What are ETFs?
𝗠𝗼𝘀𝘁 𝗽𝗲𝗼𝗽𝗹𝗲 𝗱𝗼𝗻'𝘁 𝘂𝗻𝗱𝗲𝗿𝘀𝘁𝗮𝗻𝗱 𝗘𝗧𝗙𝘀.
Here's the simplest post on ETFs you'll ever read:
Imagine you're the young Warren Buffett who just lost a fortune in the stock market.
You meet Charles Munger at a dinner party in Omaha where he tells you about ETFs.
You're confused.
So you pick up your phone...
And read this 👇
The story starts on Black Monday, Oct. 19, 1987, when the stock market falls by 22.6%.
The crash had a domino effect, causing fear, panic, and massive losses.
It was the beginning of the end...
Until 73-year-old Nathan Most had an idea of ETFs.
Fast-forward 30 years, and his idea has become a 7.3 trillion dollar industry.
In this 𝗍𝗁𝗋𝖾𝖺𝖽, you'll learn what an ETF is, and what the hype is all about.
So, let's get started!
𝗪𝗵𝗮𝘁 𝗮𝗿𝗲 𝗘𝗧𝗙𝘀?
Imagine an ETF as a basket filled with investments like stocks, bonds, or commodities.
Now, picture that basket being traded on the stock market, like a single stock.
That's what an ETF is: an all-in-one fund that can be traded. on a stock exchange.
But that's not all...
Exchange Traded Funds combine the features of mutual funds and stocks.
→ Mutual funds offer diversification by combining many people's money to buy a diversified portfolio.
→ Stocks can be traded throughout the day.
Mutual funds + stocks = ETFs.
The idea was... "If I have a piece of everything, a decline in one of them won't be brutal on my portfolio".
ETFs make diversification and risk management easier as one ETF can hold 25 to 7,000 stocks.
For example... The S&P 500 Index, or Standard & Poor's 500 Index, gives you access to 500 leading publicly traded companies in the U.S.
ETFs track indexes.
An index is like a measuring stick, while an ETF lets you invest in what the measuring stick is measuring.
𝗧𝘆𝗽𝗲𝘀 𝗼𝗳 𝗘𝗧𝗙𝘀.
ETFs are grouped based on the kind of assets they hold. The 6 major ones are:
1. Equity ETFs: holds stocks of companies.
2. Sector ETFs: focuses on specific industries.
3. Commodity ETFs: invests in tangible goods like Gold.
4. Bond ETFs: invests in different bonds.
When you buy a bond, you lend money to the government / company for interest. When the bond matures, you get your initial money back.
5. International ETFs: offers exposure to global markets.
6. Crypto ETFs: you know the drill 🌚.
𝗣𝗮𝘀𝘀𝗶𝘃𝗲 𝗩𝘀. 𝗮𝗰𝘁𝗶𝘃𝗲𝗹𝘆 𝗺𝗮𝗻𝗮𝗴𝗲𝗱 𝗘𝗧𝗙𝘀
· Passive ETFs replicate the performance of a specific index.
· Active ETFs involve fund managers trying to outperform the market.
Bitcoin ETFs can either be actively or passively managed.
𝗛𝗼𝘄 𝗱𝗼 𝗘𝗧𝗙𝘀 𝘄𝗼𝗿𝗸?
An ETF provider will:
· Research.
· Get regulatory documents.
· Get approved by regulators.
· Pick / create an index.
· Gather initial assets.
· Create shares.
· List on stock exchanges.
· Allow buying & selling.
· & Charge fees.
𝗗𝗲𝗲𝗽 𝗱𝗶𝘃𝗲 𝗶𝗻𝘁𝗼 𝗕𝗶𝘁𝗰𝗼𝗶𝗻 𝗘𝗧𝗙.
A Bitcoin ETF provides a simple and regulated way of trading Bitcoin without the complexities and risks of getting it directly.
The goal is to target people who are interested in Bitcoin but unable to get it or learn the technicalities of wallet safety, securing seed phrases, etc.
Bitcoin ETFs bridge the gap between traditional financial markets and crypto through simplicity and 𝗿𝗲𝗴𝘂𝗹𝗮𝘁𝗶𝗼𝗻 to attract a broader audience.
Different firms are battling to be the first Bitcoin ETF provider in the U.S.
Since the first attempt in 2013 by Cameron and Tyler Winklevoss, the SEC, led by Gary Gensler has yet to approve a proposal.
However, there are two types of Bitcoin ETFs:
/1 𝗕𝗶𝘁𝗰𝗼𝗶𝗻 𝘀𝗽𝗼𝘁 𝗘𝗧𝗙
When you buy a spot Bitcoin ETF, its performance is directly linked to the real-time value of Bitcoin it holds.
I.e. you're buying a representation of actual Bitcoin, although you don't own it personally.
For example, Let's say I have a Bitcoin ETF called "BitGain".
If BitGain holds 5,000 BTC and issues 1 million shares, each share would represent 0.005 BTC.
A rise / fall in Bitcoin's price will directly affect your shares.
Downside: it's more costly due to the fee you'll pay.
Secondly,
/2 𝗕𝗶𝘁𝗰𝗼𝗶𝗻 𝗙𝘂𝘁𝘂𝗿𝗲𝘀 𝗘𝗧𝗙
A futures contract gives you the right to buy / sell something at a particular price in the future. In this case, Bitcoin.
Here, you own the contract, not the underlying asset.
Hence, you're protected from volatility.
For example, Imagine you buy a futures contract.
Upon expiry, the party that agrees to buy BTC will either buy it at a:
·Discount: If the contract's price is below the current price.
OR
·Premium: If the contract's price is above the current price.
One party's gain = Another party's loss.
𝗥𝗶𝘀𝗸𝘀
· Liquidity risk.
· Tracking error.
· Regulatory risks.
· No decentralization.
· Limited trading hours
· ETF providers charge fees.
· The ETFs can't be traded for tokens, used for voting, or staked 🌚.
Spot Bitcoin ETFs official decision window: 5th to 10th January.
𝗧𝗮𝗸𝗲𝗮𝘄𝗮𝘆𝘀
· ETFs combine various investments into one stock.
· Bitcoin ETFs allow traditional investors to get Bitcoin with simplicity and zero technical knowledge.
· Bitcoin futures and Bitcoin spot ETFs are excellent, depending on your investment goals.
credit: Eni Joshua
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