What is a Bitcoin ETF?
An Exchange-Traded Fund (ETF) is a type of investment fund that holds assets like stocks, bonds, or commodities and is traded on stock exchanges. A Bitcoin ETF is a type of exchange-traded fund that tracks Bitcoin's performance while trading on traditional market exchanges. The first crypto futures funds launched in 2021, with spot Bitcoin ETFs joining later, in early 2024.
There are two types of Bitcoin ETFs, primarily: Spot Bitcoin ETFs and Futures Bitcoin ETFs.
The primary benefit of Bitcoin ETFs is providing exposure to Bitcoin without the need to directly own or manage the cryptocurrency. These investment tools provide investors with a more regulated means of investing in Bitcoin. ETFs are much better understood in traditional markets. Bitcoin ETFs raise awareness of a new asset class and create a more accessible means to trade crypto without having to learn about key storage and cryptocurrency exchanges.
Crypto ETFs vs Bitcoin ETFs vs Blockchain ETFs
Crypto ETFs and Bitcoin ETFs are similar investment vehicles, with a key difference being that crypto ETFs hold a portfolio of different cryptocurrencies while Bitcoin ETFs focus solely on Bitcoin by holding either a physical asset or providing access to derivatives.
Because they hold a basket of different cryptocurrencies, crypto ETFs offer broad exposure to the digital asset market. Diversification mitigates risks and reduces volatility as compared to single-asset ETFs. That said, crypto ETFs may charge higher than usual management fees compared to single-asset ETFs due to the complexity of their holding. On top of that, it becomes more difficult to predict returns because it depends on the performance of multiple cryptocurrencies.
A third type of ETF is Blockchain ETFs. These ETFs track the stock prices of companies that have heavily invested in blockchain technology, though they are not necessarily focused on cryptocurrencies or entities. Visa and Honeywell, for example, are two companies typically held by blockchain ETFs for their work in restructuring payment infrastructure and supply chain management.
Buying Bitcoin ETFs vs Bitcoin
Investing in a bitcoin ETF and purchasing bitcoin directly from a crypto exchange provides exposure to the asset class. However, there are many differences between the two. Here are some things to look out for:
Convenience
Purchasing Bitcoin ETFs is more convenient for most investors. Rather than having to deal with crypto keys and securing your own wallet, the brokerage firms handle that for you. Additionally, managing your crypto investments within the same brokerage account as your other assets is more convenient.
Fees
When comparing bitcoin ETFs and bitcoin, purchasing bitcoin directly is generally cheaper than a bitcoin ETF. Popular crypto exchanges allow investors to purchase bitcoin at fees that range anywhere from 0%-0.2%, while bitcoin ETFs can have management fees up to 1.5% which cover expenses related to fund management and custody of assets.
Control
When purchasing bitcoin directly from an exchange, you own the actual cryptocurrency instead of shares in a fund that tracks the price while the fund owner holds the underlying assets. Total control also comes with its own risks, as the responsibility of security and the complexity of managing cryptocurrencies falls into the investor’s hands. Hacking and losing your private keys represent some of the security risks that come with handling your own crypto.
Spot Bitcoin ETFs
These ETFs hold Bitcoins in a secure digital vault. They track the price of Bitcoin directly, meaning that the ETF share price should reflect the currency’s prevailing market price.
Spot bitcoin ETFs provide exposure without the responsibility of managing and securing the cryptocurrency. Investors gain exposure to bitcoin’s price movements without having to worry about the responsibility of security and custody, as those who purchase directly from a crypto exchange.
While spot bitcoin ETFs were only recently made available in the US markets, some of the largest brokerage firms have jumped at the opportunity to provide crypto exposure to their investors. Grayscale Bitcoin Trust (GBTC), iShares Bitcoin Trust ETF (IBIT), and Fidelity Wise Origin Bitcoin Fund (FBTC) are the largest spot bitcoin ETFs available today with market caps of $36.34bn, $24.26bn, and $11.96bn, respectively.
Bitcoin Futures ETFs
These ETFs trade derivatives rather than holding physical bitcoin as its underlying asset. Futures contracts are agreements to buy or sell bitcoin (going “long” or “short”) at a future date at a price agreed upon today, so these contracts allow investors to speculate on future price movements without directly owning the cryptocurrency.
Here’s a fun fact: Futures ETFs were easier to approve by regulators because they don’t directly involve holding on to Bitcoin. The contracts allow investors to speculate on the asset’s price without having to physically hold it.
Since the introduction of spot bitcoin ETFs, bitcoin Futures ETFs have fallen quite out of favor. ProShares BITO fund is the largest bitcoin Futures ETF with a market cap of $1.90bn, while GBTC is the largest spot bitcoin ETF with a market cap of $36.34bn.
Buying Bitcoin ETFs
If you’re ready to invest in bitcoin ETFs, you can do so through various brokerage platforms. To do so, you will need to:
- Open a Brokerage Account: If you don’t already have one, sign up for an investment brokerage account with a platform that offers bitcoin ETFs.
- Verify Your Profile: Once you open an account, you will likely be asked to verify and deposit funds into your account before you’ll be able to make a transaction. This process is pretty simple and involves linking your bank account with a brokerage account online.
- Research Bitcoin ETFs: Look for available Bitcoin ETFs using their ticker symbols. Make sure to research the different funds available to you beforehand.
- Buy Shares: The final action is to purchase shares of the ETF, just as you would with any other stock or mutual fund.
Make sure to be aware of any management fees or commissions incurred when you make transactions.
The Risks of Bitcoin ETFs
Let’s dive deep into the risks associated with Bitcoin ETFs.
Lack of Fundamental Value
Cryptocurrencies, unlike stock options, don’t represent ownership in a tangible asset or company. For this reason, bitcoin lacks many of the fundamental indicators that come with tangible companies. Without earnings reports or other financial metrics, it’s difficult for analysts to evaluate Bitcoin’s intrinsic worth.
Market Volatility
Compared to the traditional equities market, crypto price performance has historically been volatile, marked by frequent and often extreme price fluctuations. Unfamiliar investors may make emotionally driven decisions, such as panic-selling or over-investing, which can lead to significant realized losses.
Liquidity Concerns
Early in 2020, a sudden drop in Bitcoin value led to liquidity issues on several major exchanges. During periods of heightened volatility, investors could face issues with buying and selling Bitcoin at their desired price - impacting trading efficiency.
Tracking errors and price deviations, as a result of liquidity issues, could also negatively impact investor confidence in Bitcoin as a stable investment.
Alternatives to Bitcoin ETFs
Crypto ETFs remain a viable alternative to bitcoin ETFs. Peccala, for example, trades over the perpetual futures of over 130 currency pairs available in Binance Futures. Similar to bitcoin ETFs, purchasing a Peccala token is the gateway to having exposure to a proprietary trading algorithm continuously monitoring 130 crypto pairs.
With a revolutionary trading engine, Peccala has a unique set of parameters and internal rules to find a trend and calculate the probability of further amplification.
With as little as $200, Peccala makes investing in crypto much more approachable to people with no prior knowledge in the space.
