Bitcoin ETFs have been a topic of discussion in the crypto markets since the Winklevoss twins first tried to list one back in 2013. Bitcoin futures ETFs have traded on U.S. exchanges for several years. Spot bitcoin ETFs were finally approved on Jan. 10, 2024, and began trading the next day.
In this guide, you will learn about bitcoin ETFs, how they work and which ones you can already can invest in.
This is partner content sourced from Laura Shin’s Unchained and published by CoinDesk.
What is a bitcoin ETF?
Bitcoin ETFs are publicly traded investment funds that enable investors to gain exposure to bitcoin (BTC) without actually owning the cryptocurrency. Unlike cryptocurrencies that are traded on crypto exchanges, ETFs are traded on traditional securities exchanges, such as the New York Stock Exchange and Nasdaq.
When you invest in a bitcoin ETF, you’re not directly purchasing bitcoin itself. Instead, you’re buying shares in a fund that holds bitcoin. This regulated investment vehicle is designed to make it easier for traditional investors to gain exposure to bitcoin’s price movements without having to securely buy and store the digital currency, alleviating the technological hurdles of investing in crypto.
How do bitcoin ETFs work?
Bitcoin ETFs function in a way similar to the traditional exchange-traded funds you might be familiar with. An ETF issuer, typically an asset management company, purchases the underlying asset and securely stores it with a custodian. Then, it issues shares to its fund to provide investors with access to the underlying asset held in the fund.
In exchange for an annual fund management fee, the financial institution manages the purchasing, storing, and safekeeping of bitcoin on behalf of the ETF’s investors.
When investing in a bitcoin ETF, you’re essentially buying shares in a pool of bitcoin. This process involves the creation of new ETF shares to match the demand. Conversely, when you sell your shares, they are redeemed, effectively adjusting the total number of ETF shares in circulation.
ETF shares and bitcoin prices
The value of a bitcoin ETF's shares reflects the performance of bitcoin. As the price of bitcoin moves, the value of the ETF shares adjusts accordingly.
To ensure that the ETF shares stay in sync with bitcoin prices, market makers actively buy and sell, maintaining a balance between supply and demand. If the ETF’s price starts deviating from the actual bitcoin price, market makers step in to restore equilibrium – earning a profit in the process.
Why is a spot bitcoin ETF considered such a big deal?
The introduction of a spot bitcoin ETF is considered a significant development in the cryptocurrency space for several reasons:
Mainstream adoption: A spot bitcoin ETF should attract a broader range of investors, including institutional investors, who have been hesitant to invest directly in the cryptocurrency markets for regulatory reasons. This could lead to increased adoption of bitcoin as an investment asset.
Regulatory approval: The launch of spot bitcoin ETFs required regulatory approval from the SEC, which could provide an additional level of legitimacy and oversight to the cryptocurrency markets. This could pave the way for more regulatory clarity and acceptance of cryptocurrencies.
Convenience and accessibility: A spot bitcoin ETF makes it easier for retail investors to gain exposure to bitcoin without the technical challenges of wallet management and private key security. It offers a more user-friendly and familiar investment vehicle.
Market maturity: The launch of spot bitcoin ETFs could signify that the cryptocurrency market has matured to a point where it can support regulated and standardized investment products. This could attract more institutional capital and increase market stability.
While bitcoin futures ETFs have been available for some time, the introduction of a spot bitcoin ETF holds the promise of further mainstream adoption, regulatory clarity and market maturity for bitcoin as an asset class.
The primary distinction between a bitcoin futures ETF and a spot bitcoin ETF lies in the underlying assets they invest in.
A bitcoin futures ETF invests in futures contracts that derive their value from the expected future price of bitcoin. These contracts enable investors to speculate on bitcoin’s price movements without holding the actual cryptocurrency.
A spot bitcoin ETF invests directly in bitcoin itself. Investors in a spot Bitcoin ETF own a share of the actual cryptocurrency, and the ETF’s value is directly correlated with the price of bitcoin in the market.
This article was originally published on
Jan 11, 2024 at 7:14 p.m. UTC
