Bitcoin Investment Via an ETF

Fidelity Investments, an asset manager with trillions of dollars under investment, has filed papers for a spot Bitcoin ETF. This follows news of Blackrock, an even larger asset manager with more trillions of dollars under investment, doing the same thing. Traders credit the news of a possible Fidelity Bitcoin Spot ETF with driving Bitcoin to a one year high. Is Bitcoin investment via an ETF a good idea? A previous attempt to start a Bitcoin spot ETF by Fidelity was turned down in 2021. There are, however, a couple of dozen spot Bitcoin ETFs in operation. What excites Bitcoin investors and traders is the potential for a really big dog in the financial world jumping into this arena.

What Is an EFT?

ETF stands for exchange traded fund. This is an investment fund that trades on a stock exchange. These are pooled securities and operate similarly to mutual funds. ETFs are structured to track commodity prices like gold, market indices like the S&P 500, or any collection of securities. They can even be created to track a given market trading strategy. Investors commonly buy shares of an ETF that tracks the S&P 500 instead of trying to buy all five hundred stocks that comprise the index. Gold investors find it much easier to buy shares in a gold ETF that tracks the spot price of gold than to buy and store gold bullion. Shares of ETFs trade just like stocks, which makes ETFs an efficient investment and trading vehicle. When lots of money goes into an ETF, trading of that ETF can have measurable effects on the markets of its constituents. This is because the ETF managers will be buying and selling stocks in the S&P 500, gold bullion, or Bitcoin in order for the exchange traded fund to continue to accurately track the value of its investments.

Why Would a Spot Bitcoin ETF Be a Good Investment?

Despite the travails of crypto winter, cryptocurrencies in general and Bitcoin particularly can be good long term investments and profitable for short term trading. Many investors might be interested in investing in Bitcoin or trying to time the market through short term trading. However, they do not know how to create a crypto wallet and buy or sell Bitcoin. And, frankly, they do not care to know. This is like people who have successfully traded the fluctuations of the gold market. They have no interest in buying and storing gold bullion or paying for secure storage. An ETF is an easy way for folks who do not want to actually own Bitcoin (or gold bullion in a vault) to buy and sell using US dollars.

How good an investment Bitcoin will be will depend on the market and on the timing of one’s Bitcoin purchases. What a spot ETF will do is make the processes of investing and trading much easier and much quicker.

Spot Bitcoin ETF Versus Bitcoin Futures ETF

There are ETFs that track the price of Bitcoin and those that track the price of Bitcoin futures. Futures are contracts to buy or sell a commodity, stock, or Bitcoin at a future date. The value of such a contract will rise and fall in similar fashion to the spot price but may be more sensitive to market speculation. As a rule, one should not start trading futures on anything unless they have learned how futures work and are willing to accept the risks. Similar advice applies to trading an ETF that tracks Bitcoin futures prices.

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