“ETF” stands for Exchange Traded Funds. Think of it as a basket containing a large number of assets – in this case Bitcoin or something closely related to its price. The basket is then traded on the stock exchange just like regular stocks.
So instead of buying actual Bitcoin and figuring out how to store it safely, you can buy shares of this ETF. When the price of Bitcoin increases, the value of your ETF shares should also increase, and vice versa. In this guide, we’ll explain what a Bitcoin ETF is, how it works, its pros and cons, and the future of crypto ETFs.
What is a Bitcoin ETF?
A Bitcoin exchange-traded fund (ETF) is a financial product designed to track the price of Bitcoin. It enables investors to understand Bitcoin’s price movements No need to buy, store or manage cryptocurrencies directly. Bitcoin ETFs trade on traditional stock exchanges and can therefore be traded through regular brokerage accounts.
For example, iShares Bitcoin Trust (IBIT) It is one of the well-known Bitcoin ETFs, with assets under management (AUM) of approximately US$55.44 billion. same, Grayscale Bitcoin Trust (GBTC) It holds approximately US$19.98 billion in assets.
(Bitcoin ETF overview, source: CoinGlass ETF Tracker)
How do Bitcoin ETFs work?
Bitcoin ETFs work by tracking the market price of Bitcoin. When you invest in a Bitcoin ETF, you purchase shares of the fund that represent the value of Bitcoin. The fund may hold actual Bitcoin (such as a spot ETF) or utilize financial instruments such as futures contracts to replicate Bitcoin’s performance.
For example, Fidelity Wise Origins Bitcoin Fund (FBTC) Designed to keep investors informed of Bitcoin’s daily price movements. Investors can buy and sell FBTC shares through a traditional brokerage account.
Types of Bitcoin ETFs
Bitcoin Futures ETF
The Bitcoin Futures ETF invests in BTC futures contracts rather than directly holding the cryptocurrency. In simple terms “A futures contract is an agreement to buy or sell Bitcoin at a predetermined price on a specific date in the future.”
These ETFs are designed to track the expected future price of Bitcoin, which can sometimes lead to differences between the ETF’s value and Bitcoin’s current market price.
An example is ProShares Bitcoin Strategy ETF (BITO)One of the first approved Bitcoin futures ETFs in the United States, it provides investors with the opportunity to invest in Bitcoin through futures contracts traded on the Chicago Mercantile Exchange (CME).
Spot Bitcoin ETF
Spot Bitcoin ETFs hold actual Bitcoins and are designed to closely reflect the current market price of the cryptocurrency. Investing in spot ETFs provides direct exposure to Bitcoin’s price movements without requiring investors to manage a digital wallet or deal with cryptocurrency exchanges.
this iShares Bitcoin Trust (IBIT) is an example of a spot Bitcoin ETFManage a large number of assets and provide investors with a direct way to gain access to Bitcoin investments.
Advantages of Bitcoin ETFs
convenient
One of the biggest draws of Bitcoin ETFs is their convenience. if you have ever tried buy bitcoin Directly, you know this can be a bit of a hassle.
You need to set up an account with a cryptocurrency exchange, complete the verification process, learn how to use a digital wallet, and then worry about how to protect your Bitcoins from hackers.
Bitcoin ETFs simplify this. You can buy and sell them through a regular brokerage account, just like you would buy stocks or other ETFs. No special cryptocurrency exchange or wallet is required. This is all handled within the familiar framework of traditional investing. This makes Bitcoin more accessible to a wider range of investors.
diversification
Another benefit of a Bitcoin ETF is diversification. Now, this doesn’t mean you want to diversify within the ETF itself, since it primarily tracks Bitcoin. Rather, it’s about diversifying your overall portfolio.
Let’s say you have a portfolio of stocks and bonds. The addition of a Bitcoin strategy ETF could introduce a new asset class that doesn’t always move in the same direction as traditional assets. This may reduce the overall volatility of your portfolio. If stocks fall, Bitcoin may rise and vice versa, which helps balance your returns.
tax efficiency
In some cases, Bitcoin ETFs can provide tax benefits compared to owning Bitcoin directly. This is a bit complicated and may vary depending on your specific tax situation and location.
Generally speaking, when you sell Bitcoin outright, a taxable event may be triggered, either as a capital gain or a capital loss. With a Bitcoin ETF, some of these tax events may be deferred or handled within the fund, simplifying your tax reporting and potentially reducing your tax burden.
Disadvantages of Bitcoin ETFs
management fee
These are fees charged by the company that manages the ETF to cover its operating expenses. While these fees may seem small, they can eat into your returns over time, especially if you’re a long-term investor.
When you own Bitcoin directly, you don’t have to pay any ongoing management fees. Fees are only incurred when you buy or sell on an exchange. So with ETFs, you’re essentially paying for the convenience of not having to manage your Bitcoins yourself. This is a trade-off to consider.
ETF is incorrect
Bitcoin ETFs aim to track the price of Bitcoin as closely as possible. However, they are not always perfect. There may be a discrepancy between the price of an ETF and the actual price of Bitcoin. this is called “Tracking error”.
Several factors can cause tracking error, such as the ETF’s transaction costs, the way the assets are held, and market volatility. While these differences are usually small, they can still affect your returns.
Limitations on Cryptocurrency Trading
When you own Bitcoin directly, you have complete control over it. You can send it to anyone, use it to make purchases (if accepted), and participate in other cryptocurrency activities. Bitcoin ETFs don’t offer this level of flexibility.
With an ETF, you are essentially just investing in the price of Bitcoin. You can’t actually use it like real Bitcoin. This may not be a big deal for some investors, but it’s something to consider if you’re interested in actively using cryptocurrencies.
Lack of Bitcoin Ownership
When you buy a Bitcoin ETF, you don’t actually own any Bitcoin. The ETF provider owns the Bitcoin, and you own shares of the ETF. This means you have no control over the private keys to your Bitcoins, just like the passwords that allow you to access your Bitcoins.
In the encryption world, there is a saying: “Not your keys, not your coins.” This highlights the importance of controlling one’s own private keys for security and autonomy.
With a Bitcoin ETF, you trust the ETF provider to hold your Bitcoin safely. While reputable providers have strong security measures in place, there is always a small amount of counterparty risk.
The future of cryptocurrency ETFs
- More crypto assets: Currently, most crypto ETFs focus on Bitcoin or Ethereum. In the future, we may see ETFs tracking other cryptocurrencies or even a basket of different cryptocurrencies.
- New ETFs: In addition to tracking the price of cryptocurrencies, we may see more sophisticated ETFs. For example, there may be ETFs that focus on blockchain technology companies, or even ETFs that use strategies to try to beat the market.
- Strengthen supervision: As crypto ETFs become more popular, governments are likely to create more rules and regulations around them. The move is intended to protect investors and make the market safer.
- wider adoption: Since ETFs are easy to buy and sell through regular brokerage accounts, they can attract more people to the cryptocurrency market.
- Pay attention to safety: Security is a big issue in the encryption world. Future crypto ETFs are likely to place a strong emphasis on protecting the security of the underlying assets. This may involve using advanced cold storage solutions and working with trusted custodians.
- Competition and lower fees: As more and more companies launch cryptocurrency ETFs, market competition will become more intense. This could lower management fees for investors, making these products more attractive. Lower fees mean more returns stay in investors’ pockets.
in conclusion
In short, cryptocurrency ETFs are great for investing in digital currencies. They provide a simple and convenient way to acquire assets like Bitcoin without the complexity of direct ownership. Although there are some drawbacks, such as management fees and not actually owning the underlying cryptocurrency, their ease of use and diversification potential make them attractive to many investors.
Looking ahead, the future seems bright for crypto ETFs. We can foresee a wider range of crypto-assets being tracked, innovative ETF structures, and increased regulation.
FAQ
Is it safe to buy Bitcoin ETFs?
Yes, for many investors, investing in a Bitcoin ETF is safer than buying Bitcoin directly. This is because ETFs trade on regulated stock exchanges and are managed by reputable financial institutions, compared to unregulated cryptocurrency exchanges. However, as with any investment, there are risks associated with Bitcoin ETFs. Bitcoin is known for its high volatility, which means the value of an ETF can fluctuate significantly. Additionally, factors such as management fees and tracking errors can affect your returns.
Which ETF is best for Bitcoin?
The best Bitcoin ETFs are ProShares Bitcoin Strategy ETF (BITO), Grayscale Bitcoin Trust (GBTC), and Valkyrie Bitcoin Fund. Here are some popular Bitcoin ETFs:
- ProShares Bitcoin Strategy ETF (BITO): This is the first Bitcoin futures ETF allowed in the United States. It is ideal for investors looking to trade Bitcoin futures without direct ownership.
- Grayscale Bitcoin Trust (GBTC): Although not an ETF in the traditional sense, it provides exposure to the price of Bitcoin through stocks that trade on the stock market. It has one of the largest assets under management in cryptocurrency investing.
- Valkyrie Bitcoin Strategy ETF (BTF): Similar to BITO, this ETF tracks Bitcoin futures and provides a regulated way to invest in Bitcoin.
Is BTC ETF approved?
Yes, several Bitcoin ETFs were approved in January 2024, marking an important moment for the cryptocurrency market. Major companies such as BlackRock and Fidelity have launched Bitcoin ETFs following approval.
Does a Bitcoin ETF exist?
Yes, Bitcoin ETFs do exist and are actively traded on stock exchanges around the world. In the United States, there are Bitcoin ETFs such as BITO and BTF. In Canada, investors can purchase spot Bitcoin ETFs such as the Purpose Bitcoin ETF (BTCC) and the Evolve Bitcoin ETF (EBIT).
