Bitcoin ETFs are securities that aim to track the price of Bitcoin.
It can provide a simpler way to invest in Bitcoin for people who don’t have a wallet or exchange account.
There are different types of ETFs that operate in different ways, including futures and spot.
In early January 2024, the SEC approved the public trading of several spot Bitcoin ETFs, including options such as iShares Bitcoin Trust (IBIT), Grayscale Bitcoin Trust (GBT), and Fidelity Wise Origin Bitcoin Fund (FBTC).
Risks, benefits, and regulatory issues are just a few things to consider when considering a Bitcoin ETF as an investment.
Many financial assets have exchange-traded funds (ETFs). It is an investment vehicle that provides exposure to a basket of related assets. For example, there are ETFs for technology stocks, semiconductor stocks, defense stocks, corporate bonds, government bonds, etc.
The most common ETF providers include large investment firms such as Blackrock, iShares, and Van Eck. These companies hold a variety of individual stocks, issue ETF shares, and offer those shares to the public on stock exchanges.
In the case of Bitcoin, a spot ETF involves an asset manager creating an ETF based on Bitcoin rather than stocks.
What is a Bitcoin ETF?
A Bitcoin ETF is a fund that provides investors with exposure to Bitcoin. Shares in a fund represent ownership of something related to Bitcoin. It has a ticker symbol and can be traded on exchanges like individual stocks.
The main difference between Bitcoin ETFs and traditional ETFs has to do with the assets underlying the ETF shares. Most funds hold a basket of stocks or bonds. Bitcoin ETFs hold Bitcoin or assets related to Bitcoin. Futures ETFs hold futures contracts or bet on the price of Bitcoin. Spot Bitcoin ETFs only hold Bitcoin.
Types of Bitcoin ETFs
Not all Bitcoin ETFs are created equal. Depending on the type of ETF, investors can purchase very different products. The two main types of Bitcoin ETFs are Bitcoin futures ETFs and spot Bitcoin ETFs.
Until January 2024, the US market primarily offered Bitcoin futures ETFs. These ETFs invest in futures contracts, which are contracts to buy or sell Bitcoin at a predetermined price in the future. They aim to track the Bitcoin price but do not provide direct exposure to the actual Bitcoin asset. Futures ETFs often carry higher fees and greater volatility than cash ETFs. They are generally better suited to sophisticated investors who understand the complexities of futures contracts, including the need for continuous rollover of these contracts. This rollover process may incur additional costs, known as rollover fees, which are passed on to ETF shareholders.
In contrast, the Spot Bitcoin ETF, approved by the SEC in January 2024, provides direct exposure to Bitcoin. These ETFs hold actual Bitcoin, and their shares represent proportional ownership of that coin. Managed by trusted custodians, spot ETFs aim to reflect the real-time value of Bitcoin, providing a simpler investment option for those seeking direct exposure to cryptocurrency price movements. In some cases, spot ETFs may allow shareholders the option to redeem their shares for native Bitcoin, but this may vary depending on the policies of the specific ETF and market conditions.
Investors should carefully consider these differences when choosing between futures and spot Bitcoin ETFs. While futures ETFs may appeal to those with a deeper understanding of derivatives markets and a higher risk appetite, spot ETFs may be better suited to investors seeking a more direct and potentially less complex investment in Bitcoin. As with all investments, it is important to compare the specific characteristics and risks of each ETF type to your investment strategy and risk tolerance.
Benefits of Investing in Bitcoin ETF
For both institutional and retail investors, Bitcoin ETFs offer a simple and easy way to invest in Bitcoin. Other large investors, such as institutions and family offices, have no clear way to invest in Bitcoin while complying with regulatory standards.
For the average individual, buying and holding Bitcoin requires some research and technical knowledge. Learning how to sign up for an exchange account, maintain a self-custodial wallet, and manage a portfolio are responsibilities that some people may not want to take on.
Bitcoin ETFs can easily solve these obstacles. Taking responsibility for the security of your coins becomes meaningless. Investors can purchase and hold stocks in a brokerage account or retirement account. Regulatory issues also disappear. To be listed on an exchange such as the NYSE, a product must be approved by the SEC. Trading these securities can be done easily.
Risks and Things to Consider Regarding Cryptocurrency ETFs
Investing in a Bitcoin ETF, whether spot-based or futures-based, means exposure to the inherent volatility of the underlying cryptocurrency. This volatility can lead to significant price fluctuations and is an important factor for investors to consider. Although these ETFs provide a more accessible investment path into Bitcoin, they do not protect investors from the high volatility of the market.
Compared to owning Bitcoin directly, spot Bitcoin ETFs hold actual Bitcoin with the goal of closely tracking the market price. However, investors should be aware of potential tracking errors. This error occurs when the ETF’s stock price does not perfectly reflect Bitcoin’s price movements due to factors such as fund expenses and trading timing. This discrepancy may affect the performance of your investment compared to holding Bitcoin directly.
Regulatory uncertainty is another important consideration. The cryptocurrency market is still evolving, and changes in regulation may affect the legality, trading, and valuation of Bitcoin ETFs. For example, future regulatory developments may affect operational aspects of the ETF, such as custody and compliance requirements, potentially affecting the performance and accessibility of the ETF.
Additionally, investors should be mindful of the custody risks associated with spot Bitcoin ETFs. These ETFs hold large amounts of Bitcoin, making them attractive targets for cybercriminals. Although ETF managers take strong security measures, Bitcoin’s digital nature makes it vulnerable to cybersecurity risks. A successful breach could have serious implications for the stability of the ETF and investor confidence. Therefore, before investing in a Bitcoin ETF, it is essential to understand these risks and how they align with your personal risk tolerance and investment objectives.
How to Invest in Bitcoin ETF
Investing in a Bitcoin ETF is not that difficult. It just takes some research and trading.
First, investors must decide which ETF is right for them. Factors to consider include associated fees (known as expense ratios), stock price, and the assets in which the fund invests. You can then go to your brokerage account, enter the ticker symbol, and place your trade. For example, BITO is a Bitcoin futures ETF. It can be traded like stocks.
Of course, it is up to each individual investor to determine their ideal allocation to Bitcoin.
Path to U.S. regulatory approval
For years, investment firms have struggled to bring Bitcoin ETFs to market. That’s because U.S. regulators are reluctant to approve such products.
For example, Grayscale has attempted several times to convert the highly trusted Grayscale Bitcoin Trust (GBTC) into a spot ETF. It was rejected by the Securities and Exchange Commission (SEC) each time before January 2024.
Throughout 2023, many of the world’s largest asset managers have begun filing for spot Bitcoin ETFs with the SEC. Fidelity, Blackrock, and Charles Schwab were a few names on the list. These investment products will eventually all be approved simultaneously on January 10, 2024.
So why did it take the SEC so long to give such approval? The answer to this question is long and complex, and an entire article could be devoted to it.
In the distant past, Bitcoin was such a new and unfamiliar asset class that it was no surprise that regulators wanted nothing to do with it. Bitcoin was perceived as insecure, insecure, and too volatile.
Recently, negative events surrounding Bitcoin and cryptocurrencies may have played a role. In 2022, the Luna and UST stablecoins collapsed, followed by the FTX exchange and many centralized lenders such as Celsus, BlockFi, and Vauld. Considering the scale of this failure and how it reflects negatively on the entire cryptocurrency industry, regulators’ approval of a spot Bitcoin ETF in January 2024 is a positive sign for cryptocurrencies.
You can learn a lot about why the regulatory approval was granted in the following resources: January 10 Statement from SEC Chairman Gary Gensler. Several statements stand out in his comments:
“Importantly, the Commission’s action today concerns ETPs that hold Bitcoin, a non-secure commodity.”
In other words, while the SEC has been willing to approve Bitcoin-only products, it may be more reluctant to approve exchange-traded products for other cryptocurrencies. Gensler has expressed similar sentiments several times in the past. He expressed his view that Bitcoin is a commodity and other cryptocurrencies are securities.
Gensler also explained that the decision to approve an all-Bitcoin spot ETF was influenced by: SEC loses Grayscale lawsuit:
Approved ETFs
On January 10, 2024, the SEC approved 10 different spot ETFs simultaneously. Fidelity, iShares, BitWise, Invesco and many others have now listed Bitcoin ETFs on the NYSE. Here is the list of spot Bitcoin ETFs and their fees as of January 22, 2024:
- Bitwise Bitcoin ETF (BITB): 0.20%
- Ark 21Shares Bitcoin ETF (ARKB): 0.21%
- iShares Bitcoin Trust (IBIT): 0.25%
- VanEck Bitcoin Trust (HODL): 0.25%
- Fidelity Wise Origin Bitcoin Fund (FBTC): 0.25%
- Franklin Templeton Digital Holdings Trust (EZBC): 0.29%
- WisdomTree Bitcoin Fund (BTCW): 0.30%
- Invesco Galaxy Bitcoin ETF (BTCO): 0.39%
- Valkyrie Bitcoin Fund (BRRR): 0.80%
- Grayscale Bitcoin Trust (GBTC): 1.50%
These ETFs are designed to track the price of Bitcoin, with the funds holding actual “physical” BTC. However, there is no guarantee that stock prices will provide the same exact returns as the underlying assets.
Grayscale’s GBTC was converted from a trust to an ETF at the same time that other new ETFs were approved. The nine new funds saw inflows of $2.9 billion in the first four days of trading, while GBTC saw outflows of $1.62 billion.
A wrap-up on the Bitcoin ETF (for now)
In summary, Bitcoin ETFs offer Bitcoin to a much broader pool of investors. For most of Bitcoin’s history, it has been difficult for certain groups of people to invest directly in Bitcoin. Now that spot ETFs have been approved, that has changed.
Investing in a Bitcoin ETF is similar to investing in other securities. Investors can select the appropriate ticker symbol and place a buy order with their preferred broker.
Anticipation of ETF approval was seen as a big factor in Bitcoin’s 150% rise in 2023. The price has since fallen about 20%, falling below the $40,000 level.
Now that a mainstream investment vehicle for Bitcoin has been launched, it is likely to spark huge demand in the market.
All information in this article is provided for educational purposes only and should not be construed as investment advice. BitPay assumes no liability for errors, omissions, or inaccuracies. The opinions expressed are solely those of the author and do not reflect the views of BitPay or its management. Please consult a professional for guidance regarding investments or finances.