A bitcoin exchange-traded fund (ETF) is a financial product that allows investors to gain exposure to the price movements of bitcoin without actually holding the asset itself.
Shares of a bitcoin ETF are traded on traditional stock exchanges, making it easier for investors to participate in the cryptocurrency market.
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ETFs have generated significant interest from both retail and institutional investors as they offer a more convenient and regulated way to invest in bitcoin. They can be particularly attractive to investors who are hesitant to directly purchase and manage cryptocurrencies due to concerns about security, regulatory issues or technical complexities.
Spot bitcoin ETFs and bitcoin futures ETFs are currently approved in the United States.
What are the types of bitcoin ETFs?
There are two main types of bitcoin ETFs: spot and futures.
Spot bitcoin ETF
A bitcoin spot ETF is a type of exchange-traded fund that aims to provide investors with direct exposure to the current market price of bitcoin.
In this context, “spot” refers to the immediate or current price of the underlying asset, which is bitcoin itself. A bitcoin spot ETF typically holds moderno bitcoin as its underlying asset and attempts to track the real-time price of bitcoin as closely as possible.
Physically-backed bitcoin ETF
A physically-backed bitcoin ETF holds physical bitcoin as part of its assets, meaning that the ETF directly owns and stores the cryptocurrency.
A physically-backed bitcoin ETF is comparable to a spot bitcoin ETF, except the latter places greater emphasis on tracking the current price of bitcoin over physical settlement and ownership.
Futures bitcoin ETFs
Futures ETFs do not hold moderno bitcoin. Instead, they use bitcoin futures contracts to gain exposure to the cryptocurrency. A bitcoin futures contract allows investors to speculate and bet on the future price of the asset.
Futures bitcoin ETFs can behave differently from spot bitcoin ETFs, and there may be costs associated with rolling over or settling futures contracts. Some futures bitcoin ETFs are designed to provide leveraged or inverse exposure to bitcoin’s price, allowing investors to amplify both gains and losses.
Regulations and product offerings may evolve, so it’s essential to stay up to date with the latest developments in the bitcoin ETF space, including any new types of products that may emerge. Additionally, the availability and structure of bitcoin ETFs may vary by country and region due to regulatory considerations and market demand.
Has a bitcoin ETF been approved in the US?
The SEC has approved both bitcoin futures ETFs and spot bitcoin ETFs in the U.S. The ProShares Bitcoin Strategy ETF, a bitcoin futures ETF, was approved on Oct. 19, 2021. Other bitcoin futures-linked ETFs have been launched by VanEck, Valkyrie, Simplify Asset Management and GlobalX.
On Jan. 10, 2024, the SEC green-lit spot bitcoin ETFs after a notably chaotic and confusing approval process in the days prior. The first 11 approved spot bitcoin ETFs came from Bitwise, Grayscale, Hashdex, BlackRock, Valkyrie, BZX, Invesco, VanEck, WisdomTree, Fidelity and Franklin.
Trading for spot bitcoin ETFs first began on Jan. 11, 2024. They reached $4.6 billion in volume within that first day of trading, with BlackRock’s product alone hitting $1 billion. After the first seven days of trading, the products saw $20 billion of trading volume.
Within the first month of launch, the spot bitcoin ETFs amassed billions of assets under management (AUM). By the end of January, BlackRock’s IBIT had gained $2.7 billion of assets while Fidelity’s FBTC had gained $2.3 billion. The chart below shows the current AUM for each ETF.
Grayscale’s conversion
Grayscale Bitcoin Trust (GBTC) was a popular investment vehicle that allows investors to gain exposure to Bitcoin without directly owning the cryptocurrency. GBTC functioned as a publicly traded trust, with shares representing fractional ownership of Bitcoin held by the trust.
Turning the Grayscale Bitcoin Trust into an ETF offered certain advantages over the former trust structure, such as lower fees, greater liquidity and broader access to institutional and retail investors compared to a trust.
Grayscale attempted to change GBTC into a spot bitcoin ETF in 2021, but the SEC rejected the proposal in June 2022. Grayscale sued, and the courts sided with Grayscale in August 2023, stating that the SEC had to review Grayscale’s ETF proposal.
Grayscale renewed discussions to convert the trust into a spot bitcoin ETF with the SEC around Nov. 8, 2023. The SEC ultimately approved the conversion on Jan. 11, 2024 when it greenlit the spot bitcoin ETF filings from 10 other firms.
Spot bitcoin ETF fee structure in 2024
Spot bitcoin ETFs have fees, which are used to cover the costs of managing and operating the funds. Ahead of approval, the ETF issuers raced to undercut each other’s fees in an attempt to gain the most customer interest. After approval, some providers dropped their fees even further as a result of the heavy competition.
As of Feb. 1, the spot bitcoin ETFs have the following fees without waivers;
Seven of these ETFs (Franklin, Bitwise, ARK 21Shares, Fidelity, Valkyrie, Invesco, Wisdomtree) offered 0% in waived fees until certain conditions are met, after which the above fees will take place. BlackRock’s iShares Bitcoin Trust (IBIT) has a fee reduced to 0.12% for the first year or until the fund hits $5 billion in assets.
Why are investors interested in bitcoin ETFs?
The demand for a bitcoin ETF primarily stems from the desire for greater accessibility, convenience and exposure to bitcoin as an asset class. Here are some of the key reasons why people are interested in bitcoin ETFs:
- Ease of access: ETFs are traded on traditional stock exchanges, making it easier for mainstream investors to buy, hold and trade the bitcoin-related asset through their existing brokerage accounts. This accessibility is particularly appealing to investors who are not familiar with cryptocurrency exchanges or are hesitant to use them.
- Regulatory oversight: A bitcoin ETF would be subject to regulatory oversight, providing investors with a level of protection and transparency. This regulatory oversight can help reduce concerns about fraud and market manipulation, which can be more prevalent in unregulated cryptocurrency markets.
- Portfolio diversification: Investors view bitcoin as a potential diversification tool. By offering exposure to bitcoin through an ETF, they can incorporate the cryptocurrency into their investment portfolios without the need to directly hold and manage do dedo assets.
- Mainstream acceptance: The introduction of a bitcoin ETF can be seen as a sign of mainstream acceptance and integration of cryptocurrencies into traditional financial systems.
Are there other types of crypto ETFs beyond bitcoin?
There are a variety of cryptocurrency exchange-traded products (ETPs) outside of the U.S., including ETFs that provide exposure to a range of cryptocurrencies beyond bitcoin. These products allow investors to gain exposure to various cryptocurrencies and crypto-related assets, providing diversification within the do dedo asset space.
In the U.S., there are ETFs linked to other cryptocurrencies, like ether, but again these are only for futures-related products.
A history of bitcoin ETF proposals
Gaining regulatory approval for a spot bitcoin ETF took over a decade of filings, waiting, delays and rejections. More than a decade passed between the first ever bitcoin ETF proposal and their ultimate approval.
Winklevoss Bitcoin Trust
The first attempt at a bitcoin ETF occurred in 2013 with the Winklevoss Bitcoin Trust (COIN). Founded by Cameron and Tyler Winklevoss, the trust offered shares of the ETF that were equivalent to 0.2 BTC. Each share was worth $20.09 since bitcoin’s price hovered around $100 at the time, according to CoinMarketCap.
COIN shares facilitated indirect investment in bitcoin, as “the shares are designed for investors seeking a cost-effective and convenient means to gain exposure to bitcoins with minimal credit risk,” according to the original SEC filing.
The SEC rejected the COIN proposal in March 2017 due to concerns of potential fraud, lack of investor protection and insufficient market surveillance that could lead to market manipulation, among other reasons.
VanEck-SolidX Bitcoin ETF
The software firm SolidX also filed for a Bitcoin ETF in collaboration with the New York-based investment management firm VanEck to propose the VanEck SolidX Bitcoin Trust, a physically backed Bitcoin ETF.
The firms withdrew the proposed bitcoin ETF twice: once in January 2019 and again in September of the same year before the SEC could grant a decision.
Bitwise Bitcoin ETF
Bitwise Asset Management also submitted a proposal for its spot bitcoin ETF in 2019, but the SEC rejected it. The main reason was that the regulator doubted whether the fund could prevent fraud or manipulation.
VanEck Bitcoin ETF
VanEck made another attempt in 2021, proposing a bitcoin ETF with a new structure.
The SEC denied it in November of that year.
Read more about specific spot bitcoin ETFs
What is BlackRock’s IBIT spot bitcoin ETF?
What is Fidelity’s FBTC spot bitcoin ETF?
Disclaimer: This article was produced with the assistance of OpenAI’s ChatGPT 3.5/4 and reviewed and edited by our editorial team.
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