Exchange-traded funds (ETFs) are now Accessible to Bitcoin Enthusiasts, but what Exactly are they?

The long-awaited decision to include Bitcoin in conventional investment funds has been taken by the US.

It has authorised what are referred to be spot Bitcoin exchange-traded funds (ETFs), which are available for purchase by both regular investors and pension funds.

The head of the Securities and Exchange Commission issued a strong warning about the asset’s hazards along with the announcement.

However, cryptocurrency enthusiasts responded with joy and wealth-related memes.

A number of times in the past, the US financial watchdog had rejected bids for permission, citing possible fraud and manipulation.

However, a US judge ruled last year that its explanation was insufficient.

The approval follows a false start on Tuesday, when the regulator was forced to quickly remove a “unauthorised” post that prematurely announced the decision.

Gary Gensler, the head of the SEC, stated on Wednesday that investors shouldn’t interpret the recent approvals as a support for cryptocurrencies.

“Bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing,” he stated.

“Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”

However, what exactly is an ETF?

ETFs are investment portfolios that let investors speculate on a variety of assets without having to purchase any of them directly.

Similar to shares, they are traded on stock exchanges and their value is determined by the real-time performance of the entire portfolio.

A mix of shares in leading technological and insurance businesses, or bullion made up of gold and silver, might be included in an ETF.

While some ETFs already indirectly own Bitcoin, a spot Bitcoin ETF will buy the cryptocurrency “on the spot” throughout the day at the current price.

Why is everyone so excited?

The US Securities and Exchange Commission (SEC) has been waiting for approval from about a dozen investment firms, including Blackrock and Fidelity, to begin purchasing Bitcoin for their own exchange-traded funds (ETFs) for months.

And now that the wording has been worked out for weeks, the first have been approved.

This implies that a new class of investors can now participate in the speculative Bitcoin market without worrying about setting up digital wallets or utilising cryptocurrency exchanges.

As big financial institutions begin purchasing the virtual currency, billions of dollars are anticipated to flood the Bitcoin market.

Few analysts predict that the price of the cryptocurrency will be significantly impacted because spot Bitcoin ETFs are already available in other nations.

However, most experts anticipate that as US corporations enter the market, the value of bitcoins will increase in line with demand.

Still, the pricing is infamously erratic.

Coin prices increased to about $70,000 (£55,000) in 2021 but dropped to $16,000 in 2022 as scandals rocked the business.

But it increased steadily in 2023—partially as a result of the excitement surrounding the introduction of the Bitcoin ETF—and is currently at $44,000.

Based on a concept that a person going by the name Satoshi Nakamoto posted online in 2008, Bitcoin was the first cryptocurrency and is still the most valuable and well-known today.

Thousands of other coins, tokens, and goods based on the same blockchain technology are in the market, and its price is frequently used as a gauge for the entire sector.

Additionally, many anticipate a spike in interest in bitcoin technology in general as more money enters the ecosystem.

How will the choice impact the uptake of cryptocurrencies?

Some claim that this historic ruling demonstrates that the establishment is now considering Bitcoin seriously, albeit only as a speculative asset.

What stronger evidence could there be for proponents of Bitcoin as genuine “digital gold” than the largest wealth-management firms swarming to purchase it under regulatory supervision?

According to others, Bitcoin is about eschewing established financial institutions in favour of a decentralised, user-powered substitute. Additionally, Satoshi Nakamoto did not intend for investment bankers to purchase Bitcoin in order to become wealthy using US dollars.

However, based on the frenzy on social media, it appears that most people are hoping the cash infusion would make current Bitcoin investors extremely wealthy.

What dangers exist for aspiring investors?

Bitcoin’s price is subject to frequent, abrupt fluctuations without prior notice or justification.

Therefore, before choosing an ETF associated with the digital currency, investors must consider that.

Nevertheless, ETFs are frequently marketed as high-risk, high-reward investments.

The possibility of cybercrime is another.

Large-scale, expensive assaults on Bitcoin and other cryptocurrencies have resulted in the sudden loss of hundreds of millions of dollars by cryptocurrency companies.

Furthermore, if companies like Blackrock start to amass significant Bitcoin holdings, their cyber security will be put to the test in ways they are not used to.

The environmental cost is yet another drawback.

To process transactions and produce coins, Bitcoin depends on a vast network of powerful computers located all over the world.

The usage of renewable energy is increasing, but it’s unclear how investment firms will reconcile Bitcoin’s possible environmental cost with purchasers’ concerns about corporate governance, social responsibility, and environmental issues.