It seemed inevitable that two of the hottest investment areas would collide at some point. The prospect of an ETF that follows bitcoin is the biggest option for this type of relationship for cryptocurrency fans and investors hoping to capitalize on the growing popularity of exchange-traded funds (ETFs). However, attempting to launch the first bitcoin ETFs has been fraught with difficulties.
( Also Read: Guide to Trading and Investing in Bitcoin )
The reason for this is that bitcoin, the world's most valuable cryptocurrency by market capitalization, is still mostly unregulated. The Securities and Exchange Commission (SEC) is also wary of allowing an ETF based on the new and largely untested cryptocurrency industry to be sold to the general public.
Launch of Bitcoin Futures ETF
However, On October 19, the New York Stock Exchange introduced the first Bitcoin futures exchange-traded fund (ETF), marking a watershed moment for the fledgling cryptocurrency industry. People will be able to invest in Bitcoin without needing to buy it. On several Indian exchanges, Bitcoin is currently trading at an all-time high of $67,139 (approximately Rs 50,25,433).
Investors can purchase and sell Bitcoin ETF shares at any time during market trading hours, just like they can buy and sell stocks. Crypto aficionados have reacted positively to the introduction of the Bitcoin futures ETF to the New York Stock Exchange.
The fact that the value of Bitcoin reached an all-time high just one day after the Bitcoin ETF was introduced in the United States has added to the enthusiasm.
( Must Read: ETF Dividends: Types, Working, and Examples )
What Are Bitcoin Futures?
Bitcoin futures and Bitcoin are not the same things. With futures, you contract to buy or sell an asset at a specific price in the future. You are not purchasing and selling the underlying asset directly (Bitcoin in this case).
When the agreed-upon day arrives, you must buy or sell the asset at the agreed-upon price, regardless of what the asset's real price is that day. As an investor, you make money if your contract expires and Bitcoin is worth more than what you agreed on.
This is referred to as premium trading. You lose money if the price of Bitcoin is lower than you expected. This is known as trading at a discount.
( Also Read: How to Mine Bitcoin?)
By investing in this new fund, you're simply betting that your ETF shares will be worth more in the future. Bitcoin is the driving force behind the value of your stock.
Futures are used to trade a variety of assets, most common commodities like oil, grain, and coal. Instead of buying gold bars, you might invest in a gold futures ETF.
“Futures contracts are derivatives of Bitcoin, and are not directly backed by physical Bitcoin,” says Dana J. Menard, a CFP and founder of Twin Cities Wealth Strategies in Minneapolis. This may cause some confusion because the price of the ETF does not always correspond to the price of Bitcoin.
( Must Read: Top Companies Adopting Bitcoins )
For example, if Bitcoin rises 30%, the Bitcoin futures ETF may only climb 20%, according to Hunsberger. "Futures ETFs store contracts that regularly expire and must be repurchased," Hunsberger explains. "This can increase tracking inaccuracy between the ETF and the underlying asset, in this case, Bitcoin," says the author.
Watch this video: First bitcoin futures ETF from ProShares makes trading debut
What is a Bitcoin Futures Exchange Traded Fund (ETF)?
ETFs (exchange-traded funds) are regulated financial products that can represent a wide range of assets. An ETF also keeps track of an underlying asset's price swings, allowing investors to profit from the asset's price trend without actually holding a single unit of it.
Bitcoin futures are a sort of price-tracking trading contract in which two parties agree to track the price of bitcoin. According to a CoinDesk report, both parties agree to buy or sell Bitcoins at a predetermined price at a later date. A commodities exchange is where this type of trading takes place.
( Suggested Blog: Top Casino Stocks to Invest In )
The Bitcoin final day price – more or less – has no bearing on this Bitcoin futures contract. In this situation, one party makes a profit while the other suffers losses.
The approval of a Bitcoin futures ETF by the Securities and Exchange Commission (SEC) has added to the warm climate surrounding cryptocurrencies that are growing in the United States, where the government is seeking ways to gain from the crypto industry while also regulating it.
The Advantages and Disadvantages of Bitcoin Future ETFs
Future ETFs make commodities easier to buy and trade by reducing the expense and obligation of keeping them. Furthermore, the profit margins that one of the parties entering into a contract can take can be significant.
( Must Read: Best Blockchain Stocks For 2022 )
One major disadvantage of this protocol is that assets such as Bitcoins cannot be held or traded on larger exchange platforms. Furthermore, because the accuracy of various crypto-price trackers varies, the agreed-upon asset value for a given date under a future ETF contract could result in severe losses.
When the Bitcoin futures contracts expire, the business that issued the ETF is required to roll them over, which entails selling the nearly expired contracts and using the proceeds to buy new contracts with a longer expiration date.
When the price of a futures contract for an asset like Bitcoin is lower than the price of a new contract, the money from selling contracts that are about to expire will not be enough to acquire the same number of contracts that will expire later.
( Also Read: Top Investors of All Time )
Should You Invest in a Bitcoin-linked ETF?
Experts advise investing no more than 5% of your whole portfolio in risky assets like cryptocurrency or specialist ETFs, whether you buy cryptocurrency outright or invest in a crypto-linked ETF.
Watch this video from CNBC: “Bitcoin futures ETF starts trading today”
Bitcoin is still a relatively new investment when compared to traditional stock market investing, thus it lacks the historical track record that investors may use to predict future success.
Remember to only invest what you're willing to lose before buying shares in a Bitcoin ETF, cryptocurrency, or any other speculative investment, and never at the price of other financial goals like paying off high-interest debt or saving for retirement.
( Also Read: Principles to keep in mind for Effective Trading )
Bitcoin is extremely volatile, and while there may be a price differential between Bitcoin and BITO, the ETF does not shield you from Bitcoin's ups and downs.
Bitcoin reached an all-time high of over $60,000 in April this year, before dramatically losing half of its value during the summer, but it has now rebounded to around $60,000. Even in the ETF, you should expect the same level of volatility.
BITO, on the other hand, makes it easier than ever for investors to expose their present portfolio to bitcoin in some fashion, as long as they are willing to accept the risks.
Trying to browse a bitcoin exchange if you're new to cryptocurrencies might be scary. This ETF allows you to easily add Bitcoin exposure to your portfolio via your brokerage. You can even keep it in a tax-advantaged account like a Roth IRA or 401(k) if you like.