An ETF is an exchange-traded fund designed to track the underlying asset’s price or group of assets. A Bitcoin ETF is an exchange-traded fund that tracks the price of Bitcoin. There are two main types of Bitcoin ETFs: Spot Bitcoin ETFs and Futures Bitcoin ETFs.
There are many benefits to investing in Bitcoin ETFs. While Bitcoin ETFs offer numerous benefits, investors need to be aware of the potential downsides and risks that come with it. SEC approved all spot Bitcoin ETF applications in the US in January 2024. The investment landscape is currently experiencing an increase in crypto-based ETFs.
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What is an ETF?
An ETF is an exchange-traded fund designed to track the underlying asset’s price or group of assets. An ETF can track the price of stocks, commodities, bonds, futures, or other financial instruments. Nowadays, also bitcoins! You can buy ETFs from all the popular investing platforms.
ETFs enable an easy and cost-effective way to invest in instruments that would otherwise be difficult to acquire. For example, an ETF that follows the oil price is a much easier option than buying a barrel of oil.
It is important to understand that an ETF does not always hold the asset whose price it’s tracking. For example, a gold ETF does not necessarily own gold bars, but the fund can invest in gold futures or mining companies.
ETFs that follow major stock indices or industries are the most popular ones. You can buy an ETF that follows the US S&P 500 index, in which case you get a share of 500 different companies with one transaction. Buying small slices from hundreds of companies one at a time would be extremely difficult and costly.
Shares of ETF funds can be bought, sold, or leveraged (long/short) during stock exchange opening hours. ETFs play a significant role in the modern investment portfolio. Both professionals and small investors invest in ETFs.
What is a Bitcoin ETF?
A Bitcoin ETF is an exchange-traded fund that tracks the price of Bitcoin. A Bitcoin ETF allows you to gain exposure to the Bitcoin price movements without owning the asset.
The primary objective of a Bitcoin ETF is to offer a more accessible and regulated means for investors to gain exposure to Bitcoin’s price fluctuations. Bitcoin ETFs are traded on traditional stock exchanges, allowing investors to buy and sell shares of the ETF just like traditional stocks.
To achieve precise price tracking, Bitcoin ETFs may employ various methods, including holding Bitcoin in cold storage, utilizing futures contracts, or engaging in over-the-counter (OTC) transactions.
Below is a list of the biggest Bitcoin ETFs at etfdb.com.
As you can see from the picture, the annual returns (YTD) vary significantly. This is because only some of the ETFs are actual Bitcoin ETFs.
For example, the Ark Next Generation Internet ETF is a fund that invests in technology companies. The Bitwise Crypto Industry Innovators ETF also invests in the entire crypto sector. The funds do not necessarily invest in Bitcoin (BTC), even though they are listed under the “Bitcoin ETF” title.
In the ETFdbs case, looking at the Asset Class category is important. If the category is marked as Currency, it means a spot Bitcoin ETF that invests directly in real bitcoins.
If you are considering investing in Bitcoin ETFs on different trading platforms, familiarize yourself with the fund’s contents before investing. Funds called Bitcoin ETFs may also invest in Bitcoin futures. In addition, there are large differences in costs.
Spot Bitcoin ETF vs. Futures Bitcoin ETF
There are two main types of Bitcoin ETFs: Spot Bitcoin ETFs and Futures Bitcoin ETFs. Each one offers a way to gain exposure to Bitcoin’s price. Let’s explain the differences.
Spot Bitcoin ETFs
Spot Bitcoin ETFs are investment funds that buy and hold Bitcoin as their underlying asset. The value of each share of a Spot Bitcoin ETF is derived from the actual, or “spot,” price of Bitcoin, allowing investors to gain exposure to the real-time fluctuations of Bitcoin’s value. This type of ETF provides the most direct correlation to the price of Bitcoin, as it involves the actual ownership of the cryptocurrency.
The management of Spot Bitcoin ETFs is responsible for securely storing the purchased Bitcoin, often using a combination of cold and hot wallets to balance security and liquidity. Investors in Spot Bitcoin ETFs do not have to worry about the challenges of buying, storing, and securing Bitcoin, as the fund’s management handles these aspects.
Futures Bitcoin ETFs
Futures Bitcoin ETFs do not buy or hold actual Bitcoin. Instead, they invest in Bitcoin futures contracts, agreements to buy or sell Bitcoin at a predetermined price on a specified future date. The value of a Futures Bitcoin ETF is influenced by the price of these futures contracts, which, in turn, is based on the expected future price of Bitcoin.
Futures Bitcoin ETFs allow investors to speculate on the future price movements of Bitcoin without owning the cryptocurrency. This type of ETF may involve a higher degree of risk and complexity due to the inherent leverage and the impact of factors such as contract expiration and roll costs.
Which one is better?
It is not straightforward to say that a Spot Bitcoin ETF is better than a Futures Bitcoin ETF or vice versa. It depends on the investor and also on the region. There might be only a Futures Bitcoin ETF available for some investors. The fees of ETFs also vary, which might make one alternative more attractive.
In general, the spot ETF gives you more direct exposure to the price of Bitcoin. A Spot Bitcoin ETF holds bitcoins and makes it straightforward from the investor’s point of view. A futures ETF only holds futures that have expiration dates. There might also be leverage involved.
A third alternative is a generic crypto and technology ETF holding crypto-related stocks, like Bitcoin mining companies. The price of these ETFs moves in the general direction of Bitcoin but could overperform or underperform it greatly.
Benefits of Investing in Bitcoin ETFs
There are many benefits to investing in Bitcoin ETFs. Let’s explore the most compelling arguments for buying a share of an ETF instead of actual bitcoins.
- Convenience: Investors can easily buy and sell shares of a Bitcoin ETF through traditional brokerage accounts, eliminating the need to navigate cryptocurrency exchanges or manage digital wallets and private keys. This convenience opens the doors to a wider range of investors.
- Regulatory benefits: Integrating Bitcoin ETFs into mainstream financial markets brings them under the purview of regulatory bodies. This regulatory oversight provides protection and transparency often lacking in unregulated cryptocurrency exchanges. Many institutions and pension funds cannot hold actual bitcoins but are free to invest in an ETF.
- No tax issues: The tax implications of trading Bitcoin ETFs are straightforward compared to the complex tax considerations of managing individual cryptocurrency transactions. In some countries, the trading platforms calculate your taxes automatically and send the information to local tax authorities. When buying actual bitcoins, you have to do taxes yourself.
- Cost efficiency: ETF investors avoid trading and withdrawal fees associated with buying and storing actual bitcoins in an external wallet. It depends on an investor which option is cheaper and more efficient.
- Safety: Unfortunately, the world of Bitcoin is full of scams. Even Bitcoin exchanges have been hacked. Due to poor wallet management, millions of bitcoins have also been lost. With Bitcoin ETF, none of these threats exist.
Many traditional stock investors choose Bitcoin ETFs. The main reason is that they can continue investing in the platform they are familiar with and manage the ETF easily as part of the entire investment portfolio.
Disadvantages of investing in a Bitcoin ETF
While Bitcoin ETFs offer numerous benefits, investors need to be aware of the potential downsides and risks that come with it. Next, we will introduce the biggest disadvantages of investing in a Bitcoin ETF.
- Lack of ownership: Investing in Bitcoin ETFs means that you don’t own actual bitcoins but shares of a fund. Many would argue that the possibility of holding bitcoins in your wallet is one of the most important reasons to invest in the first place.
- No utility: Bitcoin ETFs solely provide exposure to Bitcoin’s price movements. Bitcoin is decentralized digital money running outside the banking system. With an ETF, you lose access to the revolutionary technology and cannot use it.
- Tracking error risks: Bitcoin ETFs may experience discrepancies, or tracking errors, between the ETF’s value and the actual price of Bitcoin due to various factors like management fees and operational expenses. This can impact the returns and the effectiveness of the ETF in accurately reflecting Bitcoin’s value.
- Counterparty risk: Bitcoin ETFs are always run by financial institutions and traded in stock exchanges. If there is major turbulence in the financial markets, you might lose access to your shares, and the issuer could also face serious problems. Actual bitcoins have no counterparty risk.
- Limited trading hours: Bitcoin ETFs can be only traded when the traditional stock exchanges are open. Yet, some of the biggest price movements occur during weekends or holidays. Actual bitcoins can be traded on Bitcoin exchanges 24/7/365.
Before Bitcoin, gold and silver used to be the haven assets for those who wanted to escape the traditional banking system. Bitcoin offers the same opportunity in digital format. Think carefully before giving up on this property and invest in an ETF instead.
Spot Bitcoin ETF in the US
SEC approved all spot Bitcoin ETF applications in the US in January 2024. It was a historic day, as Bitcoin investors had been waiting for approval for over ten years.
The current head of the SEC, Gary Gensler (pictured), has been very critical of the crypto industry. Under his leadership, the SEC has attacked all major US crypto companies. However, the pressure from the market and the financial industry giants was so strong that the SEC was forced to humble itself and approve the spot Bitcoin ETF products.
The SEC approved all 11 open ETF filings on Wednesday, January 10, 2024. Gary Gensler’s comment shows that the SEC made the decision reluctantly.
While we approved the listing and trading of certain spot Bitcoin ETP shares today, we did not approve or endorse Bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.
The following spot Bitcoin ETFs were approved in January 2024:
- Bitwise Bitcoin ETP Trust (BITB)
- Hashdesh Bitcoin ETF (DEFI)
- Grayscale Bitcoin Trust (GBTC)
- ARK 21Shares Bitcoin ETF (ARKB)
- Fidelity Wise Origin Bitcoin Trust (FBTC)
- Wisdomtree Bitcoin Trust (BTCW)
- Invesco Galaxy Bitcoin ETF (BTCO)
- VanEck Bitcoin Trust (HODL)
- Franklin Bitcoin (EZBC)
- Valkyrie Bitcoin Fund (BRRR)
- iShares Bitcoin Trust (IBIT)
Fidelity is the only one of the applicants that also manages the storage of bitcoins itself. VanEck uses the Gemini exchange and the Hashdesh BitGo company. The remaining eight applicants use the services of the American crypto exchange Coinbase.
Most ETFs charge only 0.2-0.4% annual fees, making them attractive options for investors.
Bitcoin’s price did not react to the news practically at all. The market saw only a small swing up and down. The forecasters of both the collapse (“buy the rumor, sell the news”) and the rocketing were wrong. The news was priced in, and the market got what it expected.
However, Bitcoin’s price declined during the next few days when ETF trading started. If this is considered, the “buy the rumor, sell the news” camp came closest in its predictions.
Trading of ETF funds started immediately on Thursday, January 11, 2024, in the United States. We will update the article during the spring of 2024 when the effect of the money flows to the ETF on the exchange rate starts to be seen more widely. More than seven billion dollars worth of spot Bitcoin ETFs were traded in the first two days.
Other crypto ETFs
The investment landscape is currently experiencing an increase in crypto-based ETFs. While Bitcoin was the first to gain popularity, other cryptocurrencies like Ethereum are also gaining attention.
Ethereum ETFs are becoming increasingly prevalent and allow investors to profit from Ethereum’s price movements without the complexities of owning it directly. These ETFs function similarly to Bitcoin ETFs, providing a regulated and transparent way for retail and institutional investors to invest in cryptocurrencies.
In addition, there are now Exchange-Traded Products (ETPs) such as the Global X Aave ETP. This tracks the price of Aave, the popular DeFi token. These ETPs, whether focused on Aave, Ripple, or Litecoin, offer investors a range of opportunities to diversify their portfolios. They are structured to reflect the value of the underlying crypto assets, enabling investors to speculate on price variations without engaging in actual transactions with cryptocurrencies.
The evolution of ETFs reflects the increasing acceptance and integration of cryptocurrencies into the mainstream. Various crypto ETFs and ETPs have emerged, indicating the expanding opportunities for investment in the crypto domain.
There are also numerous publicly-listed crypto companies, such as Microstrategy, Coinbase, and Bitcoin mining companies. These stocks are also heavily correlated with the price of Bitcoin. Investors have these days a plethora of choices when it comes to investing in Bitcoin and other cryptocurrencies.
Read this article, Bitcoin Investing Explained, to learn more about Bitcoin investing.