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What Is a Bitcoin ETF? A Beginner’s Guide

Recently, it’s become easier to trade Bitcoin (BTC) on centralized crypto exchanges (CEXs) because of multiple advancements. Even so, many crypto investors still prefer using more familiar financial instruments to buy BTC. For instance, stock traders often feel more comfortable owning shares in a Bitcoin ETF rather than storing BTC in a crypto wallet

Bitcoin ETFs are becoming increasingly common in global stock markets, but there are some tradeoffs associated with these products. So what is a Bitcoin ETF, and how can it help you make more informed investment decisions? Before we dive into Bitcoin ETF, let’s understand the concept of ETFs.

what is bitcoin etf
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Recently, it’s become easier to trade Bitcoin (BTC) on centralized crypto exchanges (CEXs) because of multiple advancements. Even so, many crypto investors still prefer using more familiar financial instruments to buy BTC. For instance, stock traders often feel more comfortable owning shares in a Bitcoin ETF rather than storing BTC in a crypto wallet

Bitcoin ETFs are becoming increasingly common in global stock markets, but there are some tradeoffs associated with these products. So what is a Bitcoin ETF, and how can it help you make more informed investment decisions? Before we dive into Bitcoin ETF, let’s understand the concept of ETFs. 

What is an ETF?

ETFs, short for exchange-traded funds, are tradable shares representing partial ownership in a fund manager’s holdings. They’re available on many of the same brokerage platforms that facilitate individual stock trading. You can also buy ETFs on the same markets where you trade individual company shares, including the New York Stock Exchange (NYSE).  

Although trading ETFs is similar to buying and selling stocks, shares in an ETF provide price exposure to more than one company. When you buy an ETF share, you become a partial owner in whatever assets your fund manager holds. 

Many ETFs track large indices like the S&P 500, Nasdaq, or the Dow Jones Industrial Average. There are also sector-specific ETFs that hold shares in categories like energy, travel, or consumer discretionary. 

Some ETFs give stock traders access to assets outside of company shares. For instance, you can buy ETFs that invest in precious metals, oil, or foreign currencies. 

If you’re familiar with the stock market, ETFs can help diversify your portfolios. In fact, since ETFs typically track multiple assets, you don’t have to worry as much about betting on single stocks, which may help manage volatility

What is a Bitcoin ETF?

A Bitcoin ETF works the same as traditional stock, bond, or commodity ETFs. The only distinction between a Bitcoin ETF and other ETFs is that the former focuses on Bitcoin’s price. Funds that offer Bitcoin ETFs will either hold BTC directly or purchase Bitcoin-related stocks and derivatives. 

Most crypto investors divide Bitcoin ETFs into two categories: spot and futures. Companies that issue spot Bitcoin ETFs buy and store Bitcoin. However, futures Bitcoin ETFs don’t directly hold Bitcoin. Instead, they primarily offer price exposure to Bitcoin futures contracts. 

Bitcoin ETF approval controversy

Currently, all the Bitcoin ETFs in the U.S. stock exchange are futures-based. In other words, these ETFs don’t literally hold bitcoins. In other words, anyone who buys Bitcoin ETFs on American markets can only access Bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME). 

Futures contracts are known as “derivatives” because they “derive” their value from an underlying asset. In this case, a futures contract only has value based on Bitcoin’s price. A BTC futures contract promises to buy a certain amount of Bitcoin at a select date, allowing you to trade around Bitcoin’s price without physically owning BTC.  

The U.S. Securities and Exchange Commission has repeatedly rejected proposed spot Bitcoin ETFs, citing concerns of fraud in the crypto industry. The SEC favors futures Bitcoin ETFs because they’re easier to track and regulate. Since all Bitcoin futures trading happens on the CME rather than private crypto exchanges like Binance, the SEC has greater control over BTC futures. 

Dozens of American crypto funds like Grayscale have criticized the SEC’s repeated refusal to approve spot Bitcoin ETFs. Many in the crypto community believe Bitcoin’s long history and dominant market cap should make it a viable asset for mainstream spot ETF trading. However, the SEC has yet to signal it will approve a spot Bitcoin ETF. 

Meanwhile, other countries have already introduced spot Bitcoin ETFs. For instance, Canada approved Purpose Investments’ spot Bitcoin ETF. Australia launched two spot Bitcoin ETFs in 2022. Countries like Germany, Brazil, and Switzerland also have physically backed Bitcoin ETFs. 

How to buy a Bitcoin ETF?

To buy shares in a Bitcoin ETF, find a brokerage platform that offers access to this product. After signing into your preferred brokerage account, buy Bitcoin ETF shares as you would purchase stock in a company. 

Hold your Bitcoin ETF shares in your account for as long as you want. Whenever you need to convert your Bitcoin ETF holdings into cash, sell shares during a weekday trading session. 

Why are Bitcoin ETFs important? 

Bitcoin ETFs make BTC investing more accessible for retail and institutional traders. While Bitcoin ETFs don’t provide complete control over your crypto, here are some of its benefits: 

  • No need to store crypto: The fund issuing a Bitcoin ETF takes full responsibility for the custody of its crypto assets. Whether your firm owns BTC, futures contracts, or crypto-related stocks, you don’t have to worry about buying and storing everything in your manager’s account. You won’t need to download a crypto wallet or secure a seed phrase
  • More familiar to stock investors: While many know about Bitcoin and Ethereum (ETH), there’s a steep learning curve involved in safely buying, storing, and sending crypto. It’s more likely stock traders will know more about trading ETFs than investing in cryptocurrencies. Investors don’t need to learn the intricacies of blockchain to buy Bitcoin ETF stock. 
  • Typically includes insurance protection: Since the SEC needs to approve ETFs, these investments qualify for the Securities Investor Protection Corporation (SIPC) insurance protections. As long as you’re using an SIPC-approved brokerage platform, you can qualify for federal insurance protections. 
  • Increased federal oversight and regulation: Some crypto investors feel more comfortable buying Bitcoin ETFs because they meet a higher regulatory standard. The SEC monitors all ETF trading activity, which provides greater federal oversight versus buying pure Bitcoin. 
  • Highly liquid asset: You can buy and sell shares in your Bitcoin ETF during any regular trading session. As long as you’re using a brokerage firm with high liquidity, it shouldn’t be a hassle to trade your Bitcoin ETF shares. 

Drawbacks of Bitcoin ETFs

While Bitcoin ETFs may be positive for some investors, they have a few notable drawbacks. Consider the following setbacks before deciding whether or not to open a Bitcoin ETF position: 

  • No Bitcoin ownership: You won’t receive BTC in your crypto wallet when investing in Bitcoin ETFs. Even if your country offers spot Bitcoin ETFs, you can’t use the Bitcoin in the fund’s account for peer-to-peer (P2P) payments or in DeFi (decentralized finance). You also have to rely on your fund’s managers to secure the BTC or futures contracts they hold. 
  • Management fees could eat into profits: Most Bitcoin ETFs charge regular management fees to shareholders. Be sure to compare fee levels for various Bitcoin ETFs so you can prepare your financial expectations. 
  • Restricted trading hours and markets: Although the crypto market is open 24/7, you can only buy and sell Bitcoin ETFs during approved trading hours. You may miss volatile Bitcoin ETF price movements when the stock market is closed. 

Examples of Bitcoin ETFs

The list of Bitcoin ETFs continues to grow, but here are a few significant examples in the U.S. market:

  • ProShares Bitcoin Strategy ETF: Approved in Fall 2021, ProShares Bitcoin Strategy ETF (BITO) was the first Bitcoin ETF launched in the U.S. Like other Bitcoin ETFs in the country, BITO only invests in Bitcoin futures contracts. 
  • Valkyrie Bitcoin Strategy ETF: The Nashville-based firm Valkyrie also received SEC approval for its Bitcoin Strategy ETF (BTF). Similar to BITO, BTF focuses on Bitcoin futures contracts traded on the CME. However, Valkyrie also offers a Bitcoin Miners ETF (WGMI) that invests in publicly traded crypto mining companies. 
  • VanEck Bitcoin Strategy ETF: New York’s VanEck also offers Bitcoin futures exposure through its Bitcoin Strategy ETF (XBTF).

Are there any altcoin ETFs?

Although many institutional investors have expressed interest in altcoins (or non-Bitcoin digital currencies) like Ethereum, there aren’t any approved ETFs specific to altcoins. However, the CME now trades Ethereum futures contracts, and many analysts believe a futures Ethereum ETF could be available soon.

In the meantime, there are a few non-BTC crypto ETFs that track specific areas of the cryptocurrency space. For example, Fidelity Investments offers two crypto-related ETFs. First, the Fidelity Crypto Industry and Digital Payments ETF (FDIG) holds stocks of companies involved in crypto P2P payments (e.g., Block, Coinbase, and Riot Blockchain). Second, Fidelity offers a Metaverse ETF (FMET) that has exposure to large tech companies (e.g., Meta) that have some exposure to the metaverse.

Wrapping up

The introduction of Bitcoin ETFs proves that investors in traditional finance are taking crypto seriously. While buying shares in a Bitcoin ETF isn’t the same as holding BTC in a wallet, it provides retail and institutional investors more ways to access the world’s largest cryptocurrency. 

Similar to Bitcoin ETFs, at Worldcoin, we aim to help more people feel comfortable investing in cryptocurrency. To reach our goal, we intend to put a share of our crypto in the hands of every individual on the planet for free. We’re also airdropping free DAI tokens to anyone who downloads our app. Subscribe to our blog to learn more about the cryptocurrency market.

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