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

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

On Feb. 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 about how it will compete with Grayscale Investments GBTC fund. On Feb. 17, Ark Investment Management founder and CEO Cathie Wood said the likelihood that U.S. regulators will approve a Bitcoin exchange-traded fund has gone up.

Although exchange-traded funds (ETF) and exchange-traded notes (ETN) sound quite similar, there are fundamental differences in trading, risks, and taxation.

What is an exchange-traded fund?

An ETF is a security type that holds underlying investments such as commodities, stocks, or bonds. It often resembles a mutual fund, as it is pooled and managed by its issuer.

ETFs have become a $7.7 trillion industry, growing by 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 U.S.-based large-capitalization technology companies.

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

What is an exchange-traded note?

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

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

On the other hand,…

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