Understanding Bitcoin Futures and Bitcoin ETFs

Everyone wants a piece of Bitcoin, the world's most popular cryptocurrency with over $1.12 trillion in market capitalization.

Bitcoin (BTC) has become so popular in the world that everyone wants to own it. Even people who view cryptocurrencies with suspicion want it.

There are many ways you can own BTC, one way is to mine it, which you can do with ASIC mining equipment, available in the market today. Initially, you could have done it with your desktop, laptops, or graphic cards, but, as the BTC prices started to climb, this has become an unviable option now.

Another way to own BTC is to buy it from crypto exchanges, but to own it you would need a crypto wallet. 

In order to provide BTC to its clients, many institutional investing companies have started buying BTC from the open market

MicroStrategy, a company that provides business intelligence, mobile software, and cloud-based services is the biggest holder today with over 114,000 BTC.

However, in order to own BTC without a crypto wallet and crypto exchange account, you can buy Bitcoin Futures and Bitcoin Exchange Traded Funds (ETFs).

Many companies have now started providing Bitcoin Futures and Bitcoin ETFs to their clients. Under this method, a client can buy Bitcoin Futures and Bitcoin ETFs from the investment company without owning a BTC in their wallet.

On 19 October 2021, when the world's first Bitcoin Futures ETF started trading at the New York Stock Exchange (NYSE), approximately 29 million Bitcoin futures ETF shares, called BITO, were sold on this very day on ProShares. 

On the very same day, BTC's price was hovering at $66,000 per token, which was on the higher side, as compared to other days.

Let us now understand what is the difference between Bitcoin Futures and Bitcoin EFTs.


What is a Bitcoin Futures ETF?

Bitcoin futures ETF is a type of regulated financial product meant for those investors that are not skilled in crypto trading but buy stocks through brokerage accounts. ETFs are regulated financial products that represent a wide range of assets.

Bitcoin Futures and Bitcoin ETFs allow users to gain investment exposure and indirectly participate in the Bitcoin market. But unlike the crypto market that is available 24X7, ETF shares can only be bought and sold during market trading hours


How do Bitcoin futures contracts work?

A type of derivative trading instrument, Bitcoin futures contracts obligate two parties to mutually agree to buy or sell BTC at a predetermined value on a certain date in the future, known as the contract settlement date. 

The deal binds both parties to buy or sell BTC at the predetermined price on the settlement date irrespective of the current value of the token. If the buying party purchases BTC after the futures contract expires, then they would have to buy it at either a premium or a discounted rate. 

The buying price of the BTC at this time will depend on the market price or spot price and the value of each of the futures contracts they have in their possession. 


What is a Bitcoin ETF?

Bitcoin ETF is a financial instrument that tracks the value of BTC. Its main benefit is that it allows investors to diversify their holdings without actually owning any of the assets themselves. For example, a gold ETF would track the value of gold reserves it represents. Similarly, a Bitcoin ETF would track the value of Bitcoin.

Importantly, ETFs are traded on traditional market exchanges rather than crypto exchanges.


How does Bitcoin ETFs work?

Bitcoin ETFs work exactly like ETFs backed by traditional assets. To create a Bitcoin ETF, an asset management company must buy some BTC from the market, just as it would buy shares for a traditional ETF. It can then set up a fund that represents the value of the BTC asset it holds and lists it for trading on the stock exchange. If the value of the BTC token increases, so does the value of your investment.


Importance of Bitcoin ETFs

Convenience: The biggest advantage of Bitcoin ETFs is to have direct investments without handling the BTC. It helps investors benefit from the new asset class with their existing brokerage accounts. Though buying and selling cryptocurrency has become easier these days, things like setting up digital wallets and understanding how private and public keys work remain hurdles to large-scale crypto adoption. 

Safe: As a Bitcoin ETF can be traded on traditional exchanges it becomes safe to own it. As these exchanges are highly regulated, the client can monitor and analyze their performance and get protected against price manipulation within the ETF markets. As crypto exchanges and wallets are also susceptible to hacking attacks and theft, Bitcoin ETFs protect against these risks as you don’t own any actual crypto.  

As the craze of owning BTC is growing, more and more Bitcoin futures and Bitcoin ETFs will be launched by many companies and that too in various countries.

It is a Klever idea to diversify the assets and include Bitcoin Futures and Bitcoin ETFs.

Jagdish Kumar

Klever Writer

Follow me on Twitter.com/TokenBharat

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