- Bitcoin ETFs are assets of bitcoin-related pools, to be traded over conventional exchanges via brokerage.
- These ETFs are connected to future contracts which enable Bitcoin’s access without trading it.
Bitcoin’s first ETF “BITO”, introduced in 2021, debuted as one of the heavily traded ETF in the market by attracting over $1 billion in assets during its inception. It gathered a notable share of all short-term BTC future contracts. BITO is the first Security and Exchange Commision (SEC) approved ETF. It got delayed because of its concern that it could be traded primarily over non-regulated exchanges.
For now, the primary assets within the Bitcoin ETF are linked to future contracts and traded over Chicago Mercantile Exchange (CME).
What is a Bitcoin ETF?
ETFs stands for exchange-traded funds that initially invests in assets that are related to the cryptocurrency. These are almost similar to mutual funds but it got traded over stock exchanges like any other shares directly. ETF shares are sold to investors of the open market, and use the process to build a crypto asset’s portfolio based on market index.
In ETFs that monitor stocks and get purchased by funds, these fund holdings bought by companies offer fractionalized shares which are traded 24×7. This concept was initialized after brokers and investors noticed that Bitcoin price is skyrocketing and getting popular day by day. They spotted an opportunity to get returns by trading Bitcoin via ETFs.
How do these ETFs Work?
With some remarkable differences in approach, these ETFs aim to track closely the possible price of Bitcoin. Front-month future contracts are holded by these future based ETFs. Every month it gets rolled over with sustainable extra expenses. Future contracts have expiry dates with ongoing management that are reconstructed by portfolio managers.
When contracts are near expiration dates, long-term contracts are bought on behalf of selling these near-ending funds by “Roll” strategy. These ETFs hold a liquidity pool of cash or cash equivalent treasury bills. Further it uses these gains to expand its liquidity pools. When Bitcoin’s price crashes, these liquidity are used to recover significant losses of future contracts.
How to Invest in a Bitcoin ETF?
To purchase a Bitcoin ETF, you have to open a brokerage account. There are several ways of online brokers nowadays. After getting one, ETFs could be bought like any other stocks. Investors search for ticker symbols in their brokerage dashboard, further entering the amount they want to purchase. It charges an annual expense portion which gets deducted from traders’ accounts unlike conventional stocks.
ETFs are not fully composed of Bitcoin, instead it invests in conventional security beholding Bitcoin’s future contract meeting strategies of funds. These strategy funds are designed to hold only profitable positions for future contracts, else it holds security of Bitcoin-related companies. It can be borrowed via reverse repurchase agreements also.
Conclusion
Future-based ETFs can affect prices in two ways, primarily it affects through flow rebalancing while buying future contracts and pushing up future prices. Further it can be affected by calendar rebalancing, which consists of selling near expiration future contracts that result in price-fall. There are several Bitcoin ETFs available which are based on future contract’s price. It’s best to approach a professional advisor or you can do your own research before purchasing one.
