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Market trends, structures, 1000+ blockchains, and protocols: The crypto space is a place to make money, but understanding it is full of hassles, and many beginner investors are easily discouraged by the numerous variables and complexity.
A Bitcoin exchange-traded fund is a financial mechanism that helps investors monitor Bitcoin’s price movements in the traditional exchange market and invest in it.
A Bitcoin ETF aims to track Bitcoin’s price fluctuations in a traditional market like Wall Street rather than a cryptocurrency exchange.
How Bitcoin ETF Works
Bitcoin ETF provides an escape route for investors to invest in an asset they are hesitant to own.
An ETF is a basket of assets (securities) that tracks and aims to outperform an underlying index.
ETFs as an individual entity are available for various industries and assets, ranging from currencies to commodities.
Bitcoin ETF works the same way a normal ETF would. That is to say, when there is a fluctuation in the price of Bitcoin, the price of the Bitcoin ETF, showing the fluctuation, would also fluctuate.
If the price of Bitcoin should increase in the crypto exchange market, the price of the Bitcoin ETF would also increase in the traditional exchange market to indicate the increase in bitcoin price.
If Bitcoin reduces in value, so does the Bitcoin ETF, and the same goes for an increase in value.
Types of Bitcoin ETF
All Bitcoin ETFs are not the same. Depending on the particular type of Bitcoin ETF purchased, you could invest in very different products under Bitcoin ETF.
There are two major types of Bitcoin ETFs, which we will discuss below.
1. Spot Bitcoin ETF
The United States Security and Exchange Commission (SEC) approved the Spot Bitcoin ETFs in January 2024.
When we say “spot” here, we mean current, actual, or real-time value.
Spot Bitcoin ETF exposes investors to the current or immediate value of the bitcoin.
The underlying asset of a spot Bitcoin ETF is the actual Bitcoin itself, and this ETF attempts to track the real-time value of Bitcoin as closely as possible.
Some examples of known spot bitcoin ETFs are:
- iShares Bitcoin Trust (IBIT)
- Bitwise Bitcoin ETF (BITB)
- VanEck Bitcoin Trust (HOLD)
- Ark 21Shares Bitcoin ETF (ARKB)
- Wisdom Tree Bitcoin Fund (BTCW)
2. Futures Bitcoin ETF
The second type of Bitcoin ETF is the Futures Bitcoin ETF, which is a direct contrast to the spot Bitcoin ETF.
The U.S. market offered only futures Bitcoin ETFs until January 2024, when the spot Bitcoin ETFs were introduced.
Futures Bitcoin ETFs invest in futures contracts, which are agreements to buy or sell Bitcoin at a predetermined price and a future date.
Futures Bitcoin ETFs also aim to track the value of Bitcoin; however, they do not provide direct exposure to the actual asset as spot Bitcoin ETFs do.
Futures ETFs often involve greater volatility and higher fees than spot ETFs.
Majorly, futures ETFs are for sophisticated investors who are willing to take the risks involved and also sustain an understanding of the various complexities of futures contracts.
You should also understand the need for continuous rollover of these contracts.
It is also worth noting that these rollovers could incur additional fees, which are passed down to the ETF stakeholders.
Some futures Bitcoin ETFs are designed to provide leveraged exposure to Bitcoin’s price, allowing you to amplify losses and gains over investments.
Here are some examples of known futures Bitcoin ETFS in the traditional market.
- VanEck Bitcoin Strategy ETF (XBTF)
- Proshares Bitcoin Strategy ETF (BITO)
- Global X Blockchain & Bitcoin Strategy ETF (BITS)
- Valkyrie Bitcoin and Ether Strategy ETF (BTF)
- ProShares Short Bitcoin ETF (BITI)
Why Investors Are Interested In Bitcoin ETF
Wherever there is a potential to make significant gains with minimal risk, investors are always seen trying to make the most of it.
More specifically, let us discuss some major advantages the Bitcoin ETF has over other assets that make it attractive to investors.
1. Ease of Access
ETFs are ideal if you are unfamiliar with cryptocurrency exchanges or are hesitant to use them.
This is because ETFs are traded on traditional exchange markets, making buying, holding, and trading bitcoin easier through your existing brokerage accounts.
2. Diversification
Bitcoin ETFs can hold more than one asset. For example, a Bitcoin ETF can hold Bitcoin, Facebook stocks, Apple stocks, and many others.
This feature allows you to diversify their portfolios and optimize their investments.
3. Mainstream Acceptance
Introducing Bitcoin ETFs indicates mainstream integration and acceptance of cryptocurrencies into the traditional financial system.
4. Regulatory Oversight
Seeing that bitcoin ETFs are placed under regulatory bodies offers some security and transparency.
Typically, crypto markets are known for their lack of regulation, hence the hesitance of some investors due to fraud and market manipulation concerns.
However, since Bitcoin ETFs have been subject to regulatory oversight, you will feel more safe and free to invest.
5. Convenience
You must conduct an in-depth study to fully understand the market and its workings and ensure a profitable cryptocurrency investment.
You would also have to sign up for a crypto exchange and take on the risk of owning Bitcoin directly. And this can be a whole lot for a newbie, who may decide to pass instead of the whole stress.
Bitcoin ETF provides a shortcut to the whole process of investing in Bitcoin.
Disadvantages or Risks of Investing in Bitcoin ETF
Investing in Bitcoin ETFs has fantastic perks but some associated risks or disadvantages.
1. ETF Inaccuracy
Earlier, we discussed that bitcoin ETFs allow multiple holdings to diversify your portfolios. However, this has a negative effect.
This is true because the exchange-traded fund will no longer represent the actual value of bitcoin as it should. After all, its value would be influenced by the other assets held alongside Bitcoin.
For example, a 40% rise in the price of bitcoin may not be accurately reflected in value because of the price fluctuations of the assets being held.
2. Management Fees
They charge a fee for this convenience because they save you a lot of stress in cryptocurrency.
Therefore, as an investor, owning a significant share in a Bitcoin ETF could mean a significantly higher management fee in the long run.
3. Lack of Bitcoin Ownership
There are a lot of limitations associated with the traditional financial system, and Bitcoin serves as a means to overcome these limitations because it is not dependent on central banks.
However, a bitcoin ETF has been subject to regulatory bodies, meaning they are not independent of the government. So, the initial benefits of Bitcoin are eliminated in Bitcoin ETFs.
4. Limits to Cryptocurrency Trading
On cryptocurrency exchanges, bitcoin can be traded for other cryptocurrencies like Litecoin, Ethereum, etc.
However, Bitcoin ETF cannot be traded on behalf of other cryptocurrencies as it is not a real cryptocurrency in the first place. Bitcoin ETF is simply an investment fund that tracks the value of Bitcoin.
5. Market Volatility
The cryptocurrency market is known for its high volatility and price fluctuations. Investing in bitcoin ETFs, whether spot bitcoin ETFs or futures bitcoin ETFs, doesn’t exempt you from the harsh market conditions.
How To Invest In Bitcoin ETFs
Investing in bitcoin ETFs is easy. As explained earlier, it simplifies the whole crypto investment procedure.
First, you will have to research to decide which ETF to purchase. In doing this, you should consider factors like management fees, what assets the funds invest in, share price, and other essential factors.
After doing that, you should go to your brokerage account, enter the ticker symbol, and place a trade.
Voila! There it is. Your Bitcoin ETF investment has been made.
