What are Bitcoin ETFs?
By: Alex Miguel | Last updated: 2/22/24
Bitcoin exchange-traded funds (ETFs) are publicly traded funds that provide investors with exposure to Bitcoin without needing to purchase the actual cryptocurrency directly.
In this article, I’ll explain how Bitcoin ETFs work, their pros and cons, provide details on some of the popular choices available, and how you can safely acquire them.
What are Bitcoin ETFs Summary
Bitcoin ETFs are funds that provide shares backed by real Bitcoin and traded on traditional securities exchanges. They effectively provide traditional investors and institutions with a way to get Bitcoin exposure through regulated markets.
Although this benefits wider Bitcoin adoption and investment, in most cases, buying and storing your own real Bitcoin is still recommended. With actual Bitcoin, you can safely store it in your own wallet, where you maintain full control. With ETFs, you don’t actually possess the real coins and are at the mercy of your chosen broker.
That’s Bitcoin ETFs in a nutshell. If you’d like a more detailed overview of what Bitcoin ETFs are and how they work, continue reading. Here’s what I’ll cover:
- Before Bitcoin ETFs
- What is an ETF?
- What is a Bitcoin ETF?
- Pros & Cons of Bitcoin ETFs
- How to Choose a Bitcoin ETF
- Notable Bitcoin ETFs
- How Bitcoin ETFs Impact Bitcoin’s Price
- Frequently Asked Questions
- Conclusion
Don’t like to read? Watch our video version of this guide:
1. Before Bitcoin ETFs
The first US spot Bitcoin ETFs were approved on January 10, 2024. Up until this point, most methods to buy Bitcoin have involved crypto exchanges or brokers, and self-custody.
With self-custody, an investor has to personally find and select a crypto exchange, buy their Bitcoin directly, and then store the coins in a wallet they choose. It is then up to them to maintain the security of their assets.
As you likely know, this entire process involves at least some degree of expertise and confidence by the investor. Finding a reputable exchange with fair fees takes effort, and storing Bitcoin securely in cold storage (storing crypto offline for safety) like a hardware wallet takes a degree of knowledge and effort and comes with risk.
Prior to the US’s spot Bitcoin ETF approvals, most investors could not invest in Bitcoin through their traditional financial broker or allocate part of their retirement fund to the cryptocurrency.
Investors can now safely and easily acquire Bitcoin ETF shares through traditional brokerages like Fidelity or Charles Schwab and through multi-purpose investment platforms like Robinhood and eToro.
2. What is an ETF?
An ETF, or exchange-traded fund, is a publicly traded fund that tracks the performance of one or more different underlying assets. These can be purchased through typical financial services companies like Charles Schwab, Fidelity, and Vanguard.
Let’s break down the ETF abbreviation into its components to see more closely how it works:
- The E, or Exchange in ETF, means ETFs are bought and sold like any other stock on an exchange, usually through brokers.
- The T, or Traded, means ETFs are traded and, as a result, experience price movements throughout the day.
- The F, or Fund, means that ETFs generally hold a collection of assets that track a specific index, and buying into it gives investors exposure to that asset class.
Since they often hold a collection of several assets, ETFs can be similar to mutual funds – but trade on stock exchanges like individual stocks.
ETFs provide investors with exposure to the underlying asset(s) without needing to buy them directly. This is most useful when the ETF tracks a “basket” of different assets or a single asset that is difficult to invest in directly.
Gold ETFs are an example of this. If you, as an investor, want exposure to the gold market, it’s easier and more convenient to buy into a gold ETF than to purchase (and store) your own physical gold bars.
The same thinking applies to other common types of ETFs, including silver, real estate, crude oil, and natural gas.
It’s important to note that the U.S. Securities and Exchange Commission (SEC), an independent federal agency, regulates ETFs in the United States. This means that the government oversees the trading of ETFs in order to ensure investors’ safety and prevent fraud.
Overall, ETFs have a good reputation for being flexible, having great liquidity, and often lower fees than other investment options. Plus, you aren’t burdened by the need to store the actual asset you’re investing in.
3. What is a Bitcoin ETF?
Like a traditional ETF, a Bitcoin ETF provides investors with a regulated investment vehicle. It enables them to invest in the Bitcoin market without purchasing actual Bitcoin and storing it themselves.
Unlike cryptocurrencies that are traded on crypto exchanges like Kraken, ETFs are traded on traditional securities exchanges, such as the New York Stock Exchange and Nasdaq. In Canada, Bitcoin ETFs are traded on the Toronto Stock Exchange (TSX). They are traded on the Euronext Stock Exchange (ENX) in Europe.
When you invest in a Bitcoin ETF, you’re not directly purchasing Bitcoin. Instead, you’re buying shares in a fund that holds Bitcoin. Think of it like buying a ticket or voucher that officially declares you own X amount of Y asset.
Like gold and silver ETFs, this is designed to make it easier for traditional investors to get exposure to Bitcoin’s price movements without buying and storing it themselves.
How do Bitcoin ETFs work?
An ETF issuer – usually an asset management company, like BlackRock or Franklin Templeton – buys the underlying Bitcoin and stores it securely with a custodian. Then, it issues the fund shares, providing investors with access to the underlying coins.
For an annual management fee, the company manages the purchase and storage of Bitcoin on behalf of the ETF’s investors.
Coinbase has been chosen as one of the primary custodians for securely storing Bitcoin for several large financial management companies that issued Bitcoin ETFs, such as BlackRock, Grayscale, Franklin Templeton, and others.
Spot Bitcoin ETF vs. Bitcoin Futures ETF
A Spot Bitcoin ETF is the term used for a note, or a financial instrument in technical terms, that tracks the current price of Bitcoin. This is as opposed to a Futures ETF that tracks bets or, to put it more technically – speculations about Bitcoin’s price at a future date.
How to buy a Bitcoin ETF
In order to buy a Spot Bitcoin ETF, you can use an online broker such as Robinhood, eToro, Fidelity, WeBull, and Charles Schwab. You can also ask for a Bitcoin ETF to be included in your traditional IRA, Roth IRA, or 401(k) plan.
You may be wondering, “Does an ETF track the price of Bitcoin to a tee?”
The answer is – not exactly.
While the ETF aims to mirror the performance of Bitcoin, ETFs always experience tracking errors that create a gap between the ETF’s price and Bitcoin’s actual price. These tracking errors can occur due to market conditions, the ETF management’s strategy, or the fees that are associated with the ETF.
4. Pros & Cons of Bitcoin ETFs
As you may have gathered so far, there are plenty of benefits to buying a Bitcoin ETF instead of buying Bitcoin directly on your own. There are also some important negatives to consider, which I’ll go over below.
What are the pros of Bitcoin ETFs?
The positives include the convenience of buying and selling through a traditional securities broker that you may already be signed up with (like Fidelity or Charles Schwab), not having to find (and vet) a crypto exchange to buy actual Bitcoin, and not needing to store the coins securely yourself afterward.
This makes ETFs much more accessible to the general public, as acquiring them requires little technical know-how. When you buy an ETF, you don’t have to worry about getting a Bitcoin wallet, creating a backup of your seed phrase, or keeping your wallet in a safe place.
Additionally, ETFs enable exposure through investment funds such as retirement funds – something not easily done through other methods.
The bottom line: if all you want is investment exposure to the Bitcoin market and aren’t interested in any of its use cases, then buying Bitcoin ETFs through traditional brokers, Robinhood, or eToro is simple and convenient.
Of course, there are also plenty of downsides with Bitcoin ETFs.
What are the cons of Bitcoin ETFs?
Buying a Bitcoin ETF can be more expensive than buying actual Bitcoin outright due to brokerage and issuer fees – often charged annually and with each purchase and sale.
Traditional markets also have limited trading hours, which don’t exist for real crypto markets, which are open 24/7. This could easily lead to missing out on big price moves.
Additionally, when Bitcoin’s price becomes extremely volatile, some ETFs might not be available for buying or selling as a protective measure from the ETF issuer. This means that you may be unable to take advantage of big price swings when they happen.
When you purchase a Bitcoin ETF, the underlying Bitcoin is kept in the hands of a third party, which comes with its own risks. We’re entering uncharted territory with investment into digital assets, and if your ETF provider or their Bitcoin custodian is hacked, how will that be resolved? Just something to consider, as opposed to safely storing actual Bitcoin yourself.
This last point is worth mentioning: Bitcoin ETFs go against the spirit of what Bitcoin was reputedly created for – decentralization of money, privacy, anonymity, etc.
The actual Bitcoin that backs the issued ETF shares is held by one company (centralized). When you purchase a Bitcoin ETF, there is nothing anonymous or private about it. Your financial services provider knows who you are and exactly what you purchased.
Plus, with Bitcoin ETFs, you can’t use them how you would normal Bitcoin; you can’t send them anywhere (to family or friends) or buy any goods or services with them. They are vouchers, redeemable only from exactly where you bought them: your brokerage.
If you store your own actual Bitcoin in a wallet under your full control, you can do all of these things, and it’s private and anonymous and maintains the decentralized spirit of Bitcoin.
5. How to Choose a Bitcoin ETF
Today, there are 11 different Spot Bitcoin ETF options available in the US. I’ll start out by saying there’s no such thing as a perfect ETF. Choosing an ETF is based on personal preferences as much as it’s based on hard data.
Here’s a list of things you’d want to consider before choosing your ETF:
Management fees – also known as the expense ratio. Lower fees directly affect the overall return and make the investment in the ETF more correlated to investing in actual Bitcoins. At times, ETF issuers offer to waive the management fees for a certain period in order to attract new investors.
Brand name and reputation – Choosing an ETF from a reputable issuer with a track record of managing ETFs can yield better results in terms of correctly tracking Bitcoin’s price and managing your funds overall. If the issuer has experience with crypto-related assets, that’s an additional plus.
ETF assets under management (AUM) – Higher AUM may reflect greater investor confidence in the ETF. This also usually correlates with greater liquidity, meaning it’s easier to buy and sell your ETF shares.
6. Notable Bitcoin ETFs
The notable Bitcoin ETFs below are all available on typical financial services platforms:
iShares Bitcoin Trust
BlackRock’s Bitcoin ETF is known as the iShares Bitcoin Trust and trades on the Nasdaq under the ticker IBIT. It has a notable expense ratio of 0.25%, which is among the lowest fees for competing products.
The iShares Bitcoin Trust is targeting a broad audience, emphasizing the appeal to the next generation of clients, including millennials and high-net-worth individuals.
The underlying Bitcoin behind BlackRock’s IBIT ETF is held in custody by Coinbase.
Grayscale Bitcoin ETF
Grayscale’s Bitcoin ETF, the Grayscale Bitcoin Trust, trades on the New York Stock Exchange under the ticker GBTC. Due to being previously established as an investable trust, it started off as the world’s largest Bitcoin ETF by assets under management.
The original Grayscale Bitcoin Trust, created in 2013, was the first publicly traded Bitcoin fund, showcasing the longest operational history in the space. Grayscale had a long-running battle with the US Securities and Exchange Commission (SEC) as it sought to convert its fund into an ETF.
GBTC has some of the highest fees on the market, with an expense ratio of 1.5%. The ETF uses Coinbase as its custodian and BNY Mellon for fund accounting and administration.
Bitwise Bitcoin ETF
The Bitwise Bitcoin ETF trades on the New York Stock Exchange under the ticker BITB. With a compellingly low expense ratio of 0.20%, it is currently the most cost-effective option for investors seeking exposure to Bitcoin.
It is competitively priced and distinguishes itself by donating 10% of its proceeds to BTC developers, aligning with the broader crypto community.
BITB is backed by Bitwise’s specialist expertise and a robust six-year track record managing crypto assets for leading institutional investors.
The trust is administered by BNY Mellon, with coin custody also handled by Coinbase.
Fidelity Wise Origin Bitcoin Fund
The Fidelity Wise Origin Bitcoin Fund, listed on the New York Stock Exchange under the symbol FBTC, has a competitive expense ratio of 0.25%. It seeks to offer a familiar investment structure, standard reporting, and transparent pricing for easy incorporation into client portfolios.
Fidelity has conducted extensive research on Bitcoin and blockchain solutions since 2014, adding a layer of expertise to the fund.
The fund has no lockups and is administered by Fidelity Service Company, with its Bitcoin custody handled by Fidelity Digital Asset Services, LLC. In other words, instead of choosing Coinbase to custody their Bitcoin, Fidelity has chosen to self-custody their Bitcoin, or manage its security and storage themselves.
7. How Bitcoin ETFs Impact Bitcoin’s Price
Since the companies issuing the ETFs are required to hold actual bitcoins in order to back up the notes they are issuing, buying pressure is created, and the price tends to go up as ETFs become more common.
Additionally, the availability of a Spot Bitcoin ETF allows institutional investors such as pension funds, hedge funds, and other investor groups to invest in Bitcoin as well, potentially creating even more buying pressure and driving the price up further.
Combine all of this with the 2024 Bitcoin halving event, which will cut the generation of new Bitcoin in half, and you get a mix of higher demand with tightening supply. When that happens, the price of an asset almost invariably goes up.
Having said that, keep in mind that anything can happen, especially with Bitcoin. What I’m sharing with you is not investment advice. You should always do your own research and decide for yourself if you want to invest in anything.
8. Frequently Asked Questions
The three most popular spot Bitcoin ETFs by trade volume are BlackRock’s iShares Bitcoin Trust (IBIT), Grayscale’s Grayscale Bitcoin Trust (GBTC), and Fidelity’s Fidelity Wise Origin Bitcoin Fund (FBTC).
No. When purchasing a Bitcoin ETF, you are buying into a managed fund designed to track the price of Bitcoin. You don’t actually own any real Bitcoin yourself. If you want to be able to send Bitcoin somewhere, like friends or family, or buy things with it, you’ll need to purchase the real thing from a cryptocurrency exchange.
Yes. On January 10, 2024, the U.S. Securities and Exchange Commission (SEC) approved 11 spot Bitcoin ETFs, allowing retail (and institutional) investors to access them.
Bitcoin ETFs in the United States are regulated by the U.S. Securities and Exchange Commission (SEC), an agency of the US federal government.
9. Conclusion
Bitcoin ETFs provide a new and effective way for US investors to get exposure to Bitcoin, opening up access for both regular investors and institutions via traditional markets.
This is excellent for allowing a wider range of investors to access the Bitcoin market, removing the need for technical expertise while providing regulatory oversight to the instrument providers. Those interested can now safely acquire Bitcoin exposure through regulated financial companies like eToro and Robinhood or through their traditional companies like Charles Schwab.
Although this is useful for wider Bitcoin adoption and investment, you will probably want to buy and store your own Bitcoin from a trusted cryptocurrency exchange or broker, like Kraken or Coinmama, if you feel capable. This minimizes third-party risk and ensures that you can use or transfer the Bitcoin as you wish in line with its original intention.
On the other hand, it’s great to see that traditional investors and investment funds can now diversify into Bitcoin quickly and easily.
Do you have any experience with Bitcoin ETF products? Let us know in the comments section below.
