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Since 2017, investors have been eagerly awaiting the approval of a Bitcoin ETF, as the existence of such a fund was an important symbol of the massive adoption and acceptance in the field of traditional finance.
On February 18, the Toronto Stock Exchange hosted the official launch of the Purpose Bitcoin ETF and the fund quickly absorbed more than $ 333 million in market capitalization in just two days.
Now that the long-awaited Bitcoin ETF is here, investors are curious about how it will compete with the Grayscale Investments GBTC fund. Ark Investment Management Founder and CEO Cathie Wood said on February 17 that the likelihood of U.S. regulators approving a Bitcoin exchange-traded fund has increased.
While exchange-traded funds (ETFs) and exchange-traded notes (ETNs) look quite similar, there are fundamental differences in terms of trading, risk, and tax.
What is an exchange traded fund?
An ETF is a type of security that holds underlying investments such as commodities, stocks, or bonds. It often looks like a mutual fund because it is pooled and managed by its issuer.
ETFs have grown into a $ 7.7 trillion industry, growing 65% in the past two years alone.
The most recognizable example is SPY, a fund that tracks the S&P 500 Index, currently managed by State Street. Invesco’s QQQ is another EFT that tracks large-cap US-based technology companies.
More exotic structures are available, such as ProShares UltraShort Bloomberg Crude Oil ($ SCO). By using derivatives, this fund aims to offer twice the daily short leverage on oil prices.
What is an exchange traded note?
Exchange Traded Notes (ETNs) are similar to an ETF in that trading is done using traditional brokers. However, the difference is that an ETN is a debt instrument issued by a financial institution. Even if the fund has a redemption program, the credit risk rests entirely with its issuer.
For example, after the implosion of Lehman Brothers in 2008, it took ETN investors more than a decade to recover the investment.
On the other hand, buying an ETF gives a person direct ownership of its contents, creating different tax events when holding futures contracts and trading positions. During this time, ETNs are taxed exclusively on the sale.
GBTC does not offer conversion or redemption
Grayscale’s Bitcoin Trust Fund (GBTC) is the absolute leader in the cryptocurrency market, with $ 35 billion in assets under management.
Investment funds are structured like businesses – at least in regulatory form – and are “closed funds”. Thus, the number of shares available is limited and supply and demand largely determine their price.
Investment trust funds are regulated by the US Office of the Comptroller of the Currency (OCC), therefore outside the authority of the Securities and Exchange Commission (SEC).
GBTC shares cannot be easily created, nor is there an active buyback program in place. This tends to generate large price deviations from its NAV, which is the underlying BTC fraction represented.
An ETF, on the other hand, allows the market maker to create and redeem stocks at will. Therefore, a premium or discount is generally unlikely if enough cash is in place.
An ETF instrument is much more acceptable to mutual fund managers and pension funds because it carries much less risk than a closed-end trust like GBTC. Retail investors may not have been aware of the possibility that GBTC is trading below NAV. Thus, the recent event could further encourage investors to transfer their position in the Canadian ETF.
To sum up, an ETF product carries significantly less risk due to greater transparency and the ability to repurchase shares in the case of shares traded at a discount.
Nonetheless, the impressive market capitalization of the GBTC makes it clear that institutional investors are already on board.
The views and opinions expressed herein are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You need to do your own research when making a decision.
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