What is a Bitcoin ETF?

Cryptocurrency Editor

Camila Karam

Cryptocurrency Editor

Camila Karam

About Author

Camila is a Crypto Editor at Cryptonews, where she crafts research-driven, value-packed evergreen content on cryptocurrencies, exchanges, and other Web3 topics. She is passionate about gathering...

Author Profile

Share

Copied

Fact Checked by

Ilija Rankovic

Crypto Editor

Ilija Rankovic

About Author

...

Author Profile

Last updated:

September 12, 2024 11:54 EDT

Why Trust Cryptonews

Cryptonews has covered the cryptocurrency industry topics since 2017, aiming to provide informative insights to our readers. Our journalists and analysts have extensive experience in market analysis and blockchain technologies. We strive to maintain high editorial standards, focusing on factual accuracy and balanced reporting across all areas - from cryptocurrencies and blockchain projects to industry events, products, and technological developments. Our ongoing presence in the industry reflects our commitment to delivering relevant information in the evolving world of digital assets. Read more about Cryptonews

A Bitcoin ETF is an exchange-traded fund (ETF) that gives investors access to BTC’s price movements without owning Bitcoin. Most ETFs use futures contracts to track Bitcoin’s performance, but some hold the actual currency or other financial assets.

By investing in a Bitcoin ETF, people can benefit from BTC’s price without dealing with the complexities of buying and storing digital coins. This makes it easier and more secure for traditional investors to gain cryptocurrency exposure through regulated financial markets. Continue reading to explore how Bitcoin ETFs work and the advantages and risks they bring to investors.

What Are the Types of Bitcoin ETFs?

Bitcoin ETF is frequently used to refer specifically to spot Bitcoin ETFs. However, the first one is an umbrella term encompassing various types of Bitcoin exchange-traded funds. Every Bitcoin ETF differs in structure and strategy, providing different investor needs and risk profiles.

The main types of Bitcoin ETFs are:

• Spot
• Synthetic
• Futures
• Inverse
• Leveraged

The key differences among these types are outlined in the table below.

Next, we’ll provide:

• A detailed exploration of each type of Bitcoin ETF.
• Exploring their underlying assets, tracking methods, and objectives.
• Risk levels.
• Ideal audiences.

Bitcoin Spot ETFs

Bitcoin Spot ETFs are a type of exchange-traded fund designed to provide investors with direct exposure to Bitcoin. They work by holding cryptocurrency as the main asset. Unlike ETFs that use derivatives, spot ones are backed by Bitcoin. The fund’s manager stores those funds in cold storage, ensuring they track Bitcoin accurately.

The main goal of Spot ETFs is to mirror BTC’s price movements. Since the fund holds Bitcoin, it offers the closest tracking of Bitcoin’s price compared to other ETFs. The risk is moderate due to Bitcoin’s volatility. But, it avoids added risks, such as derivatives complexities.

You may find a distinction between physical Bitcoin ETFs and spot ETFs in some articles, but this is somewhat misleading as they are the same thing. When we use the term “physical” in this context, it doesn’t mean the fund has physical Bitcoin, like a bank safe with coins and bills inside. This means these ETFs are backed by actual Bitcoin held in cold storage, not just derivatives.

Synthetic Bitcoin ETFs

Like other ETFs, a synthetic Bitcoin ETF aims to mirror the return of Bitcoin. Instead of holding actual coins, it uses financial engineering to achieve the desired result. Synthetic ETFs use derivatives like swaps to track Bitcoin’s value.

The ETF provider deals with a counterparty, usually a bank, which promises that the swap will match Bitcoin’s value. This tracking method allows the ETF to profit similarly to holding Bitcoin, without the need to actually own it.

The main goal is to deliver returns that closely match Bitcoin’s actual returns over the contract period. Because of Bitcoin’s volatility and the added risks of derivatives, this is seen as a moderate-risk investment. It can be a great opportunity if you live in a region where spot ETFs are unavailable.

Today, no synthetic Bitcoin ETFs use only options or swaps; most use futures contracts. Synthetic ETFs are popular in other sectors because they offer access to hard-to-reach markets. In the Bitcoin space, however, the focus is on futures-based ETFs instead of synthetic ones. This is due to current rules and the difficulty of creating these Bitcoin products.

Bitcoin Futures ETFs

When investing in Bitcoin Futures ETFs, you invest in futures contracts instead of holding the actual cryptocurrency. These contracts let investors speculate on Bitcoin’s future price at a specific date, making them accessible through traditional markets.

Bitcoin Futures ETFs work by regularly buying and rolling over contracts to maintain exposure to this currency’s price. They can face tracking errors due to market conditions like:

• Contango: When futures prices are higher than spot prices.
• Backwardation: When spot prices are higher than futures prices.

This is also a moderate-risk investment suited for those wanting regulated exposure to Bitcoin or speculating on short-term price movements without owning Bitcoin.

Inverse Bitcoin ETFs

Inverse Bitcoin ETFs aim to profit when Bitcoin’s price falls by using derivatives, like futures contracts, to create opposite exposure. This allows investors to benefit from short-term declines without shorting the asset.

Due to their daily exposure, these high-risk investments can have compounding effects if held for a long time. Inverse Bitcoin ETFs suit experienced investors looking to bet on a drop in Bitcoin’s price. However, they are not ideal for long-term holding and are best for those with a confident short-term market outlook.

Leveraged Bitcoin ETFs

Leveraged Bitcoin ETFs are funds that use financial derivatives, like futures or swaps, to maximize Bitcoin’s daily returns. These funds aim to deliver a multiple of Bitcoin’s daily performance, usually 2x or 3x.

If Bitcoin rises by 5%, a 2x leveraged ETF would aim for a 10% increase. But, if Bitcoin falls, losses are also multiplied; a 10% drop in Bitcoin would lead to a 20% loss in a 2x leveraged ETF.

Due to leverage and Bitcoin’s volatility, these funds are very high-risk investments, which can result in significant losses. They are best suited for experienced traders using short-term and aggressive strategies. Yet, they are only appropriate for short-term investments due to the compounding effects of daily resets.

Examples of Bitcoin ETFs

In this section, we’ll look at examples of Bitcoin ETFs. We’ll also highlight some of the best Bitcoin ETFs available today. These funds offer different ways for investors to gain exposure to Bitcoin, each with its structure, goals, and risk levels. Understanding these choices can help you make informed investment decisions.

Pros and Cons of Bitcoin ETFs

Bitcoin ETFs offer advantages that can bring investors closer to crypto trading but also have some drawbacks. In this section, we’ll look at the pros and cons of Bitcoin ETFs to help you understand their benefits and potential risks.

History of Bitcoin ETF Proposals

The idea of Bitcoin ETFs has been developing for nearly a decade, with the first applications submitted in 2013. These early applications were rejected or delayed due to market volatility, security, and potential manipulation concerns.

Interest in Bitcoin ETFs continued to grow due to Bitcoin’s acceptance as a legitimate asset and demand for regulated investment options. The following topics will cover key events related to Bitcoin ETFs.

• 2013: Cameron and Tyler Winklevoss, Gemini co-founders, first applied for a spot Bitcoin ETF, while Grayscale Investments launched its Bitcoin Investment Trust (GBTC), an open-ended private Bitcoin trust.
• 2017: The U.S. Securities and Exchange Commission (SEC) rejected the Winklevoss twins’ Bitcoin ETF application, citing immature markets. Around the same time, Grayscale withdrew its GBTC-to-ETF application, citing the regulatory environment’s underdevelopment.
• 2018: The Winklevoss brothers filed a second Bitcoin ETF application, but the SEC rejected it within a month, citing concerns that Bitcoin markets were still prone to manipulation.
• 2019: Grayscale converted GBTC into an SEC-reporting entity with shares trading on pink sheets. Meanwhile, VanEck proposed a spot Bitcoin ETF to the SEC, and Bitwise withdrew a similar application.
• 2021: Bitwise refiled its request, the SEC rejected VanEck’s proposal, and Gary Gensler replaced Jay Clayton as SEC chair. Grayscale reapplied, but the SEC approved the first U.S. Bitcoin futures ETF instead.
• 2022: The SEC rejected applications from several asset managers, including SkyBridge, Fidelity, Bitwise, and Grayscale. Unwilling to accept the SEC’s decision, Grayscale took the agency to court.
• 2023: A federal appeals court ordered the SEC to reconsider the asset managers’ application.
• Late 2023: Thirteen asset managers had filed for spot Bitcoin ETFs, with the SEC’s decision deadline set for January 10, 2024.
• January 9, 2024: As people’s optimism grew around the SEC’s decision, its X account was compromised, falsely announcing all ETF approvals. Within an hour, Gensler debunked the news, confirming the post was unauthorized and the products were not approved.
• January 10, 2024: The SEC approved the spot Bitcoin ETFs. The next day, 11 ETFs began trading across multiple exchanges, generating $4 billion in volume with 700,000 trades.

Are Bitcoin ETFs Regulated?

In the United States, Bitcoin ETFs are regulated like those managing fiat currencies and stocks. The SEC oversees their approval, operation, and compliance. The Investment Company Act of 1940 sets transparency, disclosures, liquidity, and diversification rules.

Bitcoin ETFs must provide clear information on assets, fees, and performance, helping investors understand their investments. They must also reduce the risk of market manipulation.

The Commodity Futures Trading Commission (CFTC) regulates Bitcoin ETFs with futures contracts. The SEC and CFTC ensure Bitcoin ETFs follow clear legal rules, protecting investors through transparency and fairness.

Bitcoin ETF vs. Bitcoin Fund: What Are the Differences?

Bitcoin ETFs and Bitcoin Funds may sound similar, but they are different. Both give exposure to Bitcoin, but their structures, mechanisms, liquidity, and other factors vary. Understanding these differences helps investors decide which Bitcoin funds to add to their portfolios.

The following list explains the main differences between Bitcoin ETFs and Bitcoin Funds:

• Structure: Bitcoin ETFs are exchange-traded funds, while Bitcoin Funds are typically structured as private or mutual funds.
• Trading: ETFs trade on public exchanges throughout the day, like stocks. Bitcoin Funds usually have limited trading windows, such as end-of-day pricing.
• Liquidity: The funds often offer less frequent trading opportunities and lower liquidity, while ETFs are usually more liquid because they are on public exchanges.
• Regulations: The more rigid SEC regulations only apply to the ETFs, while Bitcoin Funds may operate under different regulatory frameworks, usually with fewer disclosure requirements.
• Accessibility: Bitcoin ETFs are more accessible to smaller investors since they are available on brokerage accounts. Bitcoin Funds, however, are usually focused on more prominent or institutional investors because sometimes they require higher minimum investments.
• Fees: Bitcoin ETFs typically have lower fees, while funds may have higher fees due to active management costs.
• Custody: Bitcoin ETFs usually have institutional-grade custody solutions overseen by regulated entities, whereas Bitcoin Funds may use several custodial arrangements, which can vary in security.
• Tax Implications: Bitcoin ETFs often offer more favorable tax treatment, as they are structured to minimize capital gains distributions, while Bitcoin Funds might expose investors to more frequent taxes.

How to Buy Bitcoin ETFs

If you want to buy Bitcoin ETFs, you can purchase shares through a broker or advisor. Some ETFs are traded in NASDAQ and New York Stock Exchange ARCA exchanges. If you have never done this process before, here is a step-by-step on how to start buying Bitcoin ETFs through a brokerage:

1. Research the ETFs Available: The SEC has approved 11 Bitcoin ETFs. When researching, prioritize ETFs with high trading volume and significant assets under management (AUM). Review the other assets within the ETF and ensure the issuer is reputable.
2. Open an Account: Open an account at the brokerage that contains the ETF you are interested in.
3. Fund Your account: Calculate how much money you want to invest and fund your account through the brokerage platform.
4. Place an Order: Select your favorite Bitcoin ETF and place a buy order as you would for traditional stocks. You can opt for a market order to purchase the ETF within minutes or a limit order that executes only when your specified price is met.

Where Do You Purchase Bitcoin ETFs?

As we mentioned, buying Bitcoin ETF shares can be done in three most common ways, each offering different levels of accessibility and support. Here are the main ways to start buying Bitcoin ETFs:

• Brokerage Platforms: Some examples of brokerages like Robinhood, E*TRADE, and Fidelity make it possible for investors to invest in Bitcoin ETFs through online accounts, providing user-friendly interfaces and research tools for informed decision-making.
• Stock Exchanges: Bitcoin ETFs are listed on major exchanges like the NYSE and NASDAQ, where they can be bought and sold during regular trading hours through any brokerage that offers access to these markets.
• Financial Advisors: Professional advisors can help investors purchase Bitcoin ETFs, offering personalized advice and portfolio management to align investments with financial goals and risk tolerance.

Who Should Invest in Bitcoin ETFs?

Since Bitcoin ETFs are a very versatile way to invest in crypto, they can be suitable for many kinds of investors. The main characteristic that brings these investors together is the desire to seek exposure to Bitcoin without directly buying the cryptocurrency. Here are some other types of investors that might be interested in investing in these funds:

• Traditional Investors: People already used to navigating through stocks and bonds may find investing in ETFs easier since they won’t have to deal with complex cryptocurrency exchanges or wallets.
• Portfolio Diversifiers: Investors looking to broaden their portfolio can choose Bitcoin ETFs to balance risk with more traditional investments.
• Long-Term Holders: For those looking for long-term growth, Bitcoin ETFs may offer potential long-term revenue without worrying about direct crypto ownership.
• Tax-Conscious Investors: Bitcoin ETFs’ tax regulations are usually more favorable than those for direct Bitcoin ownership. Some advantages include the more favorable treatment of capital gains and potential tax efficiency.

Best Alternatives to Investing in Bitcoin ETFs

While many experts debate whether Bitcoin is a good investment, some investors must research alternatives to Bitcoin ETFs. Depending on your specific financial goals or risk tolerance, other options may be more suitable for your investment profile.

The following topics will explore some of the best investment alternatives in Bitcoin ETFs.

Cryptocurrencies

When investing in cryptocurrencies, you buy and hold digital assets like Bitcoin, Ethereum, or other top altcoins. This gives you full ownership and control, allowing you to participate in decentralized finance (DeFi), staking, and earning rewards. You can also diversify by choosing the best cryptocurrencies to invest in, aiming for higher returns from new and established projects.

However, investing in cryptocurrencies carries risks. Prices can be highly volatile, changing rapidly in short periods. You will need strong market knowledge and secure storage solutions, such as digital wallets, to manage these assets effectively.

Cryptocurrency Presales

Crypto presales allow investors to buy new digital tokens before their public launch, often at discounted prices during ICOs. Early investors may secure significant returns if the project succeeds and its value rises after release.

However, crypto presales carry risks. These projects are new and unproven, possibly failing to deliver or going bankrupt, causing a total loss. Additionally, crypto presales lack the regulatory oversight of Bitcoin ETFs, exposing investors to potential fraud, market manipulation, and security risks.

Blockchain ETFs

Blockchain ETFs offer exposure to various businesses within the ecosystem, not just BTC. These include companies advancing blockchain technology, even if they don’t handle cryptocurrencies directly. This diversification can lead to more stable returns and lower risk than funds tied solely to Bitcoin’s price.

The downside of Blockchain ETFs is that broader economic trends or blockchain technology developments may influence them. Ethereum ETFs, for example, track Ethereum’s price, allowing investors to gain exposure without directly buying ETH. Their advantage is that they offer a regulated, accessible way to invest in Ethereum through traditional markets, with trading ease and tax benefits.

Crypto Company Stocks

When investing in crypto company stocks, investors buy shares in companies like exchanges, mining firms, and blockchain development firms. This allows exposure to the cryptocurrency industry’s growth without directly purchasing cryptocurrencies. Examples of such companies include Coinbase, Marathon Digital, and Riot Blockchain.

Like Blockchain ETFs, crypto company stocks are influenced by broader market trends, company-specific risks, and regulatory changes. These factors may not align with Bitcoin’s price movements. Additionally, investors face operational risks from individual companies, leading to higher volatility and unpredictable returns.

Final Thoughts on Bitcoin ETFs

Bitcoin ETFs have changed the crypto industry, offering a regulated and accessible way to invest in Bitcoin without owning it. These funds are popular due to their ease of trading, tax efficiency, and the security of traditional markets. However, they also carry risks like fees and limited exposure to the broader crypto ecosystem.

Since Bitcoin ETFs are relatively new, their regulatory status is crucial for their future popularity. As the SEC shapes their availability and structure, the market may see increased adoption and stability.

To learn more about Bitcoin ETFs, initial inflows, and their long-term impact, watch our exclusive interview with Lark Davis, founder of Wealth Mastery. He explains how these products could reshape cryptocurrency investments for both new and experienced investors.

FAQ

Has a Bitcoin ETF been approved in the US?

Yes, in 2021, the SEC approved Bitcoin futures ETFs, like the ProShares Bitcoin Strategy ETF (BITO). In 2024, the SEC approved spot Bitcoin ETFs. Currently, 11 of them operate, including iShares Bitcoin Trust.

How have Bitcoin ETFs affected the price of Bitcoin?

Bitcoin ETFs don’t directly affect Bitcoin’s price. However, they can indirectly influence fluctuations shown in Bitcoin price predictions. Suppose the demand for Bitcoin ETFs increases, and we start seeing greater market acceptance and trading activity. In that case, it can raise Bitcoin’s value as more capital flows into ETFs and Bitcoin itself.

Why are investors interested in Bitcoin ETFs?

Interest in Bitcoin ETFs comes from the regulated, accessible environment that those funds provide for investors to gain exposure to Bitcoin without directly owning or managing it. These ETFs also offer other advantages, such as trading on traditional exchanges, potential tax advantages, and the security of established financial management.

Is investing in Bitcoin ETFs worth it?

Suppose you are an investor looking to gain knowledge and experience in cryptocurrencies without having to handle complex token negotiations and market fluctuations. In that case, Bitcoin ETFs can be worth it. However, it’s important to highlight that they also offer some downsides, such as management fees.

Are there other types of crypto ETFs beyond Bitcoin?

Yes, there are several other types of crypto ETFs beyond Bitcoin. Two great examples are Ethereum and blockchain ETFs. Working similarly to Bitcoin ETFs, you can invest in spot Ethereum ETFs that directly track the currency’s price or in blockchain ETFs that expose you to companies involved in this technology.

References

Statement on the Approval of Spot Bitcoin Exchange-Traded Products (US SEC)

Learn About Risks Before Investing in Commodity ETPs or Funds (CFTC)

Investor Alert: Funds Trading in Bitcoin Futures (CFTC)

Timeline of Events Leading to Spot Bitcoin ETF Approval in The US (CryptoPotato)