Here’s how the Purpose Bitcoin ETF differs from Grayscale’s GBTC Trust


Since 2017, investors have been eagerly awaiting the approval of a Bitcoin ETF, as the existence of such a fund was an important symbol of mass adoption and acceptance in the realm of traditional finance.

On February 18, the Toronto Stock Exchange hosted the official launch of 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 curious how it will compete with Grayscale Investments’ GBTC fund. On February 17, Ark Investment Management founder and CEO Cathie Wood said that the likelihood of US regulators approving a Bitcoin exchange-traded fund has increased.

Although exchange-traded funds (ETFs) and exchange-traded notes (ETNs) sound pretty similar, there are fundamental differences in trade, risks, and taxes.

What is an exchange-traded fund?

An ETF is a type of security that contains underlying investments, such as commodities, stocks, or bonds. It often resembles a mutual fund in that its issuer pools and manages it.

ETFs have grown into a $ 7.7 trillion industry, with growth of 65% in the last two years alone.

The most recognizable example is the SPY, a fund that tracks the S&P 500 index, currently managed by State Street. Invesco’s QQQ is another EFT that tracks US-based large-cap technology companies.

More exotic structures are available, such as ProShares UltraShort Bloomberg Crude Crude Oil ($ SCO). Using derivative products, this fund aims to offer twice the daily short leverage on oil prices.

What is a publicly traded note?

Exchange-traded notes (ETNs) are similar to an ETF in that they are traded through traditional brokers. Still, the difference is that an ETN is a debt instrument issued by a financial institution. Even if the fund has a repayment program, the credit risk depends entirely on its issuer.

For example, after the Lehman Brothers implosion in 2008, it took more than a decade for ETN investors to recoup their investment.

On the other hand, buying an ETF gives one direct ownership of its content, creating different tax events by holding futures contracts and leveraging positions. Meanwhile, TNCs are taxed exclusively on sale.

GBTC does not offer conversion or redemption

Grayscale’s Bitcoin Trust Fund (GBTC) is the absolute leader in the cryptocurrency market, with $ 35 billion in assets under management.

Investment trusts are structured like companies, at least in a regulatory way, and are ‘fixed capital funds’. Therefore, the number of shares available is limited and the supply and demand for them largely determines 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 shares cannot be easily created, nor is there an active rescue program. This tends to lead to significant price discrepancies from your NAV, which is the underlying BTC fraction represented.

An ETF, on the other hand, allows the market maker to create and trade shares at will. Therefore, a premium or discount is often unlikely if there is sufficient liquidity.

An ETF instrument is much more acceptable to mutual fund and pension fund managers, as it carries much less risk than a closed trust like GBTC. Retail investors may not have been aware of the possibility that GBTC is trading below net asset value. Therefore, the recent event could put even more pressure on investors to move their position to the Canadian ETF.

In short, an ETF product carries significantly less risk due to greater transparency and the ability to trade shares in the case of shares that trade at a discount.

However, GBTC’s impressive market capitalization clearly establishes that institutional investors are already on board.

The views and opinions expressed here are solely those of the Authorr and do not necessarily reflect the views of Cointelegraph. Every investment and trade movement involves risk. You should do your own research when making a decision.