Since 2017, investors have been eagerly awaiting Bitcoin ETF approval, as the existence of such a fund was an important symbol of mass adoption and acceptance in the realm of traditional finance.
On February 18, the Toronto Stock Exchange hosted the official launch of 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 as to how it will compete with the grayscale GBTC investment fund. On February 17, Ark Investment Management founder and CEO Cathie Wood said it increased the likelihood that U.S. regulators would approve a Bitcoin exchange-traded fund.
Although exchange-traded funds (ETF) and exchange-traded notes (ETN) look quite similar, there are fundamental differences in trading, risks and taxation.
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 resembles a mutual fund, as it is grouped and managed by its issuer.
ETFs have become a $ 7.7 trillion industry, growing 65% in just the past two years.
The best known 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 technology companies based in the United States.
More exotic structures are available, such as ProShares UltraShort Bloomberg Crude Oil ($ SCO). Using derivative products, this fund aims to offer twice the short daily leverage on oil prices.
What is an exchange-traded note?
Exchange-traded notes (ETN) are similar to an ETF, as trading takes place through traditional brokers. Still, 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 depends entirely on its issuer.
For example, after Lehman Brothers imploded in 2008, ETN investors took more than a decade to recover their investment.
On the other hand, buying an ETF gives you direct ownership of its content, creating different tax events by maintaining futures contracts and leveraging positions. Meanwhile, ETNs are taxed exclusively at the time of sale.
GBTC does not offer conversion or redemption
Grayscale’s Bitcoin Trust Fund (GBTC) is an absolute leader in the cryptocurrency market, with $ 35 billion in assets under management.
Investment funds are structured as companies – at least in a regulatory form – and are ‘closed-end funds’. Thus, the number of shares available is limited and the supply and demand for them largely determines their price.
Investment trust funds are regulated by the United States Currency Controlling Office (OCC), therefore, outside the authority of the Securities and Exchange Commission (SEC).
GBTC shares cannot be created easily, nor is an active redemption program in place. This tends to generate significant price discrepancies in relation to its net asset value, which is the underlying BTC fraction represented.
An ETF, on the other hand, allows the market maker to create and redeem shares at will. Therefore, a premium or discount is generally unlikely if there is sufficient liquidity.
An ETF instrument is much more acceptable to mutual fund and pension fund managers, as it presents much less risk than a closed trust like GBTC. Retail investors may not be aware of the possibility that the GBTC will trade below the net value of the assets. Thus, the recent event could put further pressure on investors to change their positions to the Canadian ETF.
In short, an ETF product presents a significantly lower risk due to greater transparency and the possibility of redemption of shares in the case of shares traded at a discount.
However, GBTC’s impressive market capitalization clearly states that institutional investors are already on board.
The views and opinions expressed here are exclusively those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risk. You must conduct your own research when making a decision.