Understanding how Bitcoin ETFs work
Bitcoin ETFs (Exchange-Traded Funds) make Bitcoin investing as easy as buying stocks.
An ETF, or Exchange-Traded Fund, is like a basket that can hold many types of assets and can be bought and sold on the stock market all day.
Initially, ETFs were made to follow the performance of major stock indexes easily, allowing investors to invest in a whole index by buying a single ETF instead of buying every stock in the index.
Now, ETFs have grown to include a variety of assets like bonds, international stocks, commodities, and even Bitcoin. This makes investing in different markets much simpler and more efficient for investors.
Bitcoin ETFs allow investors to invest in Bitcoin as easily as buying stocks. They provide clear reporting, ease of use, and remove the difficulties of purchasing, holding, and securing Bitcoin themselves.
ETFs have the unique feature of trading like stocks during market hours, offering investors the chance to buy and sell throughout the day, which enhances liquidity.
This trading happens in what's known as the secondary market.
There's also a primary market for ETFs, but it's exclusive to certain institutional investors known as Authorized Participants (APs).
APs can directly interact with the ETF's issuer to create new ETF shares or redeem existing ones. This process is often done on behalf of market makers, with APs acting as agents to manage the creation and redemption of ETF shares for these entities.
The creation and redemption of ETF shares by APs are based on the ETF's Net Asset Value (NAV), which should be close to or the same as the ETF's trading price on the secondary market.
If there's a difference between the NAV and the market price, it can lead to a premium (if the market price is higher) or a discount (if the market price is lower).
This price difference between the NAV and the market price creates arbitrage opportunities.
Arbitrage helps correct imbalances by incentivizing market participants to create ETF shares (when there's a premium) or redeem them (when there's a discount) to sell at the prevailing market price, thereby pushing the price and NAV towards equilibrium.
Market makers play a vital role throughout the trading day, facilitating trades for clients and seizing arbitrage opportunities with the help of APs.
Access to both primary and secondary markets allows these participants to offer competitive pricing, which enhances the overall quality of the market and benefits all investors.
Top 5 Bitcoin ETFs
The Top 5 Bitcoin ETFs and their Assets Under Management (AUM) are:
Grayscale Bitcoin Trust ETF (GBTC): $21.44 billion
iShares Bitcoin Trust (IBIT): $2.5 billion
Fidelity Wise Origin Bitcoin (FBTC): $2.2 billion
ARK 21Shares Bitcoin ETF (ARKB): $659 million
Bitwise Bitcoin ETF (BITB): $630 million
Source: DeFiLlama as on 1 February 2024. Rounded off.
Great intro to BTC ETFs. Thanks. Would love to see a part 2 to this. Perhaps something on why Grayscale started selling BTC after BTC ETFs were approved.