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What is an ETF and How Does It Work?

ETFs (Exchange traded funds) are mutual funds traded on stock exchanges. ETF systems are designed to work with an arbitrage mechanism by holding assets such as stocks or bonds, keeping the deviations close to the net worth of the assets.


What is a Cryptocurrency ETF?

ETFs of any cryptocurrencies are mechanisms that examine and track the variability in the value of cryptocurrencies. Cryptocurrency ETFs essentially work and trade like a traditional ETF. In order for the cryptocurrency ETF to work, the company listing the ETF on the exchange must own the underlying cryptocurrency on the exchange. As a result of this transaction, investors buy a share for their trading rights on the stock exchange. The profit of the ETF to the investor here tries to offer less investment risk in these crypto assets that develop on the blockchain. In some cases investing in blockchain technology or the assets created by that technology, it is necessary to purchase a blockchain ETF. In this case, the investor interacts with ETFs that represent shares of the blockchain technology underlying the units of the cryptocurrency technology.


The Bitcoin ETF as an Example

A Bitcoin ETF can be managed by exchanges or companies that hold Bitcoin. Bitcoin price is pegged to the Bitcoin value held in the background. The company or exchange issues the ETF on a traditional exchange, and investors trade the listed Bitcoin ETF like stocks. Also, Bitcoin ETFs open up new opportunities for investors.


However, there are some key differences between a Bitcoin ETF and other ETFs.


As the first major difference, some ETFs that track the S&P 500 represent equities. Thus, a fee is charged on the payments any company in the ETF pays to its shareholders. For example, when Tesla pays out a payment and you have a stake in an ETF that includes Tesla, you also receive a payment. The difference here is that Bitcoin is not decentralized like the S&P 500. Bitcoin is decentralized, so this situation that occurs in the Tesla ETF does not occur in the Bitcoin ETF.


The second important difference is that, as with ETFs, you must pay a certain amount of fee to the company offering the ETF. But with a Bitcoin ETF, part of the fees you pay is the amount spent on buying and storing Bitcoin, which forms the main structure of the ETF.