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What is a Bitcoin ETF (Exchange-traded fund)?

Bitcoin ETF (Exchange-Traded Fund)

Introduction

It was in the mid-1970s that low-cost Exchange-Traded Funds or ETFs attracted the attention of retail investors in the United States. There has been no looking back since then, as ETFs as mostly passively managed funds, offer investment ease to investors at a fairly low cost, when compared to actively managed funds. Almost three decades later, every other person online has been examining options to buy Bitcoin.

Recently, ETFs have gained rapid popularity in developing economies like India, with many new asset management companies offering this low-cost investment avenue to value conscious investors. It was just a matter of time before the two ground-breaking ideas – ETFs and Bitcoin – came together as Bitcoin ETFs.

Before we get to the details of Bitcoin ETFs, let us quickly understand what an ETF is.

What is an ETF?

An exchange-traded fund, as the name suggests, is a financial instrument that is tradable in the stock markets, just like regular shares of listed companies. An ETF offers an investor an opportunity to invest a tiny portion of their corpus in a basket of shares. Accordingly, an ETF gives an investor a chance to become a part of an already popular or an upcoming success story even if they do not have a large corpus to spare for investing in each business separately.

Let us simplify it – If we take the NIFTY 50 index of stocks from India, buying even one share of all the 50 companies will need a lot of money. So, here comes an ETF for a retail investor. The investor can buy a unit or even a fraction of the unit of a NIFTY 50 ETF with as much money as they have. This essentially means eliminating price barriers for an investor.

The fund manager or the asset management company invests the pooled money to purchase actual shares of the companies in the predefined basket. This gives the investors an opportunity to be part of the journey of those companies till the time they remain invested.

So, what is a Bitcoin ETF?

The concept of an ETF remains the same. In the case of a Bitcoin ETF, the ETF is expected to mimic the price of the underlying asset, in this case Bitcoin. In other words, the fund manager or asset management company will invest in Bitcoin on behalf of the investors who cannot purchase an entire Bitcoin individually due to the high price.

There is another major advantage for investors. Typically, buying cryptocurrency comes with some risks on the storage of the asset and the encryption key. With an ETF, the fund managers are the ones who take care of this complex and sensitive task.

Should you buy Bitcoin ETF?

It depends on what you are looking for. If you want to easily buy a basket of cryptocurrencies, then yes, a crypto ETF makes sense. However, if you are buying a Bitcoin ETF because 1 BTC is expensive, then leading Bitcoin Exchanges in India have taken care of that problem. You can not just buy a small fraction of BTC, but also get the best BTC to INR rates. 

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