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Bitcoin ETFs and Bitcoin ETPs, what’s the difference? 

Bitcoin ETFs and ETPs: what are they and how are they different?

Bitcoin ETFs and ETPs are becoming increasingly popular. But what are these financial instruments in short? What are their differences?

Before we look at what a Bitcoin ETF is and the difference with an ETP, let’s understand what a classic ETF or Exchange Traded Fund is. In short, it’s a financial product that closely replicates the performance of an index (called a benchmark); they are ‘packages’ containing stocks, bonds, commodities, real estate securities or derivative contracts of these instruments, in order to replicate their performance. ETFs are sold and bought like ordinary securities and are therefore considered more accessible and less expensive financial instruments than classic investment funds. Like all instruments listed on financial markets, their price can go down as well as up. In short, they can be considered as baskets of securities of different companies or entities that refer to a common ‘theme’, which can be the market of a geographical area or a sector. 

What is a Bitcoin ETF

According to this definition of ETFs, Bitcoin’s Exchange Traded Funds replicate the performance of BTC and assets related to Satoshi Nakamoto‘s crypto. In essence, they allow exposure to BTC without actually buying any cryptocurrency, which is why in most cases they appeal to those not used to dealing with cryptocurrency exchanges, wallets and private keys. 

On 8 June 2022, the first Bitcoin ETF was listed on the Italian stock exchange. While the first one ever, made by ProShares, was approved in 2021 by the SEC in the US. The launch in the US was quite successful for both retail and institutional investors.

At the moment, all Bitcoin Exchange Traded Funds are based on futures, i.e. forward contracts that allocate a certain amount of the underlying asset, based on a predetermined delivery price and maturity, to the two parties that subscribe to them. In this system, one of the parties ‘bets’ on the price going up and the other on the price going down.

Are there any spot Bitcoin ETFs?

Spot Bitcoin ETFs are traded for immediate delivery: the order to buy or sell is immediately followed by the actual exchange of the asset for cash (as fiat currency). This kind of fund has not yet been put on the market, currently the company Grayscale is carrying out negotiations with the SEC to approve one, converting a mutual fund it already manages. Spot Exchange Traded Funds are more difficult to set up, and in order to issue them one has to meet a number of technical and regulatory requirements, especially with regard to the underlying asset, which in this case is the entire Bitcoin spot market. Any company issuing an ETF on the spot market will in fact have to own the bitcoins directly and hold them securely. In addition, it must be demonstrated to regulators that Exchange Traded Funds do not give rise to price manipulation in the relevant market.

Advantages and disadvantages of a Bitcoin ETF

As anticipated, the main advantage of these funds is that they allow anyone to enter the cryptocurrency market in a ‘traditional’ manner. In fact, they are easy for those who already operate with financial intermediaries. ETFs of this type are regulated instruments and therefore instil confidence in institutional investors (and retailers) and are used to diversify their investments. 

As for the disadvantages, due to management costs, buying them is less convenient than buying BTC directly on exchanges. Moreover, derivative-based ones do not reflect price changes instantaneously, so they may not accurately track market trends. You should also consider that exchange-traded funds are indirectly managed, which means that you do not have direct control over your money. This is why they are considered by many in the industry as a method used by central banks and classical finance to somehow influence the evolution and development of a currency that was designed and created to be totally decentralised.

The difference between ETFs and ETPs

Have you also heard of ETPs? Exchange traded products are a macro-category that brings together a number of financial products that replicate stock indices or other assets by following their performance in the reference market. ETFs are thus a subset of ETPs, along with ETNs (Exchange Traded Notes) and ETCs (Exchange Traded Commodities). In a nutshell, ETNs and ETCs are not funds but debt notes, since by purchasing them one is in fact providing credit to a company. Furthermore, ETCs specifically track the price of physical commodities such as gold, silver, oil, sugar, or commodity derivatives. ETNs, on the other hand, reflect the performance of all other types of financial instruments. 

A new Bitcoin ETP on the Frankfurt Stock Exchange 

On 23 September 2022, a new Bitcoin-themed Exchange Traded Product was listed on the Frankfurt Stock Exchange. The ETP, which by definition consists of ETFs and ETNs, is issued by Valour, a company that offers financial products related to the Web3 sector, and is called ‘Bitcoin Carbon Neutral’. What is the special feature of this ETP? When you buy Valour’s BTC Carbon Neutral ETP, all carbon dioxide emissions related to the product will be automatically offset. These emissions include, for example, those due to mining consumption. 

Concretely, the carbon-free plan will be implemented in cooperation with Patch, a platform offering solutions for companies that want to play their part in combating climate change. Patch at this juncture will select projects that prevent emissions and remove carbon dioxide related to BTC from the atmosphere. Valour also offers ETPs on Uniswap (UNI), Cardano (ADA), Solana (SOL) and many other crypto projects. 

Another recently launched BTC-themed product is the 21 Shares Bitcoin ETP listed on July 2022. 

Bitcoin ETFs and ETPs are thus proving to be increasingly popular financial instruments, chosen by those who want to approach cryptocurrencies in a gradual way. 

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Bitcoin’s 7 advantages in the face of the bear market

Crypto prices are dropping, but BTC is the most solid of them all. The community also fully supports it, let’s find out why!

Bitcoin’s price trend, historical data in hand, follows a 4-year cycle. The trend is marked by the halving event, which occurs precisely every 4 years. The Halving refers to the gradual halving of the BTC rewards that miners receive for their work. The event seems to coincide with the end of one of Bitcoin’s price cycles and the beginning of the next. In fact, since the creation of BTC, its price has followed a pattern where the halving is followed by 18-24 months of a bull market, which is subsequently followed by two years of bear market. Taking into consideration the timing of this theory, we are in the middle of a bear market. The next halving is expected to happen in 2024, when the supply of BTC will then change and consequently so will market behaviour. A bear market can be broken down into several phases, and understanding them can help us look in perspective at Bitcoin’s current market momentum. Discover Bitcoin’s 7 strengths in the face of dealing with a bear market!

Phases of a bear market

If we consider the previous bear market we went through, we can distinguish 7 phases:

  1. The collapse: when the market collapses very quickly, for both Bitcoin and altcoins;
  2. Rejection/denial: when there is a tendency to think that prices are only subject to one of the many usual declines;
  3. Realisation: when you realise that you’re not faced with just a temporary market downturn. Often this realisation also comes from a broader observation of the macroeconomic context;
  4. Panic: after a general realisation of what is happening, people panic and this perspective changes the market mentality. Any attempt at a rebound is eliminated by those who try to limit their losses by selling. At this stage, the rebounds are pushed by bitcoiners attracted to buying BTC at reduced prices;
  5. Accumulation/stabilisation: although the majority of users panic, those who take a long-term view accumulate mainly ‘solid’ coins such as BTC rather than altcoins;
  6. Anticipation: at this stage funds begin to return, Bitcoin is on the rise again. People are also start to buy medium market cap altcoins again;
  7. Steady growth: the market is growing steadily again. There is a shift from extreme fear to neutral sentiment.

We are currently in the panic phase, number 4, where the Fear and Greed Index has the lowest values (extreme fear). The market is slowly trying to move into number 5, or stabilisation. Those who are fully immersed in panic mode find it difficult to perceive the build-up. It is not possible to precisely predict when the bear market will evolve into the next phase. However, if we compare BTC to other cryptos, we can see that although they are all falling, Bitcoin is the one that is dropping the least. While most altcoins are falling more than 90% from their ATH, Bitcoin’s decline is just under 70% from its ATH of $69,045.

The only certainty is that the next halving will be in early 2024 (this is determined by the algorithm), and the market equilibrium will then be upset again. Those who take a long-term view and are convinced of Bitcoin’s value beyond its mere price will continue to buy and hold. The foresight of bitcoiners begs the question: why does Bitcoin continue to be supported? Here are Bitcoin’s 7 strengths to face the bear market!

Bitcoin’s strengths: why bitcoiners don’t give up

Bitcoiners don’t panic. The bear market can sow all the panic it wants, but there are those who just won’t abandon Bitcoin. This is because the strengths and potential of Bitcoin go beyond its price. Bitcoin is in fact:

  1. Open source: everyone can have access to and verify information processed by the blockchain, but above all, everyone can contribute to the development and improvement of the whole network;
  2. Transparent: you don’t need to have blind trust in how it works. One of the slogans the BTC community is fond of is ‘don’t trust, verify’, precisely because everything is in front of your eyes, available and verifiable;
  3. Neutral: it knows no politics and does not depend on any national or international legislation (at least as far as the functioning of its blockchain is concerned, mining for instance may be restricted);
  4. Decentralised: the BTC network is composed of nodes scattered all over the world and no single company or person holds all the decision-making power;
  5. Resistant to censorship: the only way to block Bitcoin is to block the internet (and we can only imagine what the consequences of disconnecting the whole world would be);
  6. Secure: Bitcoin’s security is guaranteed by its Proof-of-Work consensus mechanism. The work of miners makes transactions secure and the decentralisation of nodes means that there is no interference;
  7. Characterised by a winning monetary policy. Its scarcity and digital nature make Bitcoin an alternative to economic systems as we know them.

Will the next halving save us?

As always, the market mirrors many factors, most of which are unpredictable. The halving gives us hope for an improvement in Bitcoin’s performance because it has always had a positive impact in the past. However, the consequences of the last halving in May 2020 were also influenced by external elements such as the FED’s restrictive policy. In all this the stock-to-flow can be useful as a trend indicator but the future of BTC is all to be written!