How Bitcoin Exchange-Traded Funds (ETFs) work
For those wanting to know how to leverage Bitcoin in a secure and regulated environment that doesn’t require being on a crypto exchange platform, this article is for you. Stuarts’ award winning attorneys explain what Bitcoin Exchange-Traded Funds (ETFs) are, how they work, and the benefits of setting one up under Cayman Islands law.
What are Bitcoin ETFs?
Bitcoin ETFs are exchange-traded funds that track the value of Bitcoin and trade on traditional market exchanges rather than cryptocurrency exchanges. They provide investors with a means of investing in Bitcoin without needing to use a cryptocurrency exchange, and they also offer the advantage of price leverage.
Do Bitcoin ETFs exist in the Cayman Islands?
Yes, Bitcoin ETFs are becoming more common as the cryptocurrency space gains popularity. The Cayman Islands is an ideal jurisdiction to establish Bitcoin ETFs. Setting up and establishing Bitcoin ETFs in the Cayman Islands provide many benefits such as:
▪ Safety and security through a well-established, politically stable and sophisticated jurisdiction;
▪ World-class professional service providers;
▪ Tax neutral territory, allowing a business to take a greater portion of its revenue to the bottom line;
▪ Legal system based on robust English common law with cutting-edge legislation and regulatory framework;
▪ Close proximity to US time zones – strategically located just one hour from Miami and three hours from New York City;
▪ Streamlined and cost-effective to set up and operate international business;
▪ Special Economic Zone (SEZ) allowing technology companies to benefit from unique advantages in the Cayman Islands; and
▪ Pro-business environment – the Cayman Islands is one of the world’s top financial centres, and is a leading jurisdiction for funds and digital assets.
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How ETFs Work
An ETF is a type of pooled investment security that trades on an exchange and monitors the value of an underlying asset or index, encompassing a wide range of assets and sectors from commodities to currencies.
A Bitcoin ETF would work the same way – the price of one share of the ETF would fluctuate with the price of Bitcoin. If Bitcoin increases in value, so does the ETF, and vice versa. But instead of trading on a cryptocurrency exchange, the ETF would trade on an exchange like the New York Stock Exchange (NYSE) or Cayman Islands Stock Exchange (CSX).
Typically, Bitcoin ETFs use futures to replicate the cryptocurrency’s performance, and an alternate way to gain exposure to Bitcoin is by investing in companies involved in cryptocurrency and blockchain, which provide market leverage.
Why establish a Bitcoin ETF?
1. Convenience
Investing in a Bitcoin ETF provides leverage to the price of Bitcoin without having to learn about how Bitcoin works, having to use a cryptocurrency exchange, or taking on the risks of owning Bitcoin directly. For example, if an investor loses the password to their digital wallet, their Bitcoin is permanently lost . A Bitcoin ETF therefore simplifies the process of investing in Bitcoin and creates an additional layer of protection for the assets via traditional methods on a regulated market exchange
2. Diversification
An ETF can hold more than just one asset. For example, A Bitcoin ETF could comprise Bitcoin, Apple stocks, Amazon stocks, and more—providing investors with the opportunity to mitigate risk and diversify their portfolio. Similarly, by trading on a regulated market exchange, a Bitcoin ETF would provide investors with the chance to diversify their existing equity portfolios.
3. Tax efficiency
Given that Bitcoin is unregulated and decentralized, many financial institutions do not permit purchases of Bitcoin. On the other hand, Bitcoin ETFs trading on traditional exchanges would likely be regulated by the regulator responsible for governing the exchange and eligible for tax efficiency.
How Stuarts can help
At Stuarts, we have set up and established hundreds of digital asset projects, including ETFs and those focused on Bitcoin. Our Digital, Web3 and Fintech attorneys can offer expert legal advice in the following areas:
o The use of blockchain technology and smart contracts by investment funds, administrators and other service providers;
o Establishment of ‘crypto-related-funds’ in the Cayman Islands;
o Token offerings and the establishment of Cayman Islands companies and foundations thereto;
o Incorporating Cayman Islands companies to hold and trade cryptocurrencies and other digital products; and
o Anti-money laundering regulations and ‘know- your-client’ (KYC) challenges associated with utilizing bitcoin and other cryptocurrencies.
Reach out to one of our experts today to learn more about setting up your Bitcoin ETF in the Cayman Islands.
