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One of the most impactful events of 2024 in the crypto market has been the approval of spot bitcoin ETFs. It is hard to understate this milestone because it gave a large slew of investors access to the first cryptocurrency, even if indirectly. In this guide, the ChangeHero team explains what ETFs are and why they are so important.
Key Takeaways
- Exchange-traded funds or ETFs for short are a type of derivative asset that tracks one or more assets, usually an index or an asset basket. Consequently, cryptocurrency ETFs are derivatives tracking the price of the corresponding crypto asset.
- Bitcoin ETFs made it big in 2024, after finally getting the green light in the US. Since then, they helped the Bitcoin value and the cryptocurrency market as a whole mature considerably.
- Since ETFs do not offer direct investment in digital assets, they have their uses but do not replace the underlying asset class. For instance, Ether ETFs do not give access to staking.
What is an ETF?
An ETF, which stands for “exchange-traded fund”, is a derivative asset that tracks a selection of assets but can be traded on its own like an independent asset.
For example, SPDR S&P 500 (SPY) is an ETF that tracks the S&P 500 index (index of top-500 exchange-traded American companies). An index itself is only a metric but with a derivative like an ETF, it can be traded on an exchange.
ETF is usually backed by a basket of assets managed by an authorized provider (AP). In the case of cryptocurrencies, APs take care of custody and managing digital assets.
What is a Bitcoin ETF?
Therefore, a Bitcoin ETF (Exchange-Traded Fund) is an investment fund that lets individuals gain exposure to the price of Bitcoin without directly buying and holding the cryptocurrency.
Bitcoin ETFs were the subject of many discussions in the crypto community for years until in early 2024, the U.S. Securities and Exchange Commission (SEC) finally approved the applications. The decision had an immediate effect on the price, launching it to a new all-time high over the weeks that followed.
Bitcoin ETFs are traded on a stock exchange like individual stocks and can be bought and sold throughout the day. They offer a convenient way to invest in Bitcoin, with the added benefit of being regulated by the Securities and Exchange Commission (SEC).
Types of Bitcoin ETFs
Spot Bitcoin ETFs
A spot Bitcoin ETF is a type of ETF that directly tracks the price of Bitcoin by holding a large amount of the cryptocurrency itself. They are designed to provide investors with a way to gain exposure to the price of Bitcoin without having to buy and hold the cryptocurrency itself. Examples of spot Bitcoin ETFs include the iShares Bitcoin Trust (IBIT) and the Bitwise Bitcoin ETF (BITB).
Bitcoin Futures ETF
A Bitcoin futures ETF is a type of ETF that tracks the price of Bitcoin futures contracts, rather than the spot price of Bitcoin. They are designed to provide investors with a way to gain exposure to the price of Bitcoin without having to directly buy and hold the cryptocurrency itself. Examples of Bitcoin futures ETFs include the ProShares Bitcoin Strategy ETF (BITO) and the Invesco Galaxy Bitcoin ETF (BTCO).
Advantages of Investing in a Bitcoin ETF
Bitcoin ETFs offer a convenient way to invest in Bitcoin, without having to directly buy and hold the cryptocurrency. Self-custody can be a challenge even if the amounts held are modest, but imagine managing millions and billions of dollars in value.
Bitcoin ETFs can diversify a portfolio by adding exposure to the price of Bitcoin. It can serve as a middle ground between more volatile cryptocurrencies and less risky traditional asset classes.
Last but not least, an equally important point for large investors is protection by law. Bitcoin ETFs are regulated by the SEC, which can provide an added layer of protection for investors.
Disadvantages of Investing in a Bitcoin ETF
Bitcoin ETFs often come with fees, which can eat into investment returns. The fees are supposed to cover the expenses of the AP for handling the digital assets.
When investing in a Bitcoin ETF, investors do not have direct control over the underlying assets. While they own the derivatives, they cannot use the underlying bitcoins.
And as already mentioned, the price of Bitcoin can be highly volatile, which can result in significant losses if not managed properly. To make matters worse, crypto is not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation.
Fees and Expenses
Bitcoin ETFs often come with management fees, which can range from 0.25% to 1.50% per year.
Investors may also be charged trading fees when buying and selling Bitcoin ETFs. Moreover, there may be other expenses associated with investing in a Bitcoin ETF, such as custody fees and administrative fees.
How to Invest in a Bitcoin ETF
Opening a Brokerage Account
To invest in a Bitcoin ETF, investors will need to open a brokerage account with a reputable online broker. The account will need to be funded with cash or other securities in order to purchase the ETF.
Placing a Trade
Once the account is funded, investors can place a trade to buy the Bitcoin ETF. The trade can be placed online or through a mobile app and will be executed at the current market price.
Popular Bitcoin ETFs
By now, there are dozens of options available for investors looking to trade BTC ETFs. Each of them has a unique trading ticker to help distinguish them depending on the AP.
Some popular BTC ETFs are iShares Bitcoin Trust (IBIT), Bitwise Bitcoin ETF (BITB), ProShares Bitcoin Strategy ETF (BITO), Invesco Galaxy Bitcoin ETF (BTCO), and VanEck Bitcoin Trust (HODL).
Alternative Cryptocurrency ETFs
When it comes to altcoins, only Ethereum can boast of having the SEC-approved spot Ethereum ETFs in the US. Nevertheless, it is an important milestone considering that Ether has been a contentious topic within the government agency, particularly in the discussion of whether it constitutes a security.
Since July, nine spot Ethereum ETFs have been available for trading. Most of them are provided by the same APs that already offer Bitcoin ETFs as well.
Risks and Considerations
Market Volatility
The price of Bitcoin, despite it being the most valuable cryptocurrency, can be highly volatile. It can result in significant losses if not managed properly. Investors should be aware of the risks associated with market volatility and consider their investment objectives and risk tolerance even before investing in a Bitcoin ETF.
Regulatory Risks
The regulatory landscape for Bitcoin ETFs is still evolving, and investors should be aware of any changes to regulations. There is a risk that regulatory changes could negatively impact the price of Bitcoin, and therefore the value of the ETF.
Tax Implications
The tax implications of investing in a Bitcoin ETF depend on the individual investor’s circumstances. As a general rule, gains from investing in a Bitcoin ETF are subject to capital gains tax.
Conclusion
Investing in a Bitcoin ETF can provide a convenient way to gain exposure to the price of Bitcoin, without directly buying and holding the cryptocurrency. However, it does not mean that this option is free from any risk. Weigh your options carefully and never neglect doing your research.
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Frequently Asked Questions
What is the best Bitcoin ETF?
As choosing a Bitcoin ETF to invest in should be done with consideration for one’s capabilities and risk appetite, there is no single end-all-be-all best Bitcoin ETF. Before picking, consider factors such as fees and AP’s underlying reserves.
What is the ETF symbol for Bitcoin?
There are more than a dozen offerings in the market for spot bitcoin ETFs alone. Each has a different ticker symbol: some trade with recognizable ones like GBTC and FBTC while others have exotic and even memetic ones such as HODL and BRRR.
Does Ethereum have an ETF?
There are nine approved spot Ether ETFs in the US that offer indirect exposure to Ethereum’s price.
What is the best ETF for Ethereum?
As choosing an Ether ETF to invest in should be done with consideration for one’s capabilities and risk appetite, there is no single end-all-be-all best ETH ETF. Before picking, consider factors such as fees and AP’s underlying reserves.
Which ETF holds the most bitcoin?
The largest spot Bitcoin ETF by AUM is currently the iShares Bitcoin Trust (IBIT) ETF, offered by BlackRock. According to ETF.com, it accounts for $21.22B in assets held.
Disclaimer
This article is not a piece of financial advice. When dealing with cryptocurrencies, remember that they are extremely volatile and thus, a high-risk investment.
Always make sure to stay informed and be aware of those risks. Consider investing in cryptocurrencies only after careful consideration and analysis and at your own risk.
