Bitcoin Exchange-Traded Funds (ETFs)

An Exchange-Traded Fund (ETF) is a collective investment security that can be purchased and sold as a single stock.

It is often confused with mutual funds, but the major difference between an ETF and a mutual fund is that it is also a collective investment, but trades once a day after the market closes.

On January 10, 2024, the SEC approved the first BTC exchange traded funds and the brokerages to issue these traded funds.

The Bitcoin ETFs have been termed to be a game-changer for bitcoin specifically and the crypto market as a whole.

These types of funds offer investors exposure to the world's most traded cryptocurrency (BTC) without directly holding it.

Apart from this, many crypto experts have predicted that this approval will foster more adoption in the crypto space.

Recommended Read: Bitcoin ETF Approval in the U.S. Sparks Interest in Asia

In this article, we explain everything you need to know about Bitcoin ETFs.

Bitcoin ETF

A Bitcoin Exchange-Traded Fund is a financial asset that allows investors to gain profits due to the steady price movements of Bitcoin, without the need to actually own a Bitcoin.

It simply means that these funds give investors, especially investors with a low-risk appetite, the opportunity to be exposed to the high rewards in the Bitcoin market, without the need to hold the coin.

Example: Ben is a seasoned investor with a good investment portfolio.

He had a chat with his Investment banker who told him that the crypto market is a lucrative market with many financial rewards.

Ben wants to invest in the crypto market, but is sceptical about it due to the high risk and volatility rate that comes with investing in cryptocurrencies..

However, Ben discovers that Bitcoin ETFs are now available and decides to invest in them. He is now reaping the benefits of the Bitcoin market without the worry of owning a single Bitcoin.

This is a simple way of how Bitcoin Exchange-Traded Funds work.

Bitcoin ETFs are traded on normal stock exchanges, which makes it easier for investors to take part in the crypto market. Every BTC ETF, especially those traded in the spot market, are kept and managed by companies that purchase and hold Bitcoin.

The company lists the ETF on a normal stock exchange, and with this, an investor can trade these funds just like a normal stock.

Bitcoin Exchange Traded Funds also allow investors to short-sell, which means that traders can bet against Bitcoin for future gains.

For a lot of retail investors, Bitcoin and crypto in general are risky investments.

However, with the creation of these funds, investors can worry less about the volatility rate of Bitcoin including its security, storage, or holding a Bitcoin wallet private key.

Bitcoin ETFs provide shares just like stock shares. With this, investors can get exposure to the crypto market without going through the trouble of buying and holding crypto.

Types

1. Spot Bitcoin ETF

A Spot Bitcoin ETF is a kind of exchange-traded fund that looks to offer investors direct exposure to the current price of Bitcoin in the market.

In this situation, “spot” refers to the recent or current price of the underlying token, which is Bitcoin.

A Spot Bitcoin ETF normally keeps actual Bitcoin as its primary asset and attempts to track the current price of Bitcoin as accurately as possible.

Note: Upon the approval of Bitcoin Exchange Traded Funds, over 10 Spot Bitcoin ETFs brokerages/ issuers were appointed.

Below are the brokerages investors can trade spot Bitcoin ETFs and their fees.

• Grayscale - 1.5%

• VanEck - 0.25%

• Valkyrie - 0.25%

• Franklin - 0.19%

• Invesco - 0.25%

• Fidelity - 0.25%

• Bitwise - 0.2%

• BlackRock - 0.25%

• Ark Invest/ 21 Shares - 0.21%

• WisdomTree - 0.3%

*Please do note that these fees might have been subject to change from the actual time of publication.

2. Futures Bitcoin ETF

Futures Bitcoin Exchange Traded Funds operate differently than spot Bitcoin Exchange Traded Funds.

• FB ETFs do not keep actual Bitcoin.

• Bitcoin futures contracts are used instead to get exposure to the crypto.

A Futures Bitcoin ETF allows investors to gamble and bet on the future price of the token.

Futures Bitcoin ETF can act differently from Spot Bitcoin ETF, and there may be expenses linked with rolling over or settling futures contracts.

Some Futures Bitcoin ETFs are structured to give leveraged or opposite exposure to a BItcoin giving investors the room to amplify both losses and gains.

3. Physically Backed Bitcoin ETF

A Physically Backed Bitcoin ETF is an ETF that keeps physical Bitcoin as part of its assets.

This means that the ETF owns and keeps the crypto.

Note: You can compare a Physically Backed Bitcoin ETF to a Spot Bitcoin ETF.

The only difference is that Spot Bitcoin ETF emphasises tracking the recent price of Bitcoin over physical ownership or settlement.

Bitcoin ETFs Today

The U.S. Securities and Exchange Commission (SEC) approved ETFs Bitcoin on the 10th of January.

This approval verified that Bitcoin investments are safe and the previous rally is evidence of an unstoppable victory.

This provides investors with many ways to get exposure to Bitcoin, which they can hold as long as they want.

Pros and Cons

Although Bitcoin ETFs have created an avenue for investors to trade and hold BTC without the fear of losing their investments due to the high volatility rate of crypto, BTC ETFs also hold some disadvantages.

However the good outweighs the bad, and to know what they are, here they are below.

 

Where To Buy Bitcoin ETFs

1. Online Brokerage Accounts

The brokerages normally have a search tool that lets users look for the fund by its ticker symbol or name and trade it.

After the approval of Spots Bitcoin ETFs, anyone can purchase these funds with brokerages such as Charles Schwab, Robinhood, Fidelity, and Interactive Brokers.

2. ETF Issuers

Traders can go to the ETF issuers portal and buy the product directly. There might be a need to have an account with a broker to be able to buy an ETF. When visiting the Hashdex website, for example, customers are required to pick one broker the issuer works with.

3. Robo-advisors

Betterment and Wealthfront can ease the purchase of Bitcoin ETFs by offering a low-cost, easily accessible, investing platform.

By allowing investments in crypto-related ETFs with moderately low minimum balance requirements, they serve new and old investors.

Normally, Robo-advisors offer automated portfolio management to the investor’s risk tolerance and objectives. These include investment selection, portfolio rebalancing, and asset allocation.

4. Traditional Banks

Anyone who wants to buy a Bitcoin ETF from a traditional bank will have to open a brokerage account with the investment division of the bank.

After creating the account, funding it, and activating it, investors can look for their preferred ETF.

Future of Bitcoin ETFs

Ever since the launch of the product, there has been interest from both traders and investors. Even if the SEC remains sceptical about BTC ETFs, it is no surprise that it has been a boost to Bitcoin itself, and the crypto markets in general.

The price of the world’s largest cryptocurrency has been on an upward trend for quite some time now, and analysts believe that ETFs are the main catalyst behind the price action.

These Exchange Traded Funds could bring more liquidity to the Bitcoin market while attracting a wider investor base and facilitating more effective price discovery.

Upon the approval of Bitcoin ETFs, Bitcoin price went up from $34k per Bitcoin to $42k. Although the market witnessed a few weeks of BTC retracing in price, the price of BTC has increased in value to $62k (as of the time of writing) ahead of the Bitcoin halving event set to take place in April 2024.

Not only this, but Bitcoin ETFs have set the tone in the markets, with Ethereum ETFs now being in the talks.

Even though the SEC is still far from being a final decision on the launch of a new ETF, analysts remain optimistic.

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