What is a Bitcoin ETF?
The beginner’s guide to Bitcoin ETFs
A Bitcoin exchange-traded fund (ETF) is a regulated investment vehicle that allows investors to gain exposure to the price movements of bitcoin without owning the digital asset directly.
Bitcoin ETFs operate in a similar way to traditional ETFs. Traditional ETFs became popular as they offered an efficient way for investors to diversify risk, trade during off hours, and buy/sell fractions of shares. Although this is common in the cryptocurrency market, this sort of flexibility was difficult to achieve when trading traditional assets prior to the arrival of ETFs.
Like crypto futures contracts, cryptocurrency ETFs offer the added benefit of giving traders exposure to an asset’s price movement without having to own or take custody of the underlying digital asset itself. This structure can be especially attractive to institutional investors that want a familiar investment vehicle while still being able to gain exposure to the price movements of cryptocurrencies.
How does a bitcoin ETF work?
A traditional ETF typically comprises a basket of assets such as different stocks, bonds, or commodities. The firm behind the ETF issues shares of the ETF, which represent fractional ownership of the various assets it holds.
A Bitcoin ETF either holds bitcoin, or is designed to track the price of bitcoin. Like other traditional ETFs, shares of a Bitcoin ETF can be bought and sold on traditional market exchanges. Purchasing them provides investors with exposure to bitcoin's price movement, but does not require them to self-custody the bitcoin itself.
Globally, there are currently three approved types of Bitcoin ETF available:
- Bitcoin spot ETF
- Bitcoin futures ETF
- Leveraged bitcoin futures ETF
Bitcoin spot ETF
When a person purchases shares in a Bitcoin spot ETF, the ETF issuer (the company that creates and manages the ETF) buys an equivalent amount of BTC and holds it in reserve.
This helps to ensure that spot bitcoin ETF shares are backed 1:1 by “physical” bitcoin – the bitcoin the issuer purchases on the open market and custodies on behalf of the issuer’s shareholders. As the bitcoin price rises and falls in the crypto markets, the ETF share price should move in tandem.
Some Canadian Bitcoin spot ETF providers today include:
- Purpose Bitcoin ETF (TSE: BTCC)
- Evolve Bitcoin ETF (TSE: EBIT)
Bitcoin futures ETF
A Bitcoin futures ETF tracks the price of a basket of bitcoin futures contracts instead of the asset's spot market price. This removes the need for the ETF issuer to hold bitcoin in reserve. You can think of a Bitcoin futures ETF as a less direct way to trade bitcoin since even the issuer of the ETF does not hold any actual bitcoin.
Some Bitcoin futures ETF providers today include:
- ProShares Bitcoin Strategy ETF (NYSE: BITO)
- The Valkyrie Bitcoin Strategy ETF (NASDAQ: BTF)
Leveraged bitcoin futures ETF
This type of ETF works the same as a bitcoin futures-based ETF, but allows traders to purchase an increased quantity of shares with a smaller amount of capital. For example, with a 2x leveraged bitcoin futures ETF, a person could gain exposure to twice as many bitcoin futures contracts with their capital versus a standard, unleveraged bitcoin futures ETF.
Some leveraged bitcoin ETF providers today include:
- Volatility Shares 2x Bitcoin Strategy ETF (BITX)
Brief History of Bitcoin ETFs
The history of Bitcoin ETFs in the United States dates back to 2013, when Gemini co-founders Cameron and Tyler Winklevoss first filed a spot Bitcoin ETF application with the United States Securities and Exchange Commission (SEC).
While they failed to win approval, other established investment companies like Fidelity, Grayscale, VanEck, and WisdomTree subsequently filed applications with the SEC in hopes of becoming the first spot BTC ETF. To date, the SEC has not yet approved a spot bitcoin ETF in the United States, but has approved BTC futures ETF, ProShares Bitcoin Strategy ETF (NYSE: BITO) and the Valkyrie Bitcoin Strategy ETF (NASDAQ: BTF).
Recent filings with the SEC for a spot BTC ETF from investment firms like BlackRock not only signal renewed interes , but also could lead to SEC approval given the suite of traditional ETFs that firms like BlackRock manage. An SEC-approved bitcoin spot ETF in the United States would provide investors with a simple way to invest in crypto – using a familiar investment vehicle that is already widely used in the traditional equities market.
In other countries, Bitcoin ETF applications have had better success. In 2021, Canadian regulators approved the Purpose Bitcoin ETF (TSE: BTCC) and Evolve Bitcoin ETF (TSE: EBIT) in quick succession. These milestone events marked the debut of the world’s first two physically settled Bitcoin spot ETF products.
If you want to learn more about the various financial products that follow the price of different cryptocurrencies, check out the Kraken Learn Center article What are crypto derivatives?
Why invest in a Bitcoin ETF?
Investing in any type of Bitcoin ETF may offer several advantages over directly investing in crypto for certain types of traders. But there are also downsides to Bitcoin ETFs that all investors should consider as they determine which financial tool is right for them.
First, ETFs provide a convenient and regulated means of accessing bitcoin's price changes without the complexities associated with buying, storing, and keeping cryptocurrency safe. Additionally, traders can buy and sell digital currency ETF shares through their brokerage accounts, just like any other stock or ETF.
Second, ETFs provide liquidity and ease of trading. Bitcoin ETF shares trade on established stock exchanges, benefiting from the existing infrastructure and liquidity of these markets. This benefit allows investors to enter or exit positions in a familiar and cost-efficient manner, without needing to onboard with a dedicated crypto exchange and face additional counterparty risk.
Furthermore, a Bitcoin ETF may attract institutional investors that either lack the operational infrastructure to directly custody Bitcoin or have internal compliance restrictions, but also seek the liquidity and familiarity of traditional markets. Thus, ETFs may ultimately help them participate in crypto markets they otherwise could not, which could help to broaden the potential investor base for different types of cryptocurrencies, including bitcoin.
While bitcoin ETFs offer several advantages, especially for institutional investors, they are not without their tradeoffs.
First, investing in a Bitcoin ETF means accepting indirect exposure to bitcoin, rather than taking direct ownership of the cryptocurrency itself. While the ETF shares are meant to track the price of bitcoin, they may not provide as accurate a price correlation as holding the underlying asset. Accordingly, a Bitcoin ETF shareholder is subject to counterparty risk to the ETF issuer and custodian who maintain control over the private keys associated with the bitcoin.
Second, fees associated with ETFs can impact investment returns. Like traditional ETFs, Bitcoin ETFs typically charge management fees for offering the product. These fees can reduce the overall return on investment, especially in cases where the fund's performance closely mirrors that of the underlying bitcoin. Because these ongoing fees are a permanent drag on an investor’s total return, over time the investor’s returns from the Bitcoin ETF will be less than a direct investment in Bitcoin. Investors should carefully consider an ETF’s associated transaction and management fees (commonly referred to as its “expense ratio”) before investing.
Third, geographic bans and limited market hours are other Bitcoin ETF disadvantages. In some prominent jurisdictions, retail traders are prohibited from buying any type of crypto derivative, including ETFs.
Lastly, traders may only be able to transact in ETF shares during traditional market trading hours. Bitcoin ETFs may not be tradable 24/7/365 like cryptocurrency spot markets. This leaves ETF traders at a disadvantage during periods of price volatility if bitcoin's price moves dramatically over the weekend or outside of market trading hours.
How to invest in a Bitcoin ETF
- Choose a brokerage platform: The first step in investing in a Bitcoin ETF is to choose a brokerage platform. Several traditional brokerage services, such as Fidelity and Charles Schwab, now offer access to Bitcoin ETFs. It is important to choose a reputable, regulated platform.
- Open an account with the brokerage: Once you have chosen a brokerage platform, the next step is to open an account. Typically, this involves providing your personal information and identification documents. Some platforms may also require you to complete a suitability questionnaire to make sure that Bitcoin ETFs are a suitable investment for you.
- Fund Your Account: Before you can invest in a Bitcoin ETF, you need to fund your brokerage account. The vast majority of reputable brokerage platforms support bank transfers, credit cards, and other payment methods. It is important to note that some platforms may charge fees for funding your account, so it's essential to read the terms and conditions carefully.
- Choose a Bitcoin ETF: After funding your account, you can now choose a Bitcoin ETF to invest in. It is important to research the different ETFs available and consider factors such as fees, liquidity, and performance before deciding.
- Place your order: Once you have chosen a Bitcoin ETF, you can now place your order. This step involves specifying the number of shares you wish to purchase and the price at which you want to buy them. It is important to note that Bitcoin ETF prices can be volatile, so it's essential to check your investment and adjust your strategy accordingly.
- Monitor your investment: Investing in a Bitcoin ETF requires continuous monitoring to keep up to date with market trends and news.
Significance of Bitcoin ETFs
Overall, the emergence of Bitcoin ETFs represents a milestone in the maturation of the cryptocurrency market.
Bitcoin ETFs offer investors a regulated and accessible way to gain indirect exposure to bitcoin's potential upside while contributing to the broader adoption of digital assets.
As the regulatory landscape continues to evolve, these regulated financial products may help to further cement the legitimacy of the cryptocurrency industry.
Start buying Bitcoin
Although Kraken does not offer Bitcoin ETF trading, we do offer a secure and easy way to get started in crypto.
With Kraken, you can buy bitcoin youself rather than a derivative product that follows the price of bitcoin.