Bitcoin Forum

Please explain everything about ETF for me like for an five year old.

A five year old is not going to understand an ETF, but this might help.

http://www.investopedia.com/terms/e/etf.asp

I believe the decision over whether it will be approved is on the 11th this month.

Here's an interesting article about the fund, and it wasn't very difficult to read.

http://seekingalpha.com/article/4050600-will-bitcoin-etf-see-light-day-march

So why etf is valuable, it makes easier for investors to invest in bitcoin?

The Exchange Traded Fund (ETF) provides a mutual fund for investors to purchase like a stock rather that having a Bitcoin address. The managers of the fund would hold the actual Bitcoins and the investors would be investing money in it. This would make it easier for the average person to invest in Bitcoins without them actually buying them directly.

A Bitcoin ETF would work like this:

1) I set up a company and get it publicly listed and the shares trade-able on a public exchange (e.g. NYSE). This is the hard bit!
2) I state that all the company is going to do is hold bitcoin. And that every quarter it will sell 0.05% of the bitcoins it holds to pay the expenses of the company (cost of storing the keys to the bitcoins somewhere, marketing, legal and accounting costs with NYSE, and some management fee to me to run it all).
3) I have a rule that if someone delivers to the company 100 bitcoins the company will issue 100 new shares and give them to that person. Also I have another rule that if someone wants to return their shares they can return 100 shares and get 100 Bitcoins back. (This process is slightly more complex as is at NAV - i.e. adjusted for the fees taken).
4) I buy 1000 Bitcoin, give them to the company, then do an IPO of the 1000 shares - and I keep the proceeds in return for the 1000 bitcoins I had to buy.

Now if there is high demand for the ETF shares on the exchange the shares will become worth more than the actual bitcoins the company owns (this may happen as people may be prepared to overpay for the shares as is easier to hold shares than store bitcoins). If this happens however statement 3 kicks in and someone will hand over 100 Bitcoins to the company, get the 100 shares and sell them - making a profit, and also reduce the price of the shares - this will keep happening till the shares are roughly the same price as a bitcoin.

The reverse can happen too. If bitcoin suddenly doubled in price and the ETF shares were worth less than 1 bitcoin someone would by 100 shares (so push ETF price up) and return them to the company, getting Bitcoin in return that they could sell for a profit.

TL;DR
ETF is a large fund that invests in things. They want to trade Bitcoin. They have a lot of money. If it gets approved, a lot of money will flow into Bitcoin. That means prices will go up and everyone gets to make money.

The good news is that even if you fail to get in on Bitcoin beforehand, as long as the ETF is approved you can invest in that and then make money off of the Bitcoin market while having people trade for you (mostly automated though).

Bad news is that it means those investors suddenly have a lot more power and governments may start to care soon.

Perhaps an over emphasis on ETF share creation and redemption. Investors will be simply buying and selling the ETF shares on the market. Arbitragers will be balancing the ETF with the underlying asset by long buying the underlying asset and short selling the ETF and vice versa.