What Is A Bitcoin ETF And Why You Should Care

The Securities and Exchange Commission approved changes that allow the listing and trading of bitcoin exchange-traded funds on Wednesday. Bitcoin ETFs aim is to expose investors to bitcoin’s performance without requiring them to directly own or store the digital currency.

Until now, the buying and selling of cryptocurrency was prohibited on the U.S. stock exchange. Additionally, many casual investors may be unversed in cryptocurrency and have no idea what it is or how much to buy. The SEC’s approval of bitcoin ETFs changes all of this.

An exchange-traded fund is a type of investment fund and exchange-traded product representing a collection of securities such as stocks, bonds, or commodities. ETFs trade on stock exchanges similar to individual stocks. However, while individual stocks always run the risk of plummeting to $0, ETFs mitigate this risk by providing investors with a diverse portfolio of assets.

With the SEC’s approval of the bitcoin ETF, instead of purchasing and holding bitcoin directly on a crypto exchange platform, investors can now buy shares of a bitcoin ETF through their brokerage accounts. Experienced crypto investors manage these shares. The ETF holds bitcoin on investors’ behalf, and the shares of the ETF represent a stake in the fund's overall holdings of bitcoin.

The value of these ETF shares is typically tied to the price movements of bitcoin. This allows investors to invest in bitcoin's performance without dealing with the complexities of managing and securing the cryptocurrency themselves.

Although the bitcoin ETF is not currently a diversified pool of cryptocurrencies because it exclusively focuses on bitcoin, it could open the door to similar products featuring a pool of cryptocurrencies. The hope is that in the near future, an investor may buy a single ETF share that represents a wide range of cryptocurrencies, similar to traditional ETF models.

If you wanted to dip your toe in the crypto pool but felt intimidated by your lack of expertise, the bitcoin ETF is a great way to start. Since bitcoin ETFs are regulated financial instruments, their issuers are subject to regulatory oversight, thus protecting investors and ensuring compliance with relevant financial laws.

However, it is important to note that while bitcoin ETFs offer certain advantages, they also come with their own set of drawbacks. While bitcoin ETFs can protect you from risks like hacking or fraud, they cannot fully shield you from the cryptocurrency market’s volatility. Bitcoin is influenced by various factors, including market sentiment, regulatory changes, and technological developments, and its value has been subject to extreme price swings over the years.

The cryptocurrency industry overall has been marred by numerous frauds and scandals, like the 2022 collapse of TerraUSD , which plummeted the price of bitcoin down 65%. Then, over the past year, the price of bitcoin skyrocketed more than 150%. This is clearly a highly volatile asset. The SEC cautions investors to proceed carefully when it comes to investing in cryptocurrency assets and to ensure that they are aware of the risks.

Before making any investment decisions, it is crucial to thoroughly research and consider your risk tolerance, investment goals, and the specific details of the ETF you are interested in. Consulting with a financial advisor can provide personalized guidance based on your individual circumstances.

By Pattie Ehsaei, Contributor