Investors have been eagerly awaiting approval from the Bitcoin ETF since 2017, as the existence of such a fund was an important symbol of mass acceptance and acceptance in the field of traditional financial markets.
On February 18, the Toronto Stock Exchange officially launched 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 excited to see how it will compete with Grayscale Investments’ GBTC fund. On February 17, Cathie Wood, founder and CEO of Ark Investment Management, said the likelihood of U.S. regulators approving an exchange-traded bitcoin fund has increased.
While Exchange Traded Funds (ETF) and Exchange Traded Notes (ETN) sound pretty similar, there are fundamental differences in terms of trading, risks, and taxes.
What is an Exchange Traded Fund?
An ETF is a type of security that holds underlying investments such as commodities, stocks, or bonds. It is often similar to a mutual fund in that it is pooled and managed by its issuer.
ETFs have grown into a $ 7.7 trillion industry that has grown 65% in the last two years alone.
The best-known example is the SPY, a fund that tracks the S&P 500 index currently managed by State Street. Invesco’s QQQ is another EFT tracking US large capitalization tech companies.
More exotic structures are available, such as the ProShares UltraShort Bloomberg Crude Oil ($ SCO). Using derivatives, this fund is designed to provide twice the daily short leverage on oil prices.
What is an Exchange Traded Note?
Exchange Traded Notes (ETN) are similar to an ETF in that they are traded through traditional brokers. The difference, however, 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, it took ETN investors more than a decade to recoup the investment.
On the other hand, buying an ETF gives direct ownership of its contents, which leads to different tax events when holding futures contracts and leveraging positions. In the meantime, ETNs are only taxed on sale.
GBTC does not offer conversion or redemption
Grayscale’s Bitcoin Trust Fund (GBTC) is the absolute leader in the cryptocurrency market with assets under management of $ 35 billion.
Investment trusts are – at least in regulatory terms – structured as companies and “closed funds”. Thus, the number of stocks available is limited and the supply and demand for them 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 stock cannot be easily created, and there is no active redemption program. This tends to lead to significant price deviations from the net asset value, the underlying BTC share.
An ETF, on the other hand, allows the market maker to create and redeem shares at will. Therefore, a premium or a discount is usually unlikely if there is sufficient liquidity.
An ETF instrument is far 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 was trading below the Net Asset Value. As such, the latest event could put further pressure on investors to shift their position to the Canadian ETF.
In summary, an ETF product carries a significantly lower risk due to the greater transparency and the ability to redeem shares on shares that are trading at a discount.
However, GBTC’s impressive market cap clearly shows that institutional investors are already on board.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading step is associated with risks. You should do your own research when making a decision.
