What is an Exchange-traded-fund (ETF)?
- An ETF is a financial product that tracks the performance of various underlying assets.
- Bitcoin ETFs are progressing toward approval in the U.S.
- Major financial institutions like BlackRock are actively involved in the process.
- This development is seen as a positive sign for the cryptocurrency market.
With all the buzz around the pending approval of a Bitcoin Exchange-Traded Fund (ETF) in the US, many people are wondering what are they and how does it impact the price of Bitcoin? Let's find out.
An ETF is a financial product that is designed to track the performance of various underlying assets, such as stocks, bonds, currencies, commodities, or even cryptocurrencies like Bitcoin. ETFs are unique in that they are traded on stock exchanges, just like individual stocks.
The key features of ETFs are:
- Diversification: ETFs pool money from multiple investors to invest in a diversified portfolio of assets. This diversification spreads the risk, making them less susceptible to the fluctuations of a single asset.
- Liquidity: ETFs are bought and sold on stock exchanges throughout the trading day, providing investors with easy access to their investments. This liquidity makes it simple to buy or sell shares at market prices.
- Transparency: The value of an ETF is typically based on the net asset value (NAV) of its underlying assets. This transparency ensures that the ETF's market price closely aligns with the value of the assets it holds.
A Bitcoin ETF primarily invests in assets related to Bitcoin. In this context, it would acquire Bitcoin or financial products tied to Bitcoin. It operates in a way like other ETFs by issuing shares to investors. These shares are traded on a stock exchange and their price is determined by market supply and demand.
The influence of Bitcoin ETFs on the price of Bitcoin is significant for a few reasons:
- Accessibility: Bitcoin ETFs make it easier for traditional investors who are accustomed to the stock market to gain exposure to Bitcoin without having to manage the crypto directly. This increased accessibility attracts new investors to the crypto market.
- Institutional investment: The approval of Bitcoin ETFs is often viewed as a step toward mainstream acceptance. Institutional investors, such as hedge and super funds, are more likely to invest in Bitcoin through regulated financial products like ETFs, further legitimising the industry.
- Liquidity and volume: The trading of Bitcoin ETF shares on established exchanges can lead to higher liquidity and trading volume in the Bitcoin market. This can contribute to increased price stability and a potentially higher market valuation.
- Market sentiment: The introduction of Bitcoin ETFs can impact market sentiment. Positive news about their approval can lead to bullish sentiment and drive up the price, while negative developments can have the opposite effect.
Bitcoin ETFs offer a bridge between traditional financial markets and the cryptocurrency world, attracting new investors and potentially increasing liquidity. As a result, they can have a notable impact on the price of Bitcoin, reflecting the influence of institutional interest and market sentiment.
BlackRock, one of the world's largest asset managers, is working on its proposed Bitcoin ETF, called the iShares Bitcoin Trust, with the ticker symbol IBTC. On Tuesday morning, news broke that this fund is now listed on the Depository Trust and Clearing Corporation (DTCC) website, a major financial infrastructure platform that processes a vast number of securities transactions daily.
The DTCC has a subsidiary called the National Securities Clearing Corporation (NSCC), which has a process for clearing ETFs. This process involves reviewing the ETF's portfolio and automating the creation and redemption of ETF shares.
The fact that BlackRock's Bitcoin ETF is listed on the DTCC suggests progress toward its approval. This listing came after BlackRock made some changes to its Bitcoin ETF proposal on October 18, including adding a CUSIP, which is a code used to identify North American securities for clearing and settlement.
Eric Balchunas, a Bloomberg Intelligence senior analyst, believes that BlackRock's actions indicate a high likelihood of approval. Other companies, like Ark Invest and 21Shares, had also amended their Bitcoin ETF applications, making clarifications to address the Securities and Exchange Commissions (SEC) concerns.
Additionally, Grayscale is taking steps to register its Bitcoin Trust as part of the process to convert it into an ETF. While the SEC initially rejected this conversion but approved Bitcoin futures funds, a recent court ruling questioned the SEC's decision. Grayscale is now working with the SEC to move this conversion process forward.