What Is Bitcoin Exchange-Traded Fund (ETF)?

If you’ve been following crypto-related news, you know that talk about Bitcoin (BTC) and Bitcoin ETF was impossible to escape. For years, the crypto industry has been trying to get a spot Bitcoin ETF approved and once that happened in January 2024, it collectively celebrated.

In the weeks following the approval, the crypto news cycle has been dominated by discussions of how the ETFs are performing, how they are affecting crypto at large, which tokens might next get an ETF, and so on. But what even are Bitcoin ETFs and why are they important? Also, how do you go about investing in them? In this article, we delve into all this and more.

Bitcoin ETFs Explained

A vivid understanding of what a Bitcoin exchange-traded fund is all about will give a good insight into how it works and how investors can utilize it for more benefits.

First, let’s talk about exchange-traded funds (ETFs) which are funds used for investment and which imitate the price of an underlying asset or index. Traditionally, ETFs are classified by the United States Securities and Exchange Commission (SEC) as securities, and they monitor the movements of particular securities which could be commodities, fiat currency or particular company stock. They can carry this out without the investor buying or owning that security.

They are very useful for palliating risks while still allowing adequate or real-time exposure in live markets, and have been long recognized as important tools for new and wary investors. In other words, these investment funds track down the value of commodities and assets of different sorts and act as a replacement for them for simpler investment processes.

Meanwhile, a Bitcoin exchange-traded fund is an exchange-traded fund that tracks the price of the leading cryptocurrency, Bitcoin, and mimics it for investment’s sake. The most ‘direct’ way to invest in Bitcoin is to buy the token from an exchange and sell it for a profit. But this comes with some complications. You have to go through the process of paying for the token and have to make sure it is stored securely, and so on. An ETF is essentially a company buying a bunch of Bitcoin and then having you invest in the fund by buying shares in it. So you benefit from the Bitcoin price going up or down but don’t handle the token directly.

These funds, as the name would suggest, are traded on mainstream stock exchanges like the New York Stock Exchange (NYSE) and Nasdaq. ETFs have been in existence for decades at this point and there are funds for virtually every asset you can think of. ETFs are also a major way to drive institutional support to various asset classes, which is why the spot Bitcoin ETF was such a big deal.

Bitcoin ETFs: Types

While all the celebration in the crypto industry is regarding the spot Bitcoin ETF, that is not the only type of Bitcoin ETF we have in the market. In reality, we already had a Bitcoin futures ETF before the spot Bitcoin ETF got approved. And for any investor, it is worth knowing the difference between the two to understand why the latter was so highly coveted.

• Bitcoin futures ETF offers investors exposure to bitcoin futures contracts. Now, these contracts are legally binding agreements that allow their holders to buy or sell an asset at some point in the future. By investing in a Bitcoin futures ETF, the investor doesn’t possess the asset but can benefit from its price movements. And considering the fact that Bitcoin is known to be rather volatile, Bitcoin futures ETFs can potentially be very profitable. But just like the actual price movement of Bitcoin, these ETFs can also lose their value suddenly.
• Spot Bitcoin ETF: A spot Bitcoin ETF differs from the futures ETFs in that it is based on the price of Bitcoin at any given time and does not give the investor the right to sell at a future date. These investment funds track the ‘spot’ price of Bitcoin and derive its value based on this. The fortunes of the ETF will reflect the state of the Bitcoin market at any given time and are seen to give more direct access to the asset than Bitcoin futures ETFs.

Investing In Bitcoin ETFs

If you decide to invest in Bitcoin ETFs, you must know how to go about it. Just like with any other Bitcoin investment decision, there are certain steps you should take.

1. Choose a brokerage or advisor. If you wanted to buy Bitcoin, you’d need to sign up with an exchange or any other platform that sells it. The same principle applies to Bitcoin ETFs as only certain institutions are licensed to sell them. The good news is that there is no shortage of firms in the industry that deal in Bitcoin ETFs. From Grayscale to ARK to Bitwise, you’re likely going to find a firm that will meet your specific needs. It is best that you read up on each brokerage, including its fee structure and policies, before you choose one.
2. Set up an account. Your next step should be to visit the website of whatever broker you have chosen to set up an account. You will have to go through the typical know-your-customer (KYC) setup process, setting up payment methods and might have to verify your identity before you can begin. Ideally, you would have chosen a brokerage that has a wealth of resources for beginners so you can get a feel of how ETFs and that specific brokerage work.
3. Choose your fund. Brokerages will list all the funds they offer on their websites and you can choose the ones you want to invest in. If investing in Bitcoin is your preference, they’d need to consider the ETFs the brokerage offers, whether these are spot or futures ETFs. Many of these will have minimum investment requirements so keep that in mind. Once you choose your desired ETF fund, your investment is well underway.

Is It Worth Investing In Bitcoin ETFs?

With all the hype around Bitcoin ETFs, it is worth considering as an investor whether or not it is the right path for you. Sometimes, people are asking: “If Bitcoin ETFs mimic the price of the cryptocurrency itself, why not just invest directly in Bitcoin?” Well, there are several reasons for this. Just like any other type of investment vehicle, it has its pros and cons and you need to look into both.

Pros of Investing In Bitcoin ETFs

The advantages of choosing to invest in a Bitcoin ETF rather than Bitcoin itself are as follows:

• Investment without exposure. When you opt for investment paths like spot trading, you have to first educate yourself about cryptocurrencies. You also have to sign up for an exchange, buy the tokens, sell them when the time comes, manage custody, etc. This can be often nerve-wracking, especially since crypto transactions are mostly irreversible. But when you invest in an ETF, you essentially get to profit from the price movement of Bitcoin without buying and holding it yourself. All of the responsibility of purchase and custody falls on the broker and this is a big relief for most investors.
• Diversity of assets. One of the most tried and tested investment rules is to diversify your assets, no matter how promising they seem. This is also one of the appeals of ETFs. ETFs generally combine many different assets into a single fund. So while you might have a Bitcoin within the ETF, you can also have stocks of mainstream companies, and other assets. In this sense, you are not putting all of your eggs in one basket and this can help you in the long run.

Cons of Investing In Bitcoin ETFs

Meanwhile, there are also a few drawbacks to consider:

• Fees. When you invest in an ETF, you are essentially having someone else deal with the backend of investing in bitcoin and other assets and this is not without a price. Grayscale, for example, charges a 1.5% commission for its Bitcoin ETFs and is among the highest in the market. While some ETF issuers have cut down on their fees to remain competitive, this is nevertheless a factor to consider.
• Loss of control. While not having to deal with the purchase and storage of your cryptos saves you time, you also relinquish control of the tokens. The saying, ‘Not your keys, not your coins’ rings true as you do not decide when the tokens will be sold and at what price. Funds are known to sell off tokens if certain price points are hit and this is done independent of your wishes.
• Inaccuracy in price tracking. There are tendencies that the Bitcoin ETF might not be able to exactly track and reflect the price of Bitcoin on some occasions. Since ETFs accommodate more assets, it may become inefficient while trying to track all underlying assets in a user’s portfolio. As such, a 30% increase or decrease in the price of Bitcoin may not be accurately reflected in the value of the ETF.

Conclusion

Bitcoin ETFs have been a coveted investment vehicle in the crypto industry for years, and for good reason. They allow investors to profit off Bitcoin’s price movement but remove some of the complications of actually holding Bitcoin themselves. With the approval of the spot Bitcoin ETF, consumers have more choices than ever before.

For anyone considering investing in a Bitcoin ETF, it is worth understanding the differences between the two main types, as well as the pros and cons of Bitcoin ETFs. If they decide to invest, there are at least a few firms in the crypto space offer ETFs that they can opt for.