Bitcoin ETFs (Exchange-Traded Funds) explained
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6 min. read
A Bitcoin exchange-traded product offers price exposure through a securities account. That differs from holding BTC in your own wallet, particularly in fees, custody, trading hours and the rights attached to the investment.
If you know what ETFs are, you can skip this first bit.
What Are ETFs?
An ETF is an investment security that pools funds and functions like a mutual fund. ETFs follow specific indexes, sectors, commodities, or other assets. Unlike mutual funds, ETFs can be bought or sold on a stock exchange, like regular stocks. They can track the price of a single commodity or a diverse collection of securities. Some ETFs are designed to follow specific investment strategies.
ETF costs vary. Investors may pay ongoing fund expenses, trading commissions and a bid–ask spread. Exchange trading does not automatically make a product cheaper; compare the current prospectus and your broker’s charges.
Quick Recap
An exchange-traded fund (ETF) is a collection of securities that can be purchased and sold on an exchange, just like a stock.
ETF share prices change frequently throughout the day as investors buy and sell the ETF. This is in contrast to mutual funds, which are only traded once a day after the market closes.
ETFs can include various types of investments, such as stocks, commodities, or bonds. Some ETFs focus on U.S.-based holdings, while others have an international focus.
ETF costs depend on the fund and broker; low fees should be checked rather than assumed.
So now you understand ETFs a little better, let’s explain how spot Bitcoin products work, how they differ from futures exposure and what to check before using a brokerage account.
Status Quo
The SEC has approved previously Bitcoin futures ETFs, including the ProShares Bitcoin Strategy ETF. Other companies like VanEck, Valkyrie, Simplify Asset Management, and GlobalX have also launched bitcoin futures-linked ETFs (see below for differences between spot and futures-based ETFs).
On January 10, 2024, the SEC approved the listing and trading of a number of US spot Bitcoin ETP shares. Subsequent products operate under their own fund documents, fees and custody arrangements.
Product fees and temporary waivers can change. Check the issuer’s current prospectus and the broker’s terms rather than relying on the proposed fee comparisons circulated before the January 2024 launch.
The January 9, 2024 price discussion belongs to the period immediately before that decision. Market moves reflected several influences, so ETF expectations alone cannot establish the cause.
So what, exactly, is a Bitcoin ETF and how will I be able to invest?
A bitcoin ETF is a financial product that allows investors to track the price of bitcoin without owning the asset. It’s like investing in a gold ETF, where you’re betting on the price without owning physical gold.
A spot Bitcoin product offers exposure through shares, without requiring the investor to manage the underlying bitcoin keys. That convenience does not remove price, custody or product-structure risks.
Availability depends on the product, broker and investor’s jurisdiction or eligibility. Check whether your platform offers the actual ETP shares, rather than a derivative with a similar name.
Both spot and futures-based Bitcoin products are available in the U.S. Their structures, costs and risks differ. The SEC’s permission to list and trade a product does not endorse Bitcoin or guarantee its safety.
What are the types of bitcoin ETFs?
There are two main types of bitcoin ETFs: spot and futures.
Spot Bitcoin ETF
A bitcoin spot ETF is an exchange-traded fund designed to offer investors direct exposure to the current market price of bitcoin.
The term “spot” refers to the immediate or current price of the underlying asset, which is bitcoin itself. A bitcoin spot ETF typically holds actual bitcoin as its underlying asset and aims to closely track the real-time price of bitcoin.
Spot Bitcoin exchange-traded products exist in multiple jurisdictions, including the U.S. Commonly called spot Bitcoin ETFs, the U.S. products are generally structured as commodity trusts, distinct from funds registered under the Investment Company Act of 1940.
Futures Bitcoin ETFs
Futures ETFs do not physically hold bitcoin. Instead, they utilize bitcoin futures contracts to obtain exposure to the cryptocurrency. A bitcoin futures contract enables investors to speculate and make predictions on the future price of bitcoin.
Futures-based bitcoin ETFs can exhibit different behavior compared to spot bitcoin ETFs. There may be costs involved in rolling over or settling futures contracts. Certain futures-based bitcoin ETFs are specifically designed to offer leveraged or inverse exposure to bitcoin’s price. This allows investors to magnify both gains and losses.
Regulations and product offerings can change over time, so it’s important to keep yourself updated on the latest developments in the bitcoin ETF market, including any new product types that may emerge. Additionally, the availability and structure of bitcoin ETFs may vary by country and region due to regulatory factors and market demand.
Why are investors interested in bitcoin ETFs?
The demand for a bitcoin ETF is driven by the desire for easy access, convenience, and exposure to bitcoin as an asset class. Here are some key reasons for people’s interest in bitcoin ETFs:
Accessibility: ETFs are traded on stock exchanges, making it easy for mainstream investors to buy, own, and trade bitcoin-related assets through their brokerage accounts. This accessibility is especially appealing to investors unfamiliar with cryptocurrency exchanges or reluctant to use them.
Regulatory scrutiny: Listed products have disclosure and market rules, but oversight does not eliminate fraud, custody or underlying-market risks.
Portfolio diversification: Investors see bitcoin as a diversification tool. By using an ETF, they can include bitcoin in their portfolios without needing to directly hold and manage digital assets.
Traditional-Market Access: The products provide a brokerage route to Bitcoin exposure; listing approval is not official endorsement of the asset.
In Conclusion
U.S. spot Bitcoin ETP shares have been approved for listing and trading since January 10, 2024. They offer brokerage access to Bitcoin exposure, while futures products obtain exposure differently. Compare the structure, ongoing fees, custody arrangements and eligibility. Owning a share is not the same as controlling bitcoin in your own wallet.
