The Ultimate Guide to Bitcoin ETFs

Bitcoin ETFs, short for Exchange Traded Funds, offer investors a gateway to the Bitcoin and crypto market without the need for direct cryptocurrency management. While we’ll primarily delve into Bitcoin ETFs in this article, it’s worth noting that there are ETFs centered on other cryptocurrencies as well. For instance, ArkInvest and 21Shares recently submitted an application for an Ethereum Spot ETF.

Now, returning to Bitcoin ETFs, there are two main categories: Bitcoin Spot ETFs and Bitcoin Futures ETFs. Spot ETFs closely mirror the current price of Bitcoin, whereas Futures ETFs deal with Bitcoin futures contracts, which can be a bit more intricate in price calculation. Notably, the applications from BlackRock, Invesco, Ark Invest, and Fidelity for Bitcoin Spot ETFs indicate a potential surge in interest and growth in this investment avenue.

What Is an ETF?

An Exchange Traded Fund (ETF) is an investment fund traded on stock exchanges, like stocks. Unlike mutual funds, ETFs are traded throughout the day and their prices fluctuate based on supply and demand. This grants investors increased liquidity and flexibility in trading.

Why Bitcoin ETFs are Important

Major financial institutions creating their own Bitcoin ETFs could be the key (or at least one of them) to mainstream adoption of crypto. For older generations, cryptocurrency can be a scary subject, and due to negative press coverage is just an avenue for all kinds of nefarious and shady activities (money laundering, tax evasion, the sale of illegal substances, rug pulls, etc…) If you consult the majority of people, cryptocurrency is also terrible for the environment.

From a purely practical point of view, buying and storing Bitcoin and crypto can be overwhelming. Blockchain and cryptocurrencies have been around for less than twenty years, so these concepts might seem very foreign to older individuals. The idea of storing a purely digital, decentralized, and intangible asset (technically the cryptographic keys to access those assets on a blockchain) and being fully responsible is something a lot of people might not be comfortable with.

Bitcoin ETFs therefore have the potential to bridge the gap between the new and old financial paradigms. Interested investors can gain exposure to this new asset class, while not having to deal with setting up wallets, seed phrases, or any other alien concepts associated with Bitcoin and crypto.

Additionally, ETFs are regulated financial products and can be purchased through traditional brokerage accounts, rather than through crypto exchange. This obviously gives investors more peace of mind.

In the next section, we’ll look at Bitcoin Spot and Futures ETFs and discuss the differences.

What Are Bitcoin Spot ETFs?

Bitcoin Spot ETFs directly hold actual Bitcoins. When an investor buys shares of a Spot ETF, they effectively own a representation of the real Bitcoin value, even though they don’t possess the cryptocurrency themselves. Spot ETFs bring Bitcoin into a regulated framework, making it more accessible to traditional investors.

Of the many Bitcoin Spot ETF applications in front of the SEC, it’s proposed that Coinbase will act as the custodian of the actual Bitcoin.

Advantages of a Bitcoin Spot ETF for Investors

Bitcoin Spot ETFs may suit many investors for a variety of reasons.

Firstly, they provide exposure to Bitcoin’s price movements without the necessity for actively managing or storing the cryptocurrency. As mentioned above, a lot of investors may be nervous about the intangible and decentralized nature of crypto. The two heretofore options of either self-custody or keeping on an unregulated exchange have likely deterred a lot of potential investors.

Bitcoin ETFs could alleviate concerns about the security of digital wallets, providing a convenient and secure means of accessing Bitcoin’s potential without exposure to the risks of crypto exchanges or the unfamiliar territory of digital wallets.

Additionally, these ETFs operate within the established framework of stock trading, offering a layer of regulatory oversight and trust to a broader audience.

Things to Consider Before Investing in a Bitcoin Spot ETF

Bitcoin ETFs come with their own set of considerations. Firstly, there’s the issue of price volatility, as their value is closely tied to the fluctuating price of Bitcoin. Additionally, there’s the potential for divergence from Bitcoin’s actual performance, partly due to associated fees and administrative factors. Moreover, investors should be aware of higher trading costs with ETFs compared to direct spot crypto trading.

What is a Bitcoin Futures ETF?

A Bitcoin Futures ETF doesn’t hold Bitcoin directly. Instead, it invests in Bitcoin futures contracts, allowing investors to speculate on future price movements without owning the cryptocurrency.

Benefits of Bitcoin Futures ETFs

When it comes to Bitcoin Futures ETFs, there are some clear advantages. First off, these operate in a regulated environment, giving investors the assurance that they’re working within established standards.

They also offer excellent liquidity, meaning investors can buy or sell them easily on stock exchanges. Additionally, investors can take advantage of the volatility of the cryptocurrency market in this highly regulated and well-established forum. This is advantageous for investors who want to short Bitcoin but do not want to do so through an unregulated cryptocurrency exchange.

Considerations for Bitcoin Futures ETFs

Now, there are a few things to keep in mind with Bitcoin Futures ETFs. They can be a bit more complex compared to other investment options, as they’re tied to the futures market, which can be quite intricate.

Additionally, there’s the matter of counterparty risks. This means that if the counterparty involved in the futures contract doesn’t hold up their end of the deal, it could pose a potential risk for investors. So, while there are benefits, it’s crucial to be aware of these factors before investing.

The future of ETFs

Prominent institutions like BlackRock, Invesco, Ark Invest, and Fidelity have applied for Bitcoin Spot ETFs in 2023. At the time of writing none of these spot ETFs have received approval from the Securities and Exchange Commission. In the past, several spot ETF applications have been rejected (mainly on the grounds that the assets are too volatile). However, with big names like Blackrock throwing their hat in the ring, the market expects that the first US spot ETF will be approved sometime this year.