Bitcoin ETFs Demystified: A Comprehensive Guide

As the crypto space continues to evolve, a new investment vehicle has emerged as a game-changer for mainstream adoption. Can you imagine investing in Bitcoin without the hassle and risks of crypto wallets, exchanges, and private keys? Think of a Bitcoin ETFs

Buying, holding, or selling Bitcoins can be confusing and intimidating for new investors. However, a Bitcoin Exchange-Traded Fund (ETF) helps new and experienced investors gain exposure to Bitcoin without actually owning it.

This comprehensive guide is designed to provide an in-depth understanding of Bitcoin ETFs, a brief history, the types, and the advantages and risks associated with investing in them.

What is a Bitcoin ETF?

ETFs are investment vehicles that track the underlying performance of an asset, commodity, or index, offering a diversified portfolio in a single tradable security.

Therefore, a Bitcoin ETF is a financial instrument that tracks the price of Bitcoin, allowing investors to gain exposure to Bitcoin’s current value without directly holding the asset. 

While Bitcoin, the asset itself, can be bought on a crypto exchange, Bitcoin ETFs are only available on traditional regulated securities exchanges.

A Brief History 

There are some important dates to note in the history of Bitcoin ETFs.

For instance, in 2013, the Winklevoss twins, Tyler and Camron, filed the first Bitcoin ETF proposal with the US Securities and Exchange Commission (SEC). Still, the body rejected it in 2017 along with other proposals, citing market volatility and regulatory concerns.

In 2018, the SEC started adopting a more flexible approach, giving the green light to Bitcoin futures ETFs, which track futures contracts rather than the spot market.

Between 2019 and 2020, the SEC approved the first and second Bitcoin futures ETFs, the ProShares Bitcoin Strategy ETF (BITO) and the VanEck Bitcoin Strategy ETF (XBTF).

The following year, the authorities took a more favorable stance on the asset and approved the first spot Bitcoin ETF in Canada, the Purpose Bitcoin ETF (BTCC). 

Following the initial approval, it is reasonable to assume that subsequent approvals will ensue. However, in 2022, the SEC took a break amidst persistent worries regarding market instability and investor protection.

Eventually, in 2023, the SEC approved the first Spot Bitcoin ETF in the US, the WisdomTree Bitcoin Trust (BTCW).

Types of Bitcoin ETFs

Although the market offers a range of Bitcoin ETF options, this guide will focus on only two major types.

• Spot Bitcoin ETF: This is a type of Bitcoin ETF that tracks the current market price of Bitcoin. A spot Bitcoin ETF uses actual Bitcoin as its underlying asset and aims to replicate the real-time value of Bitcoin as precisely as possible. If the price of Bitcoin rises or drops, the price of the ETF typically follows suit.
• Bitcoin Futures ETFs: These are a type of Bitcoin ETF that exposes investors to Bitcoin futures contracts without actually holding the asset. They also allow investors to make predictions and wager on the asset’s future value.

How Does a It Work?

First, an ETF provider creates a Bitcoin ETF linked to the asset or a derivative (e.g., futures contracts) and lists it on a stock exchange.

Next, the ETF utilizes a tracking mechanism to track Bitcoin’s or futures contracts’ price while calculating its Net asset value (NAV daily).

Authorized participants (APs) or market makers can then buy and sell the ETF’s shares on the stock exchange. The buying and selling activities, or arbitrage activities, keep the ETF’s market price in sync with its NAV.

Interested investors buy and sell these ETF shares from the platform while the providers ensure compliance with relevant regulations and deduct necessary fees and costs from the ETF’s assets.

Bitcoin ETFs in the Market

Several Bitcoin ETFs are already in the market, including spot ETFs and futures contract ETFs. 

Some of the spot ETFs include:

1. Franklin Templeton Digital Holdings Trust (EZBC)
2. iShares Bitcoin Trust (IBIT) 
3. VanEck Bitcoin Trust (HODL)
4. Ark 21Shares Bitcoin ETF (ARKB)
5. Bitwise Bitcoin ETF (BITB)
6. Fidelity Wise Origin Bitcoin Fund (FBTC)
7. Invesco Galaxy Bitcoin ETF (BTCO)
8. WisdomTree Bitcoin Fund (BTCW)

Meanwhile, other Bitcoin ETFs, either Bitcoin futures or mining stocks as their underlying asset, include:

1. Global X Blockchain & Bitcoin Strategy ETF (BITS)
2. ProShares Bitcoin Strategy ETF (BITO)
3. ProShares Bitcoin & Ether Market Cap Weight Strategy ETF (BETH)
4. ProShares Bitcoin & Ether Equal Weight Strategy ETF (BETE)
5. Bitwise Bitcoin and Ether Equal Weight Strategy ETF (BTOP)
6. Valkyrie Bitcoin and Ether Strategy ETF (BTF)
7. Valkyrie Bitcoin Miners ETF (WGMI)
8. Bitwise Bitcoin Strategy Optimum Roll ETF (BITC)

Recently, Thailand became the first Southeast Asian country to have a spot in the Bitcoin exchange-traded fund (ETF) after the country’s SEC approved the proposal from One Asset Management (ONEAM).

The firm launched the ONE Bitcoin ETF Fund of Funds Unhedged and not for Retail Investors (ONE-BTCETFOF-UI), a type of Bitcoin ETF made available only to wealthy individuals and institutions.

Pros and Cons of Investing in Bitcoin ETFs

First, Investors who opt for Bitcoin ETFs can conveniently invest in Bitcoin without directly holding the asset. They can also diversify their investment portfolios while trading ETFs.

In addition, investors find it easier to invest in ETFs since they are traded on traditional stock exchanges rather than crypto exchanges. The funds are also managed by a team of experienced professionals, alleviating the need for individual investors to manage their investments actively.

Despite the benefits, some investors may opt not to invest in ETFs due to the following considerations:

First, trading ETFs attract management fees, trading costs, and other expenses. Second, although spot Bitcoin ETFs aim to track Bitcoin’s price, errors can occur, creating a difference between the ETF’s net asset value and Bitcoin’s market value.

Another setback is that although ETF investors benefit from regulatory oversight, Bitcoin ETFs are susceptible to evolving regulatory landscapes.

In conclusion, crypto exchanges operate round the clock, while traditional stock exchanges have restricted trading hours.

Bottom Line

Bitcoin ETFs expose investors to Bitcoin without the need for direct asset ownership, thus eliminating the risk and technical complications of directly investing in Bitcoin.

The quest for a Bitcoin ETF has been a long-standing aspiration among cryptocurrency enthusiasts, dating back to 2013 when the Winklevoss twins initially submitted a proposal to the US SEC, subsequently denied.

Early this year, the SEC’s Twitter account was hacked, and a fake announcement of Bitcoin ETF approval was posted, illustrating the significant interest and demand within the crypto community for a regulated spot Bitcoin ETF.

Following the SEC’s approval for a spot Bitcoin ETF, Bitcoin Whales increased their holdings by 250k BTC, showing greater mainstream adoption in the space.

Regardless of your investment experience, this comprehensive guide will help you navigate the world of Bitcoin ETFs.