What Are Bitcoin ETFs and How Can They Benefit Investors?

Bitcoin ETFs

In Brief

With Bitcoin EFTs, your ability to track the price of Bitcoin on a traditional stock exchange

Bitcoin EFTs help investors to gain exposure to Bitcoin without buying or storing the digital currency directly.


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Introduction

A Bitcoin ETF (exchange-traded fund) is an investment fund that tracks the price of Bitcoin and trades on a traditional stock exchange. The first and most well-known bitcoin ETF is the Winklevoss Bitcoin Trust, which began trading on the Bats Global Markets exchange in March 2017.

bitcoin ETFs

Bitcoin ETFs offer investors a way to gain exposure to Bitcoin without having to directly buy or store the digital currency. They also provide transparency and regulatory oversight that is not currently available for most other bitcoin investment vehicles. However, bitcoin ETFs have yet to gain widespread acceptance from the financial community and regulators. There are 25 additional Bitcoin ETF filings waiting for SEC approval, some of which are for funds that directly own Bitcoin. 

When the world of Bitcoin ETFs grows, we will offer a more comprehensive methodology that selects the best from a larger universe of BTC funds. The SEC is reviewing several proposals for bitcoin ETFs for the final decision by 2023.

What is a Bitcoin ETF, and how does it work?

Bitcoin ETFs allow investors to gain exposure to Bitcoin without buying or storing the digital currency themselves. When you invest in a Bitcoin ETF, you buy shares of a fund that tracks the price of Bitcoin. The value of your shares will go up or down as the price of Bitcoin rises and falls.

Bitcoin ETFs trade on stock exchanges, just like regular stocks, making them easy to buy and sell. You can buy Bitcoin ETFs through a broker or online trading platform.

bitcoin ETFs

Bitcoin ETFs are subject to market, exchange, and regulatory risk. For example, the Bitcoin ETF value could drop if the price of Bitcoin falls or if there is a lack of demand for the ETF.

How do I invest in a Bitcoin ETF?

You can invest in a Bitcoin ETF by buying shares in the fund on a stock exchange. The price of the ETF will track the price of Bitcoin, so you must monitor the cryptocurrency’s market movements.

Should I invest in a Bitcoin ETF?

Bitcoin ETFs offer investors a way to gain exposure to Bitcoin without buying or storing the digital currency. However, they are subject to market, exchange, and regulatory risk. You should seek professional financial advice before investing in a Bitcoin ETF.

Bitcoin ETFs are subject to the same regulations as other ETFs and are subject to regulatory scrutiny by the U.S. Securities and Exchange Commission (SEC).

Bitcoin futures and Bitcoin spot ETFs

Bitcoin futures and spot ETFs are two different ways to gain exposure to the price of Bitcoin. Futures contracts are agreements to buy or sell a certain amount of Bitcoin at a set price on a future date, while ETFs are investment vehicles that hold a basket of assets, including Bitcoin. Both have pros and cons, but which is more suitable for you depends on your investment goals.

Bitcoin futures are regulated by the Commodity Futures Trading Commission (CFTC), while Securities and Exchange Commission (SEC) regulates Bitcoin spot ETFs. Futures contracts are traded on exchanges, such as the Chicago Mercantile Exchange (CME), while ETFs are bought and sold like stocks on exchanges.

Bitcoin futures allow you to speculate on the price of Bitcoin without owning the underlying asset. This can be a riskier investment, as you are relying on the future price of Bitcoin to make a profit. However, it can also be a more hands-off approach, as you don’t have to worry about storing or securing your Bitcoin.

On the other hand, Bitcoin spot ETFs expose you to the price of Bitcoin without having to trade futures contracts. This can be a less risky investment, as you are not speculating on the future price of Bitcoin. However, it does require you to trust that the ETF provider will securely store and manage the Bitcoin on your behalf.

When deciding which option is right for you, it’s essential to consider your investment goals. If you are looking to speculate on the future price of Bitcoin, then futures contracts may be a good option. However, a Bitcoin spot ETF may be a better choice if you want a more hands-off approach or are looking for a less risky investment.

How does Bitcoin futures ETF work?

Bitcoin futures are exchange-traded contracts that allow investors to speculate on the future price of Bitcoin. The basis of the value of a Bitcoin futures contract is the underlying cost of Bitcoin, denominated in U.S. dollars. 

Each futures contract represents one Bitcoin, trading five Bitcoins in lot sizes. The CME and CFE contracts are cash-settled, meaning that investors do not receive or deliver Bitcoins when the contract expires. Instead, they receive or pay the difference between the contract and settlement prices.

The settling of the NYSE contract is physical, meaning that investors receive or deliver Bitcoins when the contract expires. Investors can use Bitcoin futures to speculate on the future price of Bitcoin or to hedge against potential price fluctuations. For example, an investor who believes that the cost of Bitcoin will increase in the future may buy a Bitcoin futures contract to lock in a price at which they can buy the cryptocurrency. 

Alternatively, an investor worried about a potential price drop may sell a Bitcoin futures contract to lock in a price at which they can sell the cryptocurrency in the future.

Downsides of the Bitcoin futures ETF

Bitcoin futures have been one of the most popular products in recent years, but there are some potential downsides to consider before investing. 

  • One critical risk is that the underlying value of Bitcoin could drop sharply, leading to losses for investors.
  • The ETF may not be able to track the performance of Bitcoin futures as closely as other investment products, such as exchange-traded funds (ETFs) that invest in the physical commodity. 
  • Regulatory uncertainty surrounding Bitcoin and other digital currencies could impact the ability of the ETF to continue operating.

Investors should carefully consider these risks before investing in a Bitcoin futures ETF. 

How does Bitcoin spot ETF work?

The Bitcoin spot price is the price at which bitcoin can be bought or sold for immediate delivery. A bitcoin ETF tracking the spot price would therefore enable investors to gain exposure to the price movements of bitcoin without having to hold the underlying asset directly.

Bitcoin spot ETFs would likely track an index that captures the average spot price of bitcoin across a range of exchanges. One such index is Bitwise’s Bitcoin Spot Rate Index, which currently sources pricing data from 15 cryptocurrency exchanges.

Bitcoin spot ETFs would provide exposure to the price of bitcoin without the need to buy and store the underlying asset. They would also offer a more liquid and regulated investment product than investing directly in bitcoin.

However, it is essential to note that bitcoin is a volatile asset, and its price can fluctuate significantly. Investors should be aware of the risks associated with investing in a bitcoin spot ETF before making any decisions.

Downsides of Bitcoin spot ETFs

Bitcoin spot ETFs have some potential downsides, including:

  • Lack of price discovery: The function of an ETF is to provide price discovery for the underlying asset. However, in the case of bitcoin, there is no centralized exchange where prices are. This could make it difficult for an ETF to track the underlying spot price of bitcoin.
  • Lack of liquidity: The function of an ETF is to provide liquidity for the underlying asset. However, bitcoin spot markets are still relatively illiquid compared to other assets, such as stocks and commodities. This could make it difficult for an ETF to provide sufficient liquidity for investors.
  • Volatility: Bitcoin is well-known for its volatility, which could make it difficult for an ETF to track the underlying spot price.
  • Counterparty risk: Since any central authority does not regulate bitcoin, there is a risk that the counterparty (i.e., the party who holds the asset) may not be able to fulfill its obligations. This could lead to losses for investors in the ETF.
  • Security risk: Bitcoin exchanges have been subject to hacks and thefts, which could pose a security risk for investors in an ETF.
  • Regulatory risk: The regulatory landscape for bitcoin is still evolving, and it needs to be clarified how or if bitcoin ETFs will be regulated. This could pose a risk for investors in the ETF.
  • Tax risk: The tax treatment of bitcoin is still unclear in many jurisdictions. This could pose a risk for investors in an ETF, as they may be subject to taxes on their gains.
  • Geographical risk: Bitcoin is still not widely accepted as a form of payment, which could limit its use in certain jurisdictions. This could make it difficult for an ETF to track the underlying spot price in those jurisdictions.
  • Reputational risk: Association of Bitcoin with criminal activity in the past could damage its reputation and lead to higher costs for an ETF.
  • Technology risk: The underlying technology of bitcoin is still relatively new and untested. This could lead to technical problems or even a complete system failure, which would pose a risk for investors in an ETF.

Investing in Bitcoin ETFs

Bitcoin ETFs are a great way to get exposure to the price movements of bitcoin without having to deal with the hassle of buying and storing the underlying asset. BITO is one of the most popular bitcoin ETFs on the market, and purchases are through online brokerages like Robinhood or Fidelity.

To determine how many shares of BITO you want, first, decide what price you’re comfortable buying. Then, open a brokerage account with a platform like Robinhood or Fidelity if you don’t already have one. From there, you’ll be able to place an order for BITO shares at your chosen price. Once you file an order, you’ll own a piece of the BITO ETF and will be able to track its performance alongside the price of bitcoin.

Bitcoin ETFs vs. Direct Investments in Bitcoin

Many in the cryptocurrency community have seen Bitcoin exchange-traded funds as Holy Grail. An ETF would allow investors to get exposure to Bitcoin in a much easier and more convenient way. However, there are several reasons why a direct investment in Bitcoin may be a better idea than investing in a Bitcoin ETF.

One of the main advantages of investing directly in Bitcoin is that you have complete control over your investment. Having ETF, you are relying on the fund manager to make all the critical decisions about when to buy and sell Bitcoin.

This includes setting the right price for the ETF and ensuring that the underlying asset is appropriately stored and secured. With a direct investment in Bitcoin, you are the one in control. You can buy and sell Bitcoin whenever you want, and you don’t have to worry about the fund manager making any decisions on your behalf.

Another advantage of investing directly in Bitcoin is avoiding some of the fees associated with ETFs. ETFs typically have high management fees and other expenses, which can eat into your profits. You only have to pay the standard transaction fees when you invest directly in Bitcoin.

Finally, direct investment in Bitcoin allows you to profit from any potential price appreciation. If the price of Bitcoin goes up, you will make money. If the price goes down, you will lose money. With an ETF, you can only profit if the fund manager makes money.

Overall, direct investment in Bitcoin may be better for many investors than investing in a Bitcoin ETF. You have more control over your investment, you can avoid high fees, and you have the potential to make money if the price of Bitcoin goes up. However, some risks are also associated with direct investment in Bitcoin, so research before making any decisions. 

FAQs

What are Bitcoin ETFs?

Bitcoin exchange-traded funds, or ETFs, are investment vehicles that enable investors to buy and trade shares in a fund that tracks the price of bitcoin. Unlike traditional ETFs, which are traded on regulated exchanges like the NYSE and NASDAQ, bitcoin ETFs can be sold outside of those marketplaces either via dedicated trading platforms or over-the-counter markets.

How do investors use Bitcoin ETFs?

Bitcoin ETFs can be used by investors to gain exposure to bitcoin without having to buy and manage the underlying assets directly. For example, if an investor wanted to purchase $1,000 worth of bitcoin with cash, they would first have to find an individual willing to sell them bitcoin at the desired price.

How do Bitcoin ETFs work?

Bitcoin ETFs are investment funds that allow investors to purchase shares in the fund and receive exposure to Bitcoin’s price movement. The shares are then stored in trust, so individual investors don’t have to hold any bitcoins themselves physically. The underlying value of each share is proportional to one bitcoin, so if an investor has purchased a particular share, they own a small percentage of the total value that is stored within the trust.

What are the benefits of investing in Bitcoin ETFs?

There are several benefits to investing in Bitcoin ETFs. One of the main advantages is that they provide investors with exposure to bitcoin’s price movement without having to manage or store any bitcoins themselves. ETFs also tend to track a portion of the market’s performance, giving investors additional diversification and potentially higher returns than if they were investing in just bitcoin.

Are there any risks associated with Bitcoin ETFs?

There are several risks associated with Bitcoin ETFs. One of the main risks is market volatility and liquidity, which can affect both the price of bitcoin and the shares of Bitcoin ETFs. Another potential risk is counterparty risk, where investors face the possibility that their share in a fund may be voided if any problems arise with its custodian.

How can I get started investing in Bitcoin ETFs?

The first step to investing in Bitcoin ETFs is to find a reputable broker or platform that offers this type of investment product. You will usually need to create an account with the platform and provide some basic personal information, such as your name and address.

What are some of the most popular Bitcoin ETFs?

Some of the most popular Bitcoin ETFs include the Bitcoin Investment Trust (GBTC), which tracks a portion of bitcoin’s market performance, and the ProShares Short Bitcoin ETF (BATS: SBTC), which is designed to profit from a decrease in bitcoin prices.

Conclusion

With Bitcoin exchange-traded funds, a new world of possibilities has opened up for cryptocurrency investors. These products offer a simple and convenient way to gain exposure to the digital asset market without dealing with the complexity of buying and storing cryptocurrencies.

However, it is essential to remember that Bitcoin ETFs are still a relatively new product with several risks. These include the potential for fraud or manipulation and the fact that the underlying asset is still highly volatile.

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Disclaimer

Any data, text, or other content on this page is provided as general market information and not as investment advice. Past performance is not necessarily an indicator of future results.

Moses Kimathi

Moses is an experienced freelance writer and analyst with a keen interest in how technology is disrupting the financial sector. He has written extensively on the subject of cryptocurrencies from an investment perspective, as well as from a technical standpoint. He has also been involved in trading cryptocurrencies for over two years.

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