Fidelity, a prominent player in asset management, is nearing the completion of its application for a bitcoin exchange-traded fund (ETF). This move places them among numerous issuers who are eager to be the first to introduce such a product to the market.
After being denied by the U.S. Securities and Exchange Commission (SEC) in early 2022 for their previous attempt with the Wise Origin Bitcoin Trust, Fidelity is making a second endeavour in the form of a bitcoin spot exchange-traded fund (ETF).
Bitcoin ETFs
Since their inception in 1993, ETFs have gained significant popularity among retail investors as they provide a convenient means to invest in a diversified portfolio of assets. For instance, if an investor wishes to gain exposure to the 500 largest American companies simultaneously, they can achieve this by purchasing shares in an S&P 500 ETF.
Similar to traditional ETFs, a Bitcoin ETF operates in a comparable manner. Investors can acquire shares in the ETF through their preferred brokerage, just as they would when purchasing stocks like Apple or Tesla. These shares can be traded in a similar fashion, providing investors with the flexibility to buy and sell them as desired.
Why don’t people just buy Bitcoin? Many ordinary retail investors perceive Bitcoin and cryptocurrencies as inherently risky. Apart from the ambiguous regulations surrounding them, owning Bitcoin involves the responsibility of managing a Bitcoin wallet and placing trust in crypto exchanges. These aspects are unfamiliar territory for individuals who lack knowledge and experience in the field, necessitating a certain level of self-education.
By investing in a Bitcoin ETF, individuals can alleviate concerns related to private keys, storage, and security. Similar to traditional stock investments, investors own shares in the ETF, enabling them to gain exposure to the cryptocurrency market without the need to navigate the complexities of purchasing and holding cryptocurrencies directly.
However, there are notable distinctions between a Bitcoin ETF and other types of ETFs.
Firstly, certain ETFs, such as those tracking the S&P 500, encompass equity shares. Consequently, investors receive a portion of the dividends paid by the companies within the ETF. For example, if an ETF includes Tesla and Tesla distributes dividends, shareholders of the ETF would receive a proportionate dividend. In contrast, Bitcoin operates in a decentralized manner, so a Bitcoin ETF does not offer the opportunity to receive such dividends.
Secondly, akin to other ETFs, investors are required to pay fees to the ETF provider. In the case of a Bitcoin ETF, a portion of these fees would be allocated to cover the custody and management expenses associated with the acquisition and safekeeping of the underlying Bitcoin held by the ETF.