What is a Bitcoin ETF?
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A Bitcoin ETF is an exchange-traded fund, meaning that it is a financial product that provides investors with access to BTC’s price movements without the need to hold the digital currency itself.
The ETF tracks the performance with future contracts, which are investment securities that let investors speculate on future asset prices. These futures contracts are agreements between two parties that want to buy or sell a specific amount of Bitcoin at a set price and date. This kind of contract helps to protect investors from potential price fluctuations that may affect this cryptocurrency.
How do Bitcoin ETFs Work?
Bitcoin ETFs work very similarly to traditional ETFs. The main difference between them is that while Bitcoin ETFs are linked to the performance of Bitcoin futures contracts, traditional ETFs work with stocks or bonds.
Investors can trade Bitcoin ETFs on stock exchanges like they would individual stocks and the price will be based on the futures contracts they may hold with Bitcoin. In this scenario, investors can buy shares of Bitcoin ETFs, just as they would any ETF in the traditional format.
When these transactions are made, investors actually own a share of a professional fund managed by a company. The company’s administrators oversee the underlying assets, including bitcoin futures contracts, and ensure the ETFs closely track bitcoin’s performance.
What Are the Types of Bitcoin ETFs?
Investors should be aware of three main types of Bitcoin ETFs, which this article will describe in more detail in the next section.
Spot Bitcoin ETF
A Bitcoin Spot ETF is a type of exchange fund that aims to provide investors with direct access to Bitcoin’s current price market.
Usually, this kind of ETF holds actual BTC as its primary asset and tries to follow the currency’s price in real time as accurately as possible.
Physically-backed Bitcoin ETF
When we talk about a physical-backed Bitcoin ETF, we are mentioning a fund that has physical Bitcoins as one of its assets. This means that the fund’s administrators have and store this cryptocurrency physically.
Spot and Physically-backed ETFs are similar; however, they differ in their main objectives. While the former aims to track the currency’s price, the latter focuses on physical settlement and ownership.
Futures Bitcoin ETFs
Nowadays, this is the most different type of Bitcoin ETF because it does not hold Bitcoin. Future Bitcoin ETFs work through future contracts, allowing investors to speculate on BTC’s future prices.
Future and Spot ETFs differ because of this main characteristic, since there may be costs associated with rolling over or settling futures contracts.
Bitcoin ETF History
Since Bitcoin started to gain more popularity and attention from brokers and investors in the early 2010s, discussions of the possibility of an ETF that holds Bitcoins started to happen. When the currency’s price started to grow to thousands of dollars, some investors couldn’t invest in the currency directly anymore, so brokerages started to respond to that demand by trying to define an Exchange-Traded Fund.
The first solicitation of a Bitcoin ETF by the Securities and Exchange Commission (SEC) started in 2013, and the first official Bitcoin-linked ETF was the Proshares Bitcoin Strategy ETF (BITO), which uses future contracts. The SEC approved this fund in Oct. 2021, and it is listed on the New York Stock Exchange.
However, the spot ETFs had a different story inside the SEC. The commission rejected all proposals until 2024, but after a court order issued in August 2023, the SEC was requested to reconsider the proposals. The result of this reconsideration is that on January 10, 2024, eleven types of Bitcoin Spot ETFs were approved and began trading.
Why Are Bitcoin ETFs Attractive to Investors?
Investing in Bitcoin ETFs has several potential advantages, especially the convenience of being able to expose your investments to the crypto market without having to hold any cryptocurrency itself.
Here are some reasons why this kind of ETF may be attractive to some investors:
- Portfolio Diversification: Having shares of a Bitcoin ETF is a good opportunity to broaden your holdings and add a new asset to the investment portfolio. A diverse selection of investments can potentially reduce risks and increase the chances of long-term returns.
- Easier Access: Since Bitcoin ETFs are traded on stock exchanges, just like individual stocks, buying and selling shares is more accessible to most investors. This means it is possible to trade shares without necessarily having all the technical expertise or resources to invest directly in BTC.
- Managed By Professional: All ETFs available for trading are managed by companies with trained professionals overseeing the fund’s assets and tracking the cryptocurrency’s price closely. This can help investors to feel safer and more confident when making this kind of investment.
How to Buy Bitcoin ETFs
If you want to start investing in Bitcoin ETFs, you can buy shares through a broker or advisor. Some ETFs are traded in exchanges such as NASDAQ and New York Stock Exchange ARCA, and some examples are:
- Proshares Bitcoin Strategy ETF (BITO)
- Valkyrie Bitcoin and Ether Strategy ETF (BTF)
- VanEck Bitcoin Strategy ETF (XBTF)
- Global X Blockchain & Bitcoin Strategy ETF (BITS)
You can also buy shares in a decentralized exchange (DEX), but make sure it supports the blockchain where your Bitcoin ETF is located.
Do Bitcoin ETFs Affect the Price of Bitcoin?
The existence of spot and future Bitcoin ETFs don’t affect the currency prices directly, but some elements might affect the fluctuation indirectly, such as:
- Demand Increase: As investors become interested in Spot ETFs, the demand for Bitcoins may increase, boosting its price.
- Market Acceptance: As the market starts to accept more Bitcoin ETFs, it validates the legitimacy of this cryptocurrency, which can make investors feel more confident and consequently increase its demand, pushing the price higher, as well.
- Increase in Trading Activity: Since the ETFs made it easier for investors to access cryptocurrencies, Bitcoin’s higher exposure to traders and speculations may increase its price volatility.
Limitations of Bitcoin ETFs
As we explored before, Bitcoin ETFs have several advantages that may bring investors closer to the crypto trading universe; however, these advantages also come with some drawbacks.
Some of these ETFs more considerable limitations are:
- Price Volatility: Like almost all assets involving cryptos, are also subject to market and price volatility. Prices can fluctuate for a long time, and investors must be prepared for the highs and lows that these assets may face.
- Early Stages of Regulatory Measures: The responsible commissions are still in the early stages of regulating and auditing the Bitcoin ETFs, so this uncertainty may affect their investments.
- Liquidity Risk: Even though these ETFs are traded as individual stocks, selling shares or accessing funds may be more complex than in the traditional market.
- Trusting Management: When you buy a share of a Bitcoin ETF, you are relying on a company to do its job of taking care of the assets inside the fund. If the owner of the fund can’t manage it properly, it may affect the investors who own shares in that fund.
Are There Other Types of Crypto ETFs Beyond Bitcoin?
Outside the United States, there are several different types of exchange-traded products (ETP), including some ETFs with other cryptocurrencies than Bitcoin. These other funds have the same objective as the Bitcoin ETFs: provide investors access to different digital assets to diversify their investment portfolios.
Conclusion
In summary, Bitcoin ETFs offer investors an easy and safe way to be exposed to BTC’s price movements, without directly owning the currency. Utilizing future contracts and spot ETFs, investors can speculate on Bitcoin’s future prices or invest in funds backed by physical or digital Bitcoin.
The creation of these funds has made it possible for investors to diversify their portfolios with digital assets while taking advantage of the professional management of those funds. Despite the long list of advantages, investors must be aware of the risks involved, such as price volatility, regulatory uncertainties, and liquidity concerns. As the market for Bitcoin ETFs continues to evolve, they represent a significant step in integrating cryptocurrencies into mainstream investment strategies.
FAQ
What is a Bitcoin ETF?
Bitcoin ETF is an exchange-traded fund that owns Bitcoins or BTC futures contracts. Their shares are traded as stocks in the traditional market.
How does a Bitcoin ETF work?
Bitcoin ETFs work similarly to traditional ETFs. However, the first is linked to BTC futures contracts instead of stocks. The Bitcoin ETFs are traded on stock exchanges and managed by professionals overseeing the underlying assets to closely track Bitcoin’s performance.
What is the best Bitcoin ETF?
The best Bitcoin ETFs may vary from time to time according to their price volatility, liquidity and other factors. When choosing the best ETF for your portfolio, research each fund’s main aspects.
Is buying a Bitcoin ETF the same as buying Bitcoin?
No, when buying shares on a Bitcoin ETF, you aren’t actually owning any BTC. In fact, you’re buying exposure to the price of the currency.
Are there disadvantages to owning a Bitcoin ETF compared to owning Bitcoin directly?
The main disadvantage of owning a share of a Bitcoin ETF instead of owning Bitcoin directly is that when participating in a fund, you must rely on the company that owns the fund. As a shareholder, you don’t have the power to decide for that fund, so you must trust that the fund’s owner will make the right decisions and track the prices correctly.
References
Futures Contract Definition (Investopedia)
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