An exchange-traded fund (ETF) is a collection of investments such as bonds or stocks. ETFs allow you to invest in many securities at once. They usually have cheaper fees than other types of funds. They are also easier to trade. Like conventional stocks, you can acquire and trade ETFs on a stock market. Designing an ETF to track anything from a single commodity's price to a huge and diversified group of commodities is possible. Furthermore, it is even possible to design ETFs to follow certain investing strategies. The <a href="https://www.investopedia.com/articles/investing/122215/spy-spdr-sp-500-trust-etf.asp">SPDR S&amp;P 500</a> ETF (SPY), which tracks the S&amp;P 500 Index, was the first ETF and is still an actively traded ETF today.

Grayscale Investments LLC recently met with the Securities and Exchange Commission (SEC) to strengthen its case for converting the Grayscale Bitcoin Trust into a spot bitcoin ETF (ETF). Grayscale stated in a recent presentation to the SEC that transforming its hallmark product into an ETF will "protect investors and the public interest. This will allow the product to follow net asset value better while offering investors the free will to invest in Bitcoin; safely and securely."

Furthermore, according to Grayscale, using an ETF vehicle rather than the present trust structure would "enable improved NAV tracking, lower discounts, and premiums, and release around $8 billion for investors." The Grayscale Bitcoin Trust, which now manages over $20 billion in assets, is popular for trading at broad premiums/discounts to the net asset value. It currently trades at a 27 percent discount to NAV.
<h2>Why Might the SEC Approve a Bitcoin ETF</h2>
SEC Commissioner Hester Peirce acknowledged that allowing a bitcoin ETF would enhance institutional participation in the underlying market. This would result in stronger investor protections and more effective surveillance for market manipulation and other fraudulent activities.

A bitcoin futures ETF differs from a bitcoin ETF. However, it is not in a way that should be relevant to the SEC's stated concern. A bitcoin futures ETF follows bitcoin futures, commodities derivatives traded on Commodity Futures Trading Commission-regulated exchanges. Futures do not track bitcoin's current price because they are a tool for speculating on it. However, bitcoin futures ETFs and bitcoin ETFs have one thing in common. They both use the same exchanges to get price data, which the SEC deems unacceptable when refusing bitcoin ETFs.

Despite these hurdles, many people remain confident that there will be approval of a spot bitcoin ETF by mid to late 2022. Projects continue to consult with the SEC on the best procedures for preventing market manipulation or fraud. Adopting a Bitcoin ETF will open the door to more cautious investors. This will benefit the sector and the price of bitcoin.
<h2>The Rejection of Winklevoss Twins' ETF</h2>
Tyler and Cameron <a href="https://www.cryptoknowmics.com/news/top-5-winklevoss-capital-coins-you-can-buy-for-a-bullish-2022">Winklevoss</a>' application to launch a bitcoin-related exchange-traded fund was denied by the Securities and Exchange Commission. The ETF would have been traded on Gemini Trust, owned by the Winklevoss twins. The SEC was not convinced that the twins and their company could safeguard investors from fraud and abuse in a 92-page ruling issued in July 2018. The government stated that the first bitcoin ETF will not be approved because the digital currency is not "immune to manipulation."

Trading Bitcoin futures have a less desired outcome than buying physical Bitcoin due to a phenomenon known as "contango." According to Bloomberg, Horizon's Front Month Rolling Futures Bitcoin Index has gained 530 percent in two years, while Bitcoin itself has returned 660 percent. So, why has the SEC rejected actual Bitcoin ETFs?

ETFs, sometimes known as "index funds," are extremely popular among retail investors and usually store and grow retirement money. The theory is that they are safer since they merely track or mimic a larger market, usually through a diversified portfolio of companies. They're also less expensive because no one is actively looking for fresh stock possibilities. However, index funds have grown so popular in the last decade that they currently hold up to 30% of US stocks and over US$11 trillion in investor capital. In addition, when ETFs grow in size, they can directly influence the stocks or other assets held by the fund.
<h2>Risks for Investors</h2>
Redemption risks, trading disruption, and price volatility are significant risks for funds and ETFs that invest in cryptocurrency. While we expect liquidity to be accessible to ETF investors during moments of high price volatility (i.e., crypto price falls), it will most likely be at significant discounts.

However, until further regulatory clarity, including answers to crucial definitional questions, crypto investments face the risk of being significantly devalued. This is due to the inherent volatility of the underlying asset and regulatory changes or other development that could ban some investments. This negatively affects investors accessing the sector through fund or trading accounts.

Existing vehicles in Canada highlight some of the risks associated with underlying asset volatility. In particular, in May 2021, many Canadian Bitcoin ETFs issued market disruption alerts, signalling that persistent stress might force the ETFs to halt trading temporarily. However, Canadian ETFs continued to operate smoothly during severe volatility, indicating that ETFs functioned according to plan. This might give applications to authorities for cryptocurrency-backed ETFs and mutual products in other areas more weight.
<h2>The Next Steps for a Bitcoin Futures ETF</h2>
A Bitcoin futures ETF would need to register under the 1940 Investment Company Act like other mutual funds. The act compels asset managers to disclose more information and follow tougher regulations. However, a physical Bitcoin ETF is exempt since most people consider as a commodity rather than a security.

According to Todd Rosenbluth, CFRA's ETF and mutual fund research director, futures prices typically mirror the underlying assets. However, there is usually some slippage. The disparity might be especially noticeable for a volatile asset like Bitcoin.

Futures ETFs must roll over their contracts, usually done monthly, as they expire. If the futures are trading above Bitcoin's real-time price, funds would have to pay a premium to roll them over. This has the potential to reduce performance.

On the other hand, Bitcoin futures can provide added security since they require investors—in this case, funds—to put down cash on margin as collateral. ETFs, unlike mutual funds, cannot close to new money if they get too big. If Bitcoin futures become volatile and many investors exit simultaneously, liquidity problems could arise. The exchange can even suspend trade to help curb panicked selling. This implies that investors in a futures ETF may be unable to exit in time.

SEC Meeting with Grayscale Could Lead to Bitcoin ETF Approval

An exchange-traded fund (ETF) is a collection of investments such as bonds or stocks. They are usually easier to trade than other kinds of funds

Oluwademilade Afolabi is a freelance writer and editor passionate about blockchain technology and the health industry. He is a 6th year medical student, and has worked with various companies and blogs since the blockchain revolution began.

SEC Meeting with Grayscale Could Lead to Bitcoin ETF Approval

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