With more and more people going cashless, Bitcoin is one the most speculated assets in the world today. A single bitcoin can be worth thousands of dollars, but, to get in on the action, you don't have to buy individual bitcoins or other digital coins. Instead, you can spread your money among hundreds of available digital currencies.
The alternative to buying single digital coins is investing in investment funds that resemble your typical mutual fund. They allow more investors to access the cryptocurrency market at an affordable cost. Of course, purchasing shares in these funds still comes with risk. That's why it's important to fully understand how crypto-investments work and which one is right for you.
What is Bitcoin ETF?
Let's first take a look at what is called a bitcoin ETF.
An ETF, or exchange-traded fund, is a collection of assets bundled together that is then sold as shares to investors. ETFs are very much like a mutual fund, except for the key difference that they are traded throughout the day on exchanges just like a common stock. Further, most ETFs track the price of certain market indexes based on the type of asset held in the fund.
Therefore, a bitcoin ETF or other cryptocurrency ETF is comprised of cryptocurrency assets and lets investors partake in the digital currency market without having to purchase actual coins. That lowers the barriers to accessing the cryptocurrency market, so even young investors with less money to invest can gain exposure.
The funds then track the price performance of one or more digital currencies. Without having your money tied to one digital coin, your risk is spread out, generally resulting in fewer price swings.
How Do ETFs Work?
These days, anyone can buy Bitcoin or another cryptocurrency, but that doesn't mean it's practical for everyone. The substantial price can prevent potential investors from entering the market, much less buying enough coins to make a worthwhile gain. Then there is the challenge of creating a digital wallet and avoiding cybersecurity threats.
Since you are never in actual possession of the assets held in an ETF, you essentially sidestep a lot of these problems. With a physical-backed crypto ETF, the fund is the owner of the digital coins while you as the investor own a share of the fund. When value of the digital coins held by the fun change so does the share price of the fund. Other crypto ETFs are comprised of future contracts, which are agreements to buy or sell an asset at a set price and at a specified time.
Because ETFs are traded on security exchanges throughout the day, there is an added element to how their prices move. Like a single stock share, the price can rise and fall based on nothing but investor sentiment. Also, as a shareholder you are subject to management and transaction fees to buy and sell ETF shares.
What is Bitcoin Tracker One?
While the market for cryptocurrency ETFs is still relatively in development, the Bitcoin Tracker One has been available on the Nasdaq Stockholm exchange since 2015. That makes it the first bitcoin-tracking security listed on a regulated exchange. Although it is listed on the Stockholm exchange, it is available in U.S. dollars, so American investors can trade it, as well.
As the name suggests, the Bitcoin Tracker One follows the price changes of bitcoin. When the price of bitcoin moves, so does the shares of the fund, minus any fees.
Though similar in many ways to an ETF, the Bitcoin Tracker One is actually an ETN, or exchange-traded note. The difference is that an ETN is a debt product, like a bond, issued by a provider. Still, shares are bought and sold in much the same way on an exchange. Regardless, the Bitcoin Tracker One provides access to bitcoin for lower cost than directly purchasing the digital currency.
Advantages of Bitcoin Tracker One
Investing in a product like Bitcoin Tracker One prevents investors from having to handle and store bitcoins. Instead, that is the responsibility of the fund provider. The custodians and guarantors are required to certify that the assets it holds are there and safe. Since nothing these days is seemingly secure from the threat of hackers, even cryptocurrency, this is a tremendous advantage over purchasing and storing individual digital coins yourself.
Not to be overlooked is the advantage that comes from being listed on an established and regulated exchange. Some cryptocurrency exchanges have been the subject of theft. For example, the Mt. Gox exchange in Tokyo was shut down when it was suspected of bitcoin theft worth up to $500 million.
As we've discussed, the high value of bitcoin is a barrier to the market for a lot of investors. The low cost of a share in a fund makes the Bitcoin Tracker One an affordable bitcoin investment. There is another price advantage to the fund in comparison to directly owning bitcoin. The fund features an annual fee of 2.5% of the amount you invest. That can be lower than what you would pay in just transaction costs from trading actual bitcoins.
Implications for Bitcoin ETF
Currently, there are many bitcoin ETFs waiting for approval. Without a doubt, the eventual release of bitcoin ETFs will be a game changer for those who want to invest in digital currencies. Until then, the Bitcoin Tracker One continues to pave the way for everyone else to follow.
For one, it continues to prove to regulators all over the world that it can be done. A cryptocurrency ETF can survive long term. What else, the creation and release of such securities has a positive influence on bitcoin as a whole. Again, funds like the Bitcoin Tracker One essentially have to buy bitcoin to appropriately track the price of the asset. That provides stability to the bitcoin market, which has been one of the concerns of regulators. As more investors gain access to bitcoin through this investment and demand rises for similar funds, bitcoin ETFs should find a much easier path to the market.
Although investors who want to invest in bitcoin still have limited options, the future looks bright with the advent of bitcoin ETFs. They will provide greater access to bitcoin at a lower cost; although, as with any investment, there will still be risks and costs involved.