Hot Right Now: What is a Bitcoin ETF?

Written by

Eddie Mitchell

Cryptocurrency Writer

Right now, the crypto world is abuzz with the potential upcoming approval of a host of US spot Bitcoin ETF applications by heavyweight investment firms from the likes of BlackRock, ARK Invest, Invesco, Grayscale, WisdomTree, VanEck, Valkyrie, and Fidelity.

It all comes down to the U.S. Securities and Exchange Commission and whether they will give the go-ahead as hoped in Q1 2024. If given the green light, the SEC's approval will have far-reaching consequences for crypto investors across the world during this year and beyond.

But first, let's take a closer look at what's involved.

What is an ETF?

An exchange-traded fund (ETF) is a type of investment fund that is traded on traditional stock exchanges as common stocks are. ETFs track the performance of a particular index, asset class, commodity, sector, and so on.

Amongst several benefits, including taxes, convenience, and diversification, the most notable one is that ETFs provide investors with a heavily vetted and diversified portfolio of assets without needing to directly own the underlying securities.

Let’s look at what this means for Bitcoin (BTC).

What is a Bitcoin ETF?

A Bitcoin ETF is a highly regulated product that brings BTC investment options to institutional investors, granting them exposure to BTC without needing to hold any tokens themselves. 

ETFs are traded on stock exchanges, and the funds themselves hold the BTC tokens or Bitcoin futures contracts for their investors.

Spot ETFs versus Future ETFs

  • Spot Bitcoin ETFs: This fund tracks the price of BTC based on the market. Spot Bitcoin ETFs use actual Bitcoins as the underlying asset, as well as other Bitcoin-related stocks. At present there are 22 spot Bitcoin ETFs trading globally, none of which are based in the United States.
  • Bitcoin Futures ETFs: These track the price by following futures contracts. Bitcoin futures ETFs do not directly hold any Bitcoin tokens. They are composed of assets related to the price of BTC. Presently, the only underlying assets in them are Bitcoin futures contracts. There are several Bitcoin Futures ETFs available to trade on exchanges such as Nasdaq and the New York Stock Exchange in the United States.

Bitcoin ETF pros:

  • Access: Bitcoin ETFs are a gateway for highly regulated financial entities to invest in crypto. 
  • Trust: ETFs are a familiar investment vehicle. These crypto products are also being backed and traded by some of the biggest names on Wall Street.
  • Convenience: ETF investors do not need to go through the technical process of setting up their wallets, managing keys, etc.
  • Diversification:  ETFs can have more than one underlying asset. For example, a Bitcoin ETF could hold BTC, Tesla, Meta, and so on.
  • Regulated: These ETFs come with clear regulatory guidelines set by their respective governments.
  • Tax efficiency: Depending on the jurisdiction, investors may be able to defer capital gains taxes until they sell their ETF shares, instead of incurring taxes per transaction.
  • Lower cost: Investing via an ETF may be cheaper than directly purchasing and storing BTC.

Bitcoin ETF cons:

  • Volatility: Bitcoin ETFs do make it easier to trade digital currency, but are still subject to volatile price swings.
  • Custody: You do not own Bitcoin if you invest in a BTC ETF. There remains the risk of hacking, mismanagement, or other potential incidents on their behalf.
  • Counterparty risk: If there are additional intermediaries involved in the trading of ETF shares, investors should consider the financial health and reliability of these entities before investing.
  • Fees: Crypto-related ETFs are actively managed and can have higher fees than traditional ETFs.
  • Price tracking: Bitcoin ETFs don’t always follow the exact price action of BTC, which is especially true of futures contracts. 

Why are Bitcoin ETFs important?

With increased accessibility, Bitcoin ETFs make it easier for a broader range of investors to add Bitcoin or Bitcoin-related investments to their portfolios. Furthermore, this can spur mainstream adoption by being listed and traded on traditional stock exchanges.

There’s also the added benefit of regulatory oversight which can help mitigate concerns regarding security risks, market manipulation, and other troubles that are frequently associated with cryptocurrency markets. 

In addition, these regulatory safeguards grant investors greater protections when compared with investing directly in crypto. The EFT structure offers heightened security, transparency, and access to professional management and custody services, ultimately reducing risks and potential losses.

Moreover, Bitcoin ETFs contribute to an overall increase in liquidity for the cryptocurrency market. As ETFs trade on stock exchanges, investors are able to purchase BTC without directly impacting the underlying crypto market. In addition, this can bolster price discovery and establish more accurate pricing mechanisms for BTC, which could result in a more stable and efficient market.

Frequently Asked Questions

What is a Bitcoin ETF?

Bitcoin ETFs are regulated financial products that allow institutional investors to purchase BTC either directly or indirectly.

How to invest in Bitcoin ETF?

By opening up a trading account on your desired stock exchange, you can invest in Bitcoin ETFs.

Where to buy a Bitcoin ETF?

Bitcoin ETFs are available for purchase on major centralized stock exchanges such as Nasdaq and the New York Stock Exchange. Meanwhile, the SEC is currently reviewing spot Bitcoin ETF applications that are due to be decided on in January 2024.