You probably hear a lot about Bitcoin ETFs in the news lately. But what is a Bitcoin ETF?
Simply put, this is a new way to trade and invest in Bitcoin.
When this new investment tool is approved, it can accelerate the massive influx of institutional money into global cryptocurrency markets.
This option will also have quite tangible advantages in terms of taxation, compared with investing in Bitcoin itself.
The first publicly traded fund (ETF) was SPY, which appeared on AMEX in January 1993. SPY currently boasts a market capitalization of $ 259 billion.
This is approximately 1.25 times more than the current global market capitalization of all cryptocurrencies.
To create a new ETF, a bank or other custodian organization takes the funds of investors and buys shares in either the underlying asset or in futures contracts.
Each ETF investor becomes a shareholder of the fund. In fact, they do not own the underlying assets that ETFs track.
ETFs are usually traded during business hours (9:30 a.m. – 4:00 p.m. EST). You can buy and sell them, as well as open short positions throughout the day.
There are small management fees, but they are not charged directly to investors. Instead, the fund’s net asset value (NAV) is adjusted to compensate fees.
Some ETF investors are subject to the same burdensome anti-money laundering rules that govern stock trading.
Other ETFs are taxed as futures contracts, that is, they receive a more favorable tax regime.
Today, there are thousands of ETFs on the stock exchanges in the US and around the world.
They offer investors who invest in stocks, bonds, Forex and commodities, many convenient, safe and liquid instruments for financial speculation and hedging.
Some ETFs (like SPY) track the performance of large stock indexes (S&P 500). Others, such as GLD, track the price of a particular commodity (gold).
Over the past year and a half, numerous Bitcoin-ETF offers have been rejected by the US Securities and Exchange Commission (SEC).
Regulators cite concerns about low volumes of Bitcoin futures trading and a significant difference in supply / demand price spreads as the two main reasons for the failure.
Another SEC problem was that the vast majority of Bitcoin transactions take place on exchanges outside the United States.
The price reacted negatively to each new failure by the regulatory authorities. Definitely, the road leading to the adoption of ETFs was quite bumpy.
You have to wait and just follow the money
Cryptocurrency investors still hope that the Bitcoin ETF will be approved in 2019 or 2020, despite continued rejections on various offers by the SEC.
Given the astronomical amounts of money of institutional investors awaiting entry into the cryptocurrency market after the adoption of the Bitcoin ETF, you only need to connect the points on the chart and monitor the market, hoping to enter the ETF on bitcoin somewhere in 2019.
Perhaps after this there will be many new cryptocurrency ETFs.
What is a Bitcoin ETF
Bitcoin ETFs are a passive investment tool that tracks the price of Bitcoin or Bitcoin futures to determine its value.
The ETF custodian organization will buy positions on Bitcoin and Bitcoin futures contracts using investor funds. You, as an investor, will own the shares of the fund, and not the bitcoins themselves.
As an ETF investor, you can choose what actions you will take: buy, sell or “short” ETF. If you guess the direction, you will make money.
If you make a mistake, you will lose money. At least once a year, management fees reduce the net face value of ETFs by a small amount.
Every year by April 15, US taxpayers need to calculate the gain and loss of their capital for the previous tax year.
Will its net face value be calculated based on the current price of Bitcoin or on the price of futures contracts
Given that the SEC sees Bitcoin as a commodity, such as gold, it is likely that the current price of Bitcoin will be used to determine the net face value of the Bitcoin ETF.
However, other ETFs, such as VXX, base the NAV parameter on the first month VX futures contract.
How about the risk of being hacked or losing money due to an increase in spread
Subject to an audit by the SEC, the ETF will be insured against theft and hackers.
A custodian bank will also have to use a proven and reliable source of daily data on bitcoin transactions, thereby ensuring price transparency.
What will happen to Bitcoin ETFs when institutional investors begin to enter them
When institutional money (hedge funds, banks, billionaire investors) begins to flow into the ETF, the price of bitcoin should stabilize.
A massive influx of liquidity will help eliminate market manipulations, as well as increase the predictability of trading strategies.
Altcoin prices may also change as cryptocurrency traders and investors begin the transition to a more liquid bitcoin and ETF market for bitcoins.
Afraid of the big nightly movements in the price of bitcoin and bitcoin futures? Would ETF be a Better Choice
The advantage of speculating / hedging using ETFs on Bitcoin will be a limited liability factor. For example, suppose Bitcoin jumped 10 percent in one day.
If you were in short positions on bitcoin or futures with leverage (borrowed money), you would have to be responsible for all losses that exceed your initial margin deposit.
Amounts can be substantial, and possibly even cause the loss of your home, business, family and anything else.
But if you instead took a short position on Bitcoin ETF without using margins, you would have lost only 10 percent. Great loss, but not necessarily catastrophic or irreparable.
How Bitcoin ETFs Are Taxed
A Bitcoin ETF associated with a Bitcoin futures contract is likely to receive favorable tax status under section 1256, which is granted by SPY, GLD and other ETF futures related US tax administrations.
With the status of section 1256, you are exempt from restrictions related to the fight against money laundering.
Moreover, 60% of your capital gains will be taxed at long-term rates, and 40% at short-term rates.
Investors who invest in Bitcoin are faced with very unpleasant restrictions from the Internal Revenue Service, and they also have to pay regular capital gains taxes (without the tax benefits associated with section 1256).
If the Bitcoin ETF is granted a tax regime under section 1256, ETF investors will receive a clear tax advantage over ordinary cryptocurrency investors.
What trading and investment strategies work with Bitcoin ETFs?
Exactly the same strategies as those that you are already using. No difference. You can buy and sell them, as well as open short positions throughout the day (we consider it necessary to emphasize this again).
However, if the Bitcoin ETF can only be traded from 9:30 a.m. to 4:00 p.m. EST, there may be noticeable price gaps when opening ETF trading the next morning.
The reason for this: Bitcoin is trading around the clock, and if the coin makes a big move at night, the net face value of ETFs will need to be adjusted up or down when opening the next trading session.
You may need to change your trading strategies to overcome the reality of ETF price gaps.
Are there any risks when speculating using Bitcoin ETF
Yes. Although the ETF is insured against hackers or theft of investor funds, it is possible that the ETF custodian bank may at some point run into financial problems, which will lead to the liquidation of the fund’s assets.
Not to mention a haircut on the balance of your trading account. You should also bear in mind the risks associated with the information in small print.
In early 2018, the wildly high volatility ETF called XIV fell nearly 90 percent in one trading day.
Even more shocking is the fact that the crash occurred after the close of trading. This meant that the vast majority of XIV holders could not exit the trade until the next morning.
Most of those who lost their money in XIV probably did not read the risk warning.
It stated that if an ETF loses 80 percent of its net face value or more in one day, the fund will be closed.
Before the crash, he was trading above $ 115. The final liquidation price was $ 5.99. You must read everything in small print before investing in ETFs!
Do all traders and investors have the right to buy and sell Bitcoin-ETF
It is possible that only accredited investors (with large capital) will be able to purchase shares in Bitcoin ETFs.
You, dear reader, may not be allowed to participate. However, SPY is the oldest existing ETF, and does not have this limitation.
We hope that the SEC will not violate the right of all investors, rich and not very rich, to participate in the Bitcoin ETF.
Is there any hope for the emergence of Bitcoin-ETF in the near future
In fact, there is. Most likely, the Securities Commission will allow ETFs, but with one key caveat.
This reservation will be that only transaction data from exchanges registered in the USA will be used to determine the Bitcoin price in real time.
Exchanges registered in the United States fall under the jurisdiction of the Securities and Exchange Commission, and therefore must provide the regulator with accurate and auditable price data.
Failure to comply with custodial requirements creates the risk of a large fine or even closure of the fund by the Securities and Exchange Commission.