Over the last few months, the crypto news cycle has heavily featured Bitcoin ETFs. But what is an ETF? Think of the characteristics and potential benefits of mutual funds, stocks and bonds combined.
Flexible traders who prefer diversifying their portfolios at a lower cost and tax benefits often invest in ETFs. But, what is an ETF? ETF refers to the exchange-traded funds that are a collection of assets whose shares are traded on a stock market. They blend the characteristics and potential benefits of mutual funds, stocks and bonds.
If Bitcoin's value rises, so does the ETF's, and vice versa. However, the ETF would trade on a stock exchange like the NYSE. ETFs are now accessible for various assets and industries, including commodities and currencies. The Bitcoin futures ETF structure has been criticized because holding BTC futures to price instead of spot Bitcoin can lead to underperformance. Another reason traders dislike futures is that they often trade at a higher price than the underlying asset, although they can also trade at a lower price.
On the other hand, a “discount” occurs when the spot price is higher than the futures price. Backwardation is the term used in the commodity derivative market, while discount is used in the equity derivative market. The situation is regarded as normal when the futures price converges with the current price.
Bitcoin futures ETFs are preferred over spot ETFs because the Commodity Futures Trading Commission regulates the futures market and has enormous trading volumes, which can be a prominent place for price discovery.
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