Understanding Bitcoin ETFs
Bitcoin ETFs are a hot topic once again in the crypto markets after BlackRock announced that it is filing for a Bitcoin ETF.
Bitcoin ETFs Explained
Exchange-traded funds (ETFs) emerged in the traditional financial markets in the 1990s to provide an easy way to invest in a range of asset classes at a low cost. Today, they are one of the most popular investment vehicles among both retail and institutional investors.
Bitcoin ETFs enable investors to add bitcoin (BTC) exposure to their portfolios without actually owning the underlying asset or having to concern themselves with securely storing their digital asset investment. However, it also means that Bitcoin ETF holders don’t actually own BTC.
If you want to own BTC directly, you can use a crypto wallet like Trust Wallet that enables you to securely buy and store bitcoin with just a few clicks. Since Trust Wallet is a non-custodial wallet, you have complete ownership and control over the BTC you purchase, including using your coins to make payments.
However, if you are interested in holding a Bitcoin ETF in your portfolio, read on to learn all about what bitcoin ETFs are, how they work, some examples you can look into, and more.
Understanding the Basics
An ETF is an investment vehicle that tracks the performance of an underlying asset, such as a commodity, stocks, bonds, an index, derivatives, or a basket of assets.
ETFs are traded on an exchange, just like stocks. Hence, the name. In many ways, an ETF is similar to a mutual fund since they are both pooled and managed by their issuers. But, they differ in terms of structure and method of trading. The global ETF industry is currently a $10 trillion industry and is expected to hit $18 trillion by 2026.
Typically, asset management companies or other financial institutions create and manage ETFs. They pool funds from investors to invest in a diversified asset portfolio. ETFs allow investors to buy or sell their ETF shares at any time during trading hours. In contrast, mutual funds are generally priced and traded at the end of the market day.
ETFs give investors access to a wide range of assets, allowing for portfolio diversification. They also offer transparency, as their holdings are typically disclosed daily. Additionally, ETFs tend to have lower expense ratios compared to mutual funds.
There are various types of ETFs in the market. These include:
- Equity ETFs - track stock market indexes
- Bond ETFs - track fixed-income securities
- Commodity ETFs - track the price of commodities like gold or oil
- Sector ETFs - focus on specific industry sectors,
- International ETFs - provide exposure to foreign markets.
An example of an ETF is the SPDR® S&P 500® ETF Trust. This fund, managed by State Street, tracks the S&P 500 index. QQQ is another ETF pooled and issued by Invesco. It tracks 100 large-cap technology companies listed on NASDAQ.
What is a Bitcoin ETF?
A Bitcoin ETF is an exchange-traded fund that exposes investors to bitcoin or assets closely related to it.
Unlike bitcoin, which is traded on exchanges dedicated to cryptocurrencies, Bitcoin ETFs are traded on securities exchanges, just like stocks. As a result, investors do not have to go through the process of setting up a digital wallet and working with cryptocurrency exchanges.
A Bitcoin ETF is a more familiar financial instrument for traditional investors who prefer to invest in bitcoin without worrying about the risks and complexities of owning and storing the digital currency. For instance, bitcoin is held in a wallet, and if an investor loses access to the wallet, their bitcoin is permanently lost. You don't need to worry about that with a Bitcoin ETF.
In the current U.S. market, Bitcoin ETFs currently don’t own any bitcoin themselves. Instead, they have Bitcoin futures as their underlying asset.
The introduction of Bitcoin ETFs is widely viewed as a significant development in the cryptocurrency industry. It provides a regulated and accessible way to invest in bitcoin. This may attract institutional investors and individuals who prefer more traditional investment channels. Bitcoin ETFs have the potential to lead to bitcoin’s mass adoption as an investment asset.
Current Bitcoin ETFs in the Market
Currently, a handful of Bitcoin ETFs have been approved for trading in the United States by the SEC. However at the time of writing, the existing ETFs in the US are not backed by actual Bitcoin, instead they track its price. That said, there are Bitcoin ETFs that exist outside of the United States as well. Below we’ll have a look at some of the most actively traded Bitcoin ETFs, while giving some background on them.
Note: Prices quoted are at time of writing and are used for illustrative purposes.
ProShares Bitcoin Strategy ETF (BITO)
Proshares Bitcoin Strategy ETF was the first ETF linked to Bitcoin approved to trade in the U.S. Due to this first market advantage, it was able to attract a significant amount of investment during its first weeks after launch in 2021. It currently has $891 million of assets under management. It’s highly liquid and one of the most actively traded Bitcoin ETFs.
BITO exposes investors to BTC via a portfolio of Bitcoin futures contracts. Bitcoin futures contracts are agreements to buy or sell bitcoin at a future date. The price of Bitcoin futures varies. It mirrors the fluctuation in the price of BTC. Therefore, by holding these futures, BITO indirectly achieves exposure to bitcoin, albeit not perfectly.
The price of bitcoin futures may occasionally differ from the actual spot price of bitcoin due to variables such as demand, supply, and inefficiencies with the pricing of derivatives.
- Price: $16.62
- Expense Ratio: 0.96%
- Assets Under Management: $891 million
Valkyrie Bitcoin Strategy ETF (BTF)
Valkyrie Bitcoin Strategy ETF BTF is an actively managed ETF listed on NASDAQ and offers investors exposure to bitcoin through Chicago Mercantile Exchange (CME) Bitcoin futures contracts. BTF was launched in Oct 2021 and has since then accumulated around $28 million of assets under its management.
Most of BTF’s portfolio consists of U.S. Treasury bills, which serve as collateral for the CME Bitcoin futures contracts it holds. U.S. Treasury bills are short-term debt securities issued by the U.S. government. By holding these Treasury bills as collateral, BTF ensures it has a secure and stable asset backing its Bitcoin futures positions.
BTF’s exposure is designed so that the estimated value of all the Bitcoin futures it holds equals 100% of the fund’s net assets. In other words, BTF doesn’t use leverage to reduce risk or increase profits.
- Price: $11.19
- Expense Ratio: 0.95%
- Assets Under Management: $28 million
VanEck Bitcoin Strategy ETF (XBTF)
VanEck Bitcoin Strategy ETF (XBTF) also Bitcoin futures are its underlying asset. The fund invests in CME Bitcoin futures and holds U.S. Treasury bills for collateral.
XBTF may be an interesting pick for investors more weary of costs considering XBTF’s lower expense ratio of 0.76%. XBTF has accrued $41 million in assets under management, which is significant considering the infancy of Bitcoin’s ETF industry.
- Price: $29.11
- Expense Ratio: 0.76%
- Assets Under Management: $41 million
Purpose Bitcoin ETF (BTCC.U)
Purpose Bitcoin ETF (BTCC.U) is a Canadian spot Bitcoin ETF. Unlike the other ETFs on this list, BTCC.U holds actual BTC in cold storage with a custodian, thanks to Canada’s regulatory frameworks. Each share of BTCC.U represents a small fraction of a bitcoin.
Although BTCC.U is listed on the Toronto Stock Exchange (TSX), it may still be available for investment to U.S. citizens who are authorized to buy international ETFs through their brokerage. The “U” in BTCC.U signifies that the ETF is denominated in U.S. dollars. BTCC.U has accrued over $160 million in assets under management and offers an expense ratio of 1.45%.
- Price: $5.45
- Expense Ratio: 0.76%
- Assets Under Management: $160 million
The Role of the SEC in Bitcoin ETFs
The Bitcoin community has long awaited the approval of a Bitcoin ETF in the United States. For many, ETFs are a crucial piece of the puzzle necessary to increase Bitcoin’s adoption as well as it’s liquidity.
However, the U.S. Securities and Exchange Commission (SEC) has been hesitant to approve proposals for new Bitcoin ETFs.
As a result, there are currently no ETFs that directly track the price of bitcoin. Instead, the existing Bitcoin ETFs in the U.S. gain exposure to bitcoin through futures contracts. This approach allows investors to participate in the cryptocurrency market indirectly while adhering to the investment structure and regulatory requirements of ETFs.
As early as 2014, the Winklevoss twins submitted a Bitcoin ETF proposal to the SEC, almost five years after bitcoin started trading. The SEC rejected this and subsequent applications. Similarly, Grayscale, a subsidiary of Digital Currency Group (DCG), has been seeking approval for a Bitcoin ETF for years. The company first applied for approval in 2016, but they later withdrew the application noting that the regulatory environment was not advanced enough to allow a Bitcoin ETF into the market.
Grayscale reapplied in 2021, only to be rejected by the SEC. The company plans to convert its bitcoin trust (GBTC) to a spot Bitcoin ETF. Among the reasons cited for the rejection was that the bitcoin market was “prone to manipulation.” Due to this latest denial, Grayscale initiated legal actions against the SEC in June 2022. The case is still ongoing.
In a 2018 letter explaining its concerns, the SEC justified its refusal of petitions citing issues such as lack of transparency at cryptocurrency exchanges, the possibility of market manipulation, custody of assets, investor protection, and liquidity.
Although the SEC has not approved any spot Bitcoin ETFs yet, it has allowed Bitcoin ETFs that hold BTC futures contracts listed on the Chicago Mercantile Exchange. ProShares Bitcoin Strategy ETF was the first Bitcoin futures ETF to be approved in October 2021. This progress has rekindled the hope of a spot Bitcoin ETF approval in the community.
Blackrock’s Entry Into the Bitcoin ETF Space
Recently, BlackRock, one of the most prominent asset management firms, submitted an application for a spot Bitcoin ETF, called the iShares Bitcoin Trust, to the SEC.
BlackRock’s entry into the Bitcoin ETF industry brings tons of credibility to the market. BlackRock boasts of a staggering $10 trillion in assets under its management. Therefore, an endorsement from the financial giant could potentially lead to more institutional adoption of bitcoin.
The BlackRock Bitcoin ETF filing signifies the changing sentiment of institutional investors toward bitcoin and digital assets in general. It reinforces bitcoin’s status as a viable investment option.
According to James Seyffart, an analyst with Bloomberg Intelligence, the decision by BlackRock to enter into the Bitcoin ETF industry should be taken with gravity. He said, “BlackRock makes up 33% of the U.S. market. They are the biggest ETF issuer. So, the fact that they are entering the space should be taken very seriously.”
The proposed BlackRock ETF intends to issue shares in sets of 40,000 or multiples thereof. The shares will only be exchangeable with bitcoin. BlackRock Bitcoin ETF shares are expected to be listed on the NASDAQ stock exchange.
If approved, the BlackRock ETF would allow investors to get exposure to bitcoin through a product from one of the largest companies on Wall Street. Furthermore, if the SEC relents, we could see a surge of spot Bitcoin ETFs in the market from several other firms who have filed similar applications with the SEC.
There are currently no spot Bitcoin ETFs that are US-based being that the SEC hasn’t approved any to date. Existing Bitcoin ETFs in the U.S. gain exposure through futures contracts.
Nevertheless, recent developments, such as BlackRock's proposed entry into the Bitcoin ETF market, bring credibility and potential for more institutional adoption.
As with any investment, remember to do your own research (DYOR) to understand all the risks involved as well as the regulatory requirements necessary before making any investment decisions.