Bitcoin ETF

Updated on April 4, 2024
Article byRutan Bhattacharyya
Edited byRutan Bhattacharyya
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Bitcoin ETF?

Bitcoin ETFs are exchange-traded funds that track the price of Bitcoin through derivatives, spot markets, or Bitcoin ownership. They enable individuals to allocate funds to Bitcoin without them needing to face the hassle of utilizing a cryptocurrency exchange while offering leverage to its price.

Bitcoin ETF

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Such ETFs have been designed to enable more retail individual investors to allocate their savings to Bitcoin without the hassle of buying the cryptocurrency directly. These investment funds eliminate the requirement of excessive funds and security procedures while offering a type of investment that is already familiar to investors. One can trade such ETFs on stock exchanges.

Key Takeaways

  • Bitcoin ETF meaning refers to an investment fund that tracks the price of Bitcoin. 
  • Since these investment funds can hold different assets in addition to Bitcoin, a fall or rise in the value of the cryptocurrency may not get reflected in Bitcoin ETF prices.  
  • Bitcoin ETF expense ratio varies from one ETF to another as the cost of managing all ETFs differs. Therefore, investors must check the expense ratio in addition to other aspects, like the portfolio holdings, before investing.
  • People investing in these ETFs do not actually own Bitcoin.

How Does Bitcoin ETF Work?

Bitcoin ETF meaning refers to an exchange-traded fund that predominantly invests in Bitcoin, the original cryptocurrency. Investing in such an ETF offers leverage to Bitcoin’s price without requiring investors to know how this cryptocurrency works. Moreover, it provides investors with portfolio diversification as ETFs can hold multiple assets.

In the case of such ETFs, the price per share fluctuates with the Bitcoin price. Therefore, if the price of Bitcoin rises, the ETF’s unit price rises too, and vice versa. That said, one must remember that instead of trading on a cryptocurrency exchange, it trades on stock exchanges, such as the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX).

One can go through the following points to understand how such ETFs work.

  • The sponsoring organization sets up the ETF and purchases the underlying asset it is established to represent.
  • The ETF enters into legal agreements with the large broker-dealers acting as the fund’s authorized dealers.
  • Then, the authorized dealers buy large share blocks from the exchange-traded fund directly and offload them to retail and institutional investors on a stock exchange.
  • Usually, investors buy and sell shares freely within a certain price range approximating the fund’s asset’s underlying value. That said, demand and supply imbalances can result in erratic price swings. If there are more sell orders than buy orders, dealers try to handle the transactions. Moreover, if the dealers’ stock of ETF shares becomes too large, they can redeem shares with that exchange-traded fund. This can trigger the sale of the underlying assets.

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How To Buy?

If individuals’ brokerage firm or financial advisor allows them to buy shares of such ETFs, they can consider purchasing through them. The brokerage firms facilitate the trade, safeguard their investment, and maintain pertinent records.

Allocating funds to Bitcoin directly is not as simple as this. One must buy Bitcoin on cryptocurrency exchanges, and the coins must be protected using a security key. Cryptocurrency exchanges can offer to store this key. However, one must remember that it can be stolen, hacked, or lost.

Examples

Let us look at a few Bitcoin ETF examples to understand the concept better:

Example #1

Suppose Sam is an investor looking to diversify his portfolio and mitigate risk. He determines that a Bitcoin ETF is a suitable investment option for him. He picks an ETF that holds shares of Apple, Amazon, Netflix, and IBM, besides Bitcoin. This will give him diversified exposure to large-cap stocks and Bitcoin without directly owing them.

Example #2

21Shares and ARK Invest seem unperturbed by the regulatory environment concerning cryptocurrency as they seek approval for a financial product based on Bitcoin. On April 25, 2023, both companies requested the SEC to approve the establishment of a spot Bitcoin ETF, despite facing rejection twice before.

While the SEC has given the green signal to multiple Bitcoin Futures ETFs, it has rejected all applications for spot ETFs to date. This is because they believe that the latter cannot safeguard the public interest and investors against manipulation and fraud.

Top Bitcoin ETFs

Let us look at some of the top ETFs tracking Bitcoin.

  • ProShares Bitcoin Strategy ETF
  • VanEck Bitcoin Strategy ETF
  • AdvisorShares Managed Bitcoin Strategy ETF
  • Valkyrie Bitcoin Strategy ETF
  • ProShares Short Bitcoin ETF
  • Global X Blockchain & Bitcoin Strategy ETF

Advantages & Disadvantages

The benefits and limitations of these ETFs are as follows:

Advantages

#1 – Provides Convenience

Allocating funds to such ETFs offers leverage to the cryptocurrency’s price without the investors needing to know how the digital asset works. Moreover, by choosing this investment option, one does not have to take on the risks associated with owning the coins directly and signing up on any cryptocurrency exchange.

#2 – Tax Efficient

Since the cryptocurrency market is decentralized and unregulated, one does not get tax benefits by purchasing Bitcoin directly. That said, the SEC, or Securities and Exchange Commission, regulates certain Bitcoin Futures ETFs. As a result, such ETFs can offer tax efficiency.

#3 – Offers Diversification 

These ETFs have a portfolio consisting of multiple assets. For example, such an ETF may hold Apple and Netflix shares besides Bitcoin. This diversification mitigates portfolio risk. Hence, individuals looking to diversify their portfolios may consider allocating their money to such investment funds.

Disadvantages

#1 – No Actual Ownership Of Bitcoin

Since central banks do not regulate Bitcoin, the cryptocurrency acts as a hedge against equity and fiat money. This offers investors a way to minimize the risks associated with the financial system. Moreover, the digital asset safeguards users and investors by offering privacy via the Bitcoin blockchain. That said, the government regulates Bitcoin exchange-traded funds, eliminating these advantages the cryptocurrency offers.

#2 – Fees

Typically, ETFs, including these, impose fees on investors to pay the people managing the investment fund. Individuals must check the Bitcoin ETF expense ratio to know what percentage of their holdings they must pay to the fund to cover the management fees. One must note that the lower the expense ratio, the better for investors.

#3 – Restrictions To Cryptocurrency Trading

Individuals can trade Bitcoin for other cryptocurrencies like XRP, Ethereum, Polygon, and Litecoin. That said, one cannot trade a Bitcoin ETF for other cryptocurrencies as it is an investment fund tracking Bitcoin’s price, not a digital coin or a token. 

#4 – ETF Inaccuracy

While these ETFs track the price of Bitcoin, they hold different assets to diversify their portfolio. This suggests that Bitcoin ETF prices may not reflect a 50% increase in Bitcoin’s price owing to the other holdings. Hence, although such an ETF offers leverage to the price of Bitcoin, it may not be able to track the cryptocurrency’s price accurately.

Frequently Asked Questions (FAQs)

1. Are Bitcoin ETFs a good investment?

Investing in Bitcoin ETF can be a suitable option for investors unwilling to manage their cryptocurrency investment actively but wishing to diversify their portfolio by allocating funds to a high-risk, high-reward asset. That said, one must consider certain aspects like financial goals and risk appetite before parking their funds in such an ETF to determine whether it is a suitable option.

2. Are Bitcoin ETFs safe?

All investments are associated with a certain degree of risk, and cryptocurrencies, including Bitcoin, have been extremely volatile. Investors must risk more than what they can afford to lose. One can consider checking with a financial advisor to find out whether investing in such ETFs can help fulfill their financial goals.

3. Does Vanguard have a Bitcoin ETF?

Vanguard does not offer Bitcoin exchange-traded funds as of yet.

4. What’s the difference between Blockchain ETFs and Bitcoin ETFs?

Considering the current form of these two ETFs, Blockchain ETFs are more stable than Bitcoin ETFs. This is because the former is not exposed to the price swings concerning Bitcoin. That said, one must remember that blockchain is still a technology that is in the developing stages.

This article has been a guide to what is Bitcoin ETF. Here, we explain how to buy it, its examples, top bitcoin etfs, advantages and disadvantages. You may also find some useful articles here –

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