In the ever-evolving landscape of cryptocurrencies, the spotlight now shines brightly on a financial innovation known as the Bitcoin Exchange-Traded Fund, or in short Bitcoin ETF. With the increased interest surrounding Bitcoin and the inherent complexities involved in owning Bitcoin and other cryptocurrencies, it’s no surprise that TradFi is looking into crypto ETFs to make crypto investing less hectic.

In the United States, financial giants like Blackrock, Fidelity, and Invesco have sought approval from the U.S. Securities and Exchange Commission (SEC) to launch Bitcoin ETFs, though approval remains pending as of September 2023. 

Meanwhile, Europe has already embraced this financial instrument, with Jacobi Asset Management launching Europe’s first Bitcoin ETF on August 15, 2023, making cryptocurrencies more accessible to both seasoned investors and newcomers alike.

What is a Bitcoin ETF?

In order to grasp the significance of Bitcoin ETFs, it’s essential to understand the broader concept of Exchange Traded Funds (ETFs).

Understanding traditional ETFs

ETFs are investment vehicles designed to mirror the performance of a specific index, commodity, or asset class. Essentially, an ETF is like a basket of different investments you can buy on a stock exchange, just like you would a single stock. 

The ETF pools funds from many people referred to as primary investors and invests in a collection of assets such as stocks, bonds, or even gold. So, when you buy a share of an ETF, you’re buying a tiny piece of that entire basket. It’s a way to easily and quickly invest in a group of assets without buying each one individually. 

For instance, if you invest in an ETF tracking the renowned S&P 500 index, you’re essentially acquiring a proportional stake in the companies listed within that index.

What sets ETFs apart from conventional mutual funds is their flexibility. ETFs can be traded throughout the trading day, just like individual stocks, in contrast to mutual funds, which are typically bought or sold at the end of the trading day at a price based on the asset’s net asset value (NAV). This inherent flexibility empowers investors to respond quickly to market fluctuations.

Beyond flexibility, ETFs offer various advantages. They are renowned for their cost-efficiency, with lower expense ratios than traditional mutual funds, allowing investors to retain a larger share of their returns. 

Additionally, ETFs are tax-efficient, often generating fewer capital gains distributions than mutual funds, translating into potential tax savings.

Moreover, ETFs offer investors diversification opportunities, enabling exposure to various asset classes, sectors, or regions through a single investment. This diversification helps spread risk and has the potential to enhance overall returns.

Let’s now have a look at what is a Bitcoin ETF.

Now, let’s turn our focus to Bitcoin ETFs specifically. Bitcoin ETFs track the price of Bitcoin through derivatives, spot markets, or direct Bitcoin ownership. 

Their fundamental purpose is to offer individuals a simplified means of allocating funds to Bitcoin without the complexities associated with cryptocurrency exchanges. 

Unlike the traditional process of purchasing Bitcoin through cryptocurrency exchanges, Bitcoin ETFs eliminate the need for extensive technical know-how and security measures. Instead, they offer a form of investment familiar to many – trading on stock exchanges.

So, how does a Bitcoin ETF work?

Understanding the inner workings of a Bitcoin Exchange-Traded Fund (ETF) is crucial for investors looking to venture into cryptocurrencies without the complexities of direct ownership. 

Let’s look at a concise breakdown of how these innovative financial instruments operate.

Investing in Bitcoin ETFs

When investors purchase shares of a Bitcoin ETF, they essentially acquire a slice of the fund itself, which holds Bitcoin as its underlying asset. The responsibility for managing these Bitcoin holdings and tracking their performance rests with the fund. 

The ETF shares’ price is determined by market demand and the Net Asset Value (NAV) of the underlying Bitcoin holdings – consider the NAV to be the per-share value of the fund.

Security and management

To ensure the security of these Bitcoin holdings, the fund provider takes measures to safeguard against theft or hacking attempts. 

Additionally, the fund provider handles the buying and selling Bitcoin, a process intricately tied to the demand for the ETF shares and the creation and redemption process.

Trading on stock exchanges

Investors enjoy the convenience of buying and selling shares of a Bitcoin ETF on traditional stock exchanges, much like trading any other publicly traded security. This flexibility empowers them to enter and exit their positions at any point throughout the trading day, responding promptly to market developments.

What are some of the key differentiators?

It’s essential to note that Bitcoin ETFs differ from traditional ETFs in several key ways. 

While ETFs tracking traditional indices yield dividends from the underlying equities, Bitcoin, being decentralized, does not provide such dividends. Additionally, investors in Bitcoin ETFs bear fees, with a portion allocated to cover custody and management expenses related to the purchase and storage of the underlying Bitcoin.

What are the different types of Bitcoin ETFs?

Bitcoin Exchange-Traded Funds (ETFs) offer a spectrum of investment options, each with distinct features. Here’s a concise overview of the diverse types of Bitcoin ETFs available:

Physically backed (spot) Bitcoin ETFs

These ETFs hold actual Bitcoin as their underlying asset. For every share, there’s a corresponding amount of securely stored Bitcoin. Investors indirectly own a portion of the held Bitcoin. Key considerations include the custodian’s security measures.

Futures-based Bitcoin ETFs

These funds do not hold Bitcoin directly but use futures contracts, deriving value from Bitcoin’s price. Investors gain exposure to Bitcoin’s price without owning it. With a future-based Bitcoin, the buyer is obligated to buy and the seller to sell a specific amount of Bitcoin at a predetermined price at a future date. They offer liquidity and flexibility but may not provide the same direct exposure. 

Bitcoin mining ETFs

Investors can tap into the profits of Bitcoin mining companies without buying individual stocks. These ETFs track mining companies’ performance, offering exposure to the growing mining industry and encouraging sector investment.

Short Bitcoin ETFs

Designed to profit from falling Bitcoin prices, these ETFs employ shorting strategies. Investors borrow Bitcoin, sell it at the current price, and aim to repurchase it at a lower price, profiting from the difference.

Long Bitcoin ETFs

Conversely, Long Bitcoin ETFs aim to profit from rising Bitcoin prices. Investors adopt long positions, agreeing to buy or sell Bitcoin at predetermined prices. These ETFs use derivatives and futures contracts to go long on Bitcoin.

A brief history of Bitcoin ETFs

Bitcoin Exchange-Traded Funds (ETFs) have charted a remarkable journey since 2013, revolutionizing cryptocurrency investments. Here’s a brief timeline of key milestones:

  • July 2013: The Winklevoss Bitcoin Trust files the first Bitcoin ETF proposal.
  • June 2018: The SEC rejects the Winklevoss’ second Bitcoin ETF proposal.
  • October 2019: The SEC rejects Bitwise’s Bitcoin ETF proposal.
  • February 2020: Wilshire Phoenix faces rejection of its Bitcoin ETF project by the SEC.
  • September 2020: The world’s first Bitcoin ETF is listed on the Bermuda Stock Exchange.
  • December 2020: VanEck files its latest proposal for a Bitcoin ETF.
  • February 2021: Canada’s first Bitcoin ETF launches, the Purpose Bitcoin ETF (BTCC). The Evolve Bitcoin ETF (EBIT) and the CI Galaxy Bitcoin ETF (BTCX) were approved the same month.
  • October 2021: The United States introduces its first Bitcoin ETF, the roShares Bitcoin Strategy ETF (BITO).
  • June 2023: SEC approves the 2x Bitcoin Strategy ETF (BITX) from Volatility Shares, introducing leveraged Bitcoin Futures ETFs.
  • August 2023: London-based Jacobi Asset Management launches Europe’s first Bitcoin ETF.
  • August 2023: Grayscale secures an appeal victory against the SEC to transform the Bitcoin Trust into an ETF.

Why do we need a Bitcoin ETF?

Investing in Bitcoin offers multiple avenues, including direct purchases or investments in related companies. However, Bitcoin Exchange-Traded Funds (ETFs) introduce several compelling reasons for their necessity:

Regulated Accessibility

Bitcoin ETFs provide a regulated and accessible channel for investors to enter the world of Bitcoin. This is particularly attractive to those unfamiliar with the complexities of cryptocurrency exchanges. Regulatory oversight adds an extra layer of protection and transparency.

Simplified Exposure

With a Bitcoin ETF, investors gain exposure to Bitcoin’s price without the need to hold the digital currency directly. This eliminates the intricacies and security challenges of storing and safeguarding Bitcoin. ETFs also enhance liquidity and reduce transaction costs, allowing for easy buying and selling.

Broadened Accessibility

Many investors, whether retail or institutional, have restrictions on holding Bitcoin directly. ETFs offer a compliant avenue for them to access this asset class. 

Moreover, Bitcoin ownership entails securing private keys and navigating tax implications. A Bitcoin ETF streamlines these processes, providing a hassle-free means of participating in the cryptocurrency market. As such, the appeal of Bitcoin ETFs transcends novice and seasoned investors alike, prompting continued interest and applications for regulatory approval.

What are the drawbacks of a Bitcoin ETF?

While Bitcoin Exchange-Traded Funds (ETFs) offer numerous advantages, they come with certain disadvantages that investors should consider:

No Actual Ownership of Bitcoin

Bitcoin’s appeal lies in its decentralized nature and its role as a hedge against traditional financial systems. However, Bitcoin ETFs are subject to government regulations, erasing some advantages, such as privacy and protection offered by the Bitcoin blockchain.

Fees

Bitcoin ETFs levy fees to cover fund management costs – just like most ETFs. Investors should scrutinize the ETF’s expense ratio to understand the percentage of their holdings allocated to these fees. Lower expense ratios are more favorable for investors.

Restrictions to Cryptocurrency Trading

Bitcoin can be freely traded for various cryptocurrencies like Ethereum and Litecoin. In contrast, Bitcoin ETFs are investment funds tracking Bitcoin’s price, making them incompatible for trading with other cryptocurrencies.

ETF Inaccuracy

While Bitcoin ETFs aim to mirror Bitcoin’s price, they often hold diverse assets to diversify their portfolios. Consequently, Bitcoin price fluctuations may not be precisely reflected in the ETF’s value. This discrepancy can affect the accuracy of the ETF in tracking Bitcoin’s price closely.

Investors should weigh these drawbacks against the benefits when considering Bitcoin ETFs as part of their investment strategy.

Some of the top Bitcoin ETFs

Let us look at some of the top ETFs tracking Bitcoin.

  1. ProShares Bitcoin Strategy ETF (BITO): With an expense ratio of 0.95% and $883.2 million in assets, this ETF provides exposure to Bitcoin through futures contracts, allowing investors to profit from a decline in Bitcoin prices.
  2. VanEck Bitcoin Strategy ETF (XBTF): This ETF has an expense ratio of 0.66% and $45 million in assets, offering investors access to Bitcoin through futures contracts.
  3. AdvisorShares Managed Bitcoin Strategy ETF: This ETF aims to provide long-term capital appreciation by investing in Bitcoin futures contracts and other Bitcoin-related investments.
  4. Valkyrie Bitcoin Strategy ETF (BTF): With an expense ratio of 0.95%, this ETF seeks to track the performance of Bitcoin futures contracts and other Bitcoin-related investments.
  5. Global X Blockchain & Bitcoin Strategy ETF (BITS): This ETF offers a hybrid strategy for Bitcoin investors, with around 46% of its holdings in the Global X Blockchain ETF (BKCH) and the rest in Bitcoin futures contracts.
  6. BlackRock Bitcoin ETF: This ETF, submitted by BlackRock, is a spot Bitcoin ETF that is currently awaiting approval from the U.S. Securities and Exchange Commission (SEC).
  7. GrayScale Bitcoin ETF: Another spot Bitcoin ETF awaiting approval. This ETF is submitted by GrayScale, a digital currency asset manager.

Frequently Asked Questions (FAQ)

Are Bitcoin ETFs a good investment?

Investing in a Bitcoin ETF is highly speculative, and there are potential drawbacks to consider, such as high expenses and the newness of the cryptocurrency market. However, if you’re looking for exposure to Bitcoin without having to deal with the underlying asset, then a Bitcoin ETF could be a good option for you. 

Are Bitcoin ETFs safe?

Investing in a Bitcoin ETF is not without risks, but it is generally considered safer than investing in Bitcoin directly. A Bitcoin ETF involves none of the risks associated with storing and securing Bitcoin, such as hacking and losing access to your Bitcoin. 

What’s the difference between Blockchain ETFs and Bitcoin ETFs?

Blockchain ETFs invest in companies that use blockchain technology, while Bitcoin ETFs invest in Bitcoin futures contracts. Blockchain ETFs are considered less risky than Bitcoin ETFs because they are not directly tied to the volatile cryptocurrency market. 

Does GrayScale have a Bitcoin ETF?

GrayScale does not currently have a Bitcoin ETF, but it does offer a Bitcoin Investment Trust (GBTC), which is a publicly traded trust that holds Bitcoin. 

When will the SEC approve the Blackrock Bitcoin ETF?

The SEC has yet to approve Blackrock’s Bitcoin ETF, and it is unclear when or if it will be approved. The SEC has previously rejected several Bitcoin ETF proposals due to concerns about market manipulation and lack of regulation in the cryptocurrency market.