Bitcoin ETFs: A New Horizon in Crypto Investing

In the dynamic world of digital finance, the approval of the first Exchange-Traded Fund (ETF) that invests directly in Bitcoin represents a milestone. This event not only marks a significant evolution in the perception and accessibility of cryptocurrencies, but also opens new frontiers for traditional and digital investors. On the one hand, we have Bitcoin, known for its volatility and for being the pioneer of cryptocurrencies, and on the other, the ETF on Bitcoin, a new entity that merges the bold world of cryptocurrencies with the more familiar universe of traditional investments. In this context, a fundamental question arises: how do you compare the volatility of the Bitcoin ETF with that of Bitcoin itself? Such a comparison is not only of academic interest, but crucial for investors looking to better understand the risk and opportunities associated with these two different, but intrinsically linked, forms of investment in cryptocurrencies. This article aims to explore and analyse the volatility of the ETF on Bitcoin versus the Bitcoin itself, providing a detailed overview and quantitative analysis to guide cryptocurrency investors and enthusiasts through this exciting new chapter in the world of digital assets.

1. Implications of Cryptocurrency Approval:

Innovation and Legitimation: The SEC’s endorsement of the Bitcoin ETF is not only a recognition of the growing importance of cryptocurrencies in the traditional financial world, but also a significant step towards their legitimacy. Increased Accessibility: The introduction of a Bitcoin ETF makes investing in cryptocurrencies more accessible to a wider audience, especially for those who are already familiar with traditional stock markets but less comfortable with direct cryptocurrency trading.

When we talk about an Exchange-Traded Fund (ETF), we could imagine it as an "investment basket". But not just any basket: it is a basket that collects different types of financial assets, such as stocks, bonds, or in this specific case, Bitcoin-related assets. The beauty of this "basket" is that you can buy or sell a part of it on the stock exchange, just as you would with the shares of a single company.

Practical example:

Imagine you want to invest in technology, but you can’t decide which company to invest in. Instead of choosing individually between Apple, Google, or Microsoft, choose an ETF that includes shares from all of these companies. By buying a share of this ETF, you invest in a diversified way across the technology industry, without having to buy individual shares of each company. It’s a bit like buying a slice of a mixed cake, instead of having to choose a single flavour.

In the case of the Bitcoin ETF, the "basket" contains various Bitcoin-related financial products, such as Bitcoin futures. Instead of buying Bitcoin directly, which can be complex and risky for some investors, buy a share of the ETF. This allows you to have exposure to Bitcoin through a more traditional and familiar investment vehicle, such as the stock exchange.

Before we delve deeper into ETFs, it’s important to understand what "futures" are. A futures contract is a contract that allows you to buy or sell an asset - like Bitcoin - at a predetermined price at a future date. It is as if I make a promise to buy or sell something in the future at a price set today. This tool is widely used to manage risk or to speculate on the price movements of an asset.

Volatility of Bitcoin

Bitcoin is renowned for its high volatility. For example, during 2020 and 2021, it experienced large price fluctuations, showing a surge from about $7,000 to over $29,000 by the end of 2020, and a further increase followed by a rapid decline in 2021. These fluctuations reflect an annual volatility that can easily exceed 60-70%, underlining the high risk but also the yield potential.

Volatility of ETFs

By counteracting the volatility of Bitcoin, ETFs tend to show lower levels of volatility, varying according to replicated assets or indices. ETFs that track diversified indices such as the S&P 500, for example, exhibit much lower volatility, in the range of 15-20% in standard market periods, offering investors greater stability.

Bitcoin ETFs and Volatility Reduction

ETFs that invest in Bitcoin, or related financial products, partly reflect the volatility of Bitcoin but can offer greater stability through diversification and professional management. These products, while remaining significantly volatile, tend to be less exposed to rapid direct price changes than Bitcoin, offering a potentially more accessible and less risky investment option for those seeking exposure to cryptocurrencies.

The introduction of the ETF on Bitcoin opens new perspectives for investors, offering a vehicle through which it is possible to gain exposure to the dynamics of the cryptocurrency market with a potentially lower level of risk. However, it is essential that investors proceed with caution, taking into account their risk tolerance and investment objectives, given the inherent volatility of these products.