been a volatile year for the world’s biggest cryptocurrency, as it plunged below US$30,000 in June 2021, amid criticism of its energy consumption and China’s crypto crackdown. Bitcoin has gained more than 300% in 2020 and 95%t in 2019 after tumbling 73% the previous year.

A crypto ETF future?

As the investment options, like BITO, become more common, this will only continue to support the widespread adoption of cryptocurrency and blockchain technology.
And while this ETF might not have been exactly what crypto enthusiasts were originally dreaming of, it’s still an important moment as it’s a bridge for more crypto-based ETFs to be potentially created and accepted by regulators in the not-too-far-away future.

In the coming months, it’s expected more traditional finance firms will follow in ProShares’ footsteps and offer their own futures-based crypto ETF. In fact, fund providers like Valkyrie Investments, VanEck, and Invesco already have their own versions awaiting the SEC’s green light.


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Cover image source: Tarasenko Andrey/ Shutterstock


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