What Are Bitcoin ETFs?

Exchange-traded funds that track the value of Bitcoin and trade on traditional market exchanges have gained popularity in recent years. These funds, known as spot Bitcoin ETFs, allow investors to gain exposure to the price movements of Bitcoin without actually owning the cryptocurrency itself. Bitcoin ETFs are designed to track the performance of Bitcoin by holding the cryptocurrency or futures contracts.

They offer a convenient way for investors to invest in Bitcoin without having to worry about the technical aspects of buying, storing, and securing the cryptocurrency. In this guide, we will explore what Bitcoin ETFs are, how they work, and the advantages and disadvantages of investing in them.

Key Takeaways

• Spot Bitcoin ETFs track the value of Bitcoin and trade on traditional market exchanges.
• They allow investors to gain exposure to the price movements of Bitcoin without actually owning the cryptocurrency itself.
• Bitcoin ETFs offer a convenient way for investors to invest in Bitcoin without having to worry about the technical aspects of buying, storing, and securing the cryptocurrency.
• Some Bitcoin ETFs have already been approved, but these trade futures contracts, unlike spot ETFs that track the live price of BTC.

How Do Spot Bitcoin ETFs Work?

Spot Bitcoin ETFs (exchange-traded funds) are investment funds that track the price of Bitcoin. The price of one share of the ETF fluctuates with the price of Bitcoin. If Bitcoin increases in value, so does the ETF, and vice versa. However, instead of trading on a cryptocurrency exchange, the ETF would trade on a market exchange like the NYSE or TSX. This allows investors to gain exposure to Bitcoin without the need to hold the cryptocurrency directly. Bitcoin ETFs are available for trading on traditional exchanges, making them more accessible to investors.

What are the Advantages of Bitcoin ETFs?

Convenience

Investing in a Bitcoin ETF provides a convenient way to gain exposure to Bitcoin’s potential without the need to learn about how Bitcoin works or sign up for a cryptocurrency exchange. Owning Bitcoin directly involves risks such as losing the password to a wallet, which can result in the loss of the Bitcoin forever. A Bitcoin ETF simplifies the process of investing in Bitcoin, allowing investors to leverage the price of Bitcoin without the hassle of owning it directly.

Diversification

A Bitcoin ETF can hold more than just Bitcoin. For instance, it could comprise assets such as Apple stocks, Facebook stocks, and more, providing investors with the opportunity to diversify their portfolios and mitigate risks. By trading on a regulated market exchange, a Bitcoin ETF would offer investors the chance to diversify their existing equity portfolios.

Tax efficiency

Since Bitcoin is unregulated and decentralized, most tax havens and pension funds do not allow for purchases of Bitcoin. However, a Bitcoin ETF trading on traditional exchanges would likely be regulated by the SEC and eligible for tax efficiency. This means that investors could benefit from tax advantages that come with investing in ETFs, such as tax deferral and reduced tax rates on capital gains.

What are the Disadvantages of Bitcoin ETFs?

Management fees

One of the main disadvantages of Bitcoin ETFs is the management fees. ETFs usually charge fees for the convenience they provide. Therefore, owning a significant amount of shares in a Bitcoin ETF could lead to high management fees over time. Investors need to carefully consider the fees associated with Bitcoin ETFs before investing in them.

ETF inaccuracy

Another disadvantage of Bitcoin ETFs is their inaccuracy in tracking the price of Bitcoin. While ETFs track the price of an underlying asset, they can also have multiple holdings in a bid to diversify the portfolio. This suggests that a 50% rise in the price of Bitcoin may not be accurately reflected in the value of the exchange-traded fund due to its other holdings. Therefore, while an ETF provides leverage to Bitcoin’s price, it may or may not be an accurate tracker of its price.

Limits to cryptocurrency trading

Bitcoin can be traded for other cryptocurrencies, like Ethereum, Litecoin, XRP, and more. However, a Bitcoin ETF would not be eligible to trade for other cryptos, as it is not a cryptocurrency but simply an investment fund that tracks the price of Bitcoin. This means that investors who are interested in trading other cryptocurrencies would need to buy them separately.

Lack of Bitcoin ownership

Bitcoin serves as a hedge against central banks, fiat currencies, and equities. By being independent of central banks, Bitcoin provides a way to mitigate risks associated with the financial system. Bitcoin also protects users and investors by providing privacy through the Bitcoin blockchain. However, a Bitcoin ETF would be regulated by the government, eliminating these benefits. Investors would not have direct ownership of Bitcoin and would not be able to use it as a hedge against central banks or for privacy purposes.

What Are The Bitcoin ETF Fees?

The Bitcoin ETFs have management and custody fees, which construe the overall expense ratio of buying and holding the ETF. Hence, it is important to be aware of the associated fees, as these significantly affect the costs and the potential profitability of holding Bitcoin ETFs in the long term.

The U.S. Securities and Exchange Commission (SEC) has been considering applications for spot bitcoin exchange-traded funds (ETFs) for several years. While the SEC has yet to approve a spot in Bitcoin ETF, several applicants are considered to be frontrunners in the race.

Valkyrie Bitcoin ETF

The Valkyrie Bitcoin ETF is a physically backed ETF that will track the price of Bitcoin by investing in Bitcoin. However, Valkyrie won’t be allowed to purchase BTC directly, which is why they have named authorized partners, such as JP Morgan, who will purchase the crypto on their behalf if approval is confirmed¹.

Fidelity Wise Spot Bitcoin ETF

The Fidelity Wise Spot Bitcoin ETF, developed by Fidelity Investments, seeks to provide investors with direct exposure to the price of Bitcoin by tracking the performance of the WisdomTree Bitcoin Trust (WBTC), a trust that holds and custodies physical Bitcoin².

ARK 21Shares Bitcoin SPOT ETF

The ARK 21Shares Bitcoin SPOT ETF, filed by Cathie Wood’s ARK Invest and digital-asset firm 21Shares, aims to provide investors with direct exposure to the price of Bitcoin without the complexities of directly purchasing and storing the cryptocurrency.

Invesco Galaxy Bitcoin ETF

Invesco Galaxy Bitcoin Spot ETF, filed by Invesco and Galaxy, aims to also provide investors with exposure to the price of Bitcoin while relying on Virtu and JP Morgan as its authorized partners that will purchase the crypto on their behalf if the ETF approval is confirmed. *Invesco waives fees for the first 10 months & $5 billion in assets, then imposes a 0.59% fee.

Comparison of Fee Structures

ETF	Initial Fees	Long-Term Fees
BlackRock	0.20%	0.30%
Valkyrie	0.80%	0.80%
Ark/21Shares	0.0%	0.25%
Fidelity	0.00%	0.39%
Invesco	0%	0.59%
Grayscale	1.50%	1.50%
VanEck	0.25%	0.25%

As you can see, the fee structure for spot bitcoin ETFs is very low, with the issuers seemingly competing for early market share gains³. Grayscale has some first-mover advantage, but its position could well be under threat as the competition is offering vastly cheaper options.

Final Thoughts on Bitcoin ETFs

Bitcoin ETFs have already been approved in several countries, including several European Union member states and Canada. However, approval from the SEC is seen as a major turning point by many analysts and investors. Speculation about approval has driven the crypto market into a frenzy, resulting in a massive surge to over $45k from its $16k low in 2022⁴. Several major financial players, including Fidelity and Blackrock, now appear to be on the cusp of having their ETFs listed on US stock exchanges, but only the SEC knows if approval is just around the corner⁵.

Frequently Asked Questions