The World of Bitcoin ETFs: Understanding Crypto Investment Vehicles

From fluctuating prices to innovative blockchain updates, Bitcoin, the world’s most prominent and pioneering cryptocurrency, has experienced an interesting journey. It’s barely a decade ago when only tech enthusiasts could own BTC — now, anyone can buy Bitcoin with a debit card. Better yet, Bitcoin is now providing investors with another avenue for investment — Bitcoin Exchange Traded Funds (ETFs). This much-awaited Bitcoin ETF was approved early this year, and investors can now access at least 11 publicly traded ETFs on stock exchanges.

Bitcoin Exchange Traded Funds are fintech products that expose investors to bitcoin price movements without truly owning the actual asset. Bitcoin ETF shares are publicly traded on traditional stock exchanges, so even rookie investors can explore the cryptocurrency market.

The Road to Approval

The path to gaining regulatory approval has taken more than ten years, featuring a series of rejections, waiting, and delays.

Here is the journey from the first-ever ETF proposal to the eventual approval.

• 2013. Winklevoss’ spot Bitcoin ETF was the first-ever attempt to get ETF approved in 2013.

• 2017-2018. Between 2017 and 2018, a series of proposals were rejected by the Securities Exchange Commission, citing potential fraud, inadequate investor protection, and unsubstantiated market surveillance. The rejected proposals included those by Winklevoss, Bitwise Asset Management, and VanEck.

• 2021. The first relief for ETF proponents came in 2021 when the SEC approved Proshares Bitcoin Strategy ETF (BITO). It was approved in October 2021 and started trading on the NYSE.

• 2022. Following the success of BITO, Fidelity Wise Origin Trust attempted to get approval for a spot bitcoin ETF. This was subsequently thrown out along with another application by Skybridge in 2022.

• 2023. Addressing the strict regulations set by SEC, ARK Invest and BlackRock iShare Bitcoin Trust submitted their proposals for Bitcoin ETF in 2023. Seven months later, the SEC approved both proposals and 9 other spot bitcoin ETFs in January 2024.

• 2024. After a rather tedious, back-and-forth, and thoroughly impervious process, the SEC finally approved 11 spot bitcoin ETFs. The approved Bitcoin ETFs are from Bitwise, Grayscale, Hashdex, BlackRock, Valkyrie, Invesco, VanEck, among others.

After the SEC green light, bitcoin ETFs started being publicly traded on Jan. 11, 2024. Within 24 hours, the trading volume for these ETFs had reached a wooping $4.6 billion.

The 2 Types of Bitcoin ETFs

There are several known ETFs but given Bitcoin dominance, the two most prominent types are spot and futures bitcoin exchange-traded funds. Let’s explore each in detail.

Spot Bitcoin ETF

A bitcoin spot ETF is an exchange-traded fund that offers crypto investors direct exposure to current bitcoin prices from their regular accounts. A bitcoin spot ETF essentially holds the true bitcoin asset as its underlying asset and tracks its price closely in real time.

Futures Bitcoin ETFs

Futures are Bitcoin ETFs that do not hold the actual asset but instead use futures contracts to get exposure to the cryptocurrency’s price performance. Futures aim to enable investors to anticipate and bet on the future BTC price.

With futures, you’ll have to incur rolling over or settling contracts costs. In some instances, you’ll find futures that offer leveraged exposure to the price of Bitcoin. This allows you to amplify gains. However, the downside is that losses can also equally be amplified.

Why Are Investors Interested in Bitcoin ETFs?

While Bitcoin’s success alone should be enough to entice investors to diversify their portfolio into Bitcoin ETFs, there’s more. The demand for bitcoin exchange-traded funds has also been skyrocketing.

Let’s explore the four fundamental reasons any investor should consider bitcoin ETFs.

1. Ease of access. The mainstream investor is used to trading in assets listed on traditional stock exchanges. Unfortunately, most cryptos aren’t listed. Enter ETFs, which are traded on conventional stock exchanges, and now investors can trade in bitcoin-related assets through existing brokerages. Investors unfamiliar with crypto exchanges but interested in these assets will find this accessibility quite appealing.
2. Regulatory oversight. Since bitcoin ETFs are subjected to regulatory oversight — hence the lengthy approval process — investors are more confident in them. With the SEC policing ETFs, traders can rest assured that their concerns about fraud or manipulated markets will be reduced.
3. Portfolio diversification. Without having to hold or manage bitcoin directly, investors can now diversify their investment portfolios through bitcoin ETFs.
4. Mainstream acceptance. Given the SEC approval, the mainstream acceptance and incorporation of crypto assets into traditional financial systems are guaranteed.

Key Risks to Consider Before Investing in Bitcoin ETFs

Although spot and futures bitcoin ETFs present a confident way of investing in cryptocurrency-related assets, no reward is without a risk.

• Management fee. ETFs impose a slightly higher management fee than what you would be paying as transaction fees for trading in cryptos. Although initially insignificant, these fees can cumulatively reduce your profits over time. This is why the expense ratio is one factor you cannot overlook.
• Extreme Volatility. Like most other crypto assets, the price of Bitcoin is highly volatile, which makes all ETFs that attempt to track its price a risky investment. Even with the innovative tools available to assist in this endeavor, you must be ready to incur rapid, unprecedented losses as an investor.
• ‍Suitability for retirement accounts. According to most regulatory bodies, using a retirement savings account to invest in ETFs is highly discouraged. Such assets may not align with the recommended investment guidelines preferred by retirement plan administrators.

Conclusion

Bitcoin Exchange-Traded Funds are an excellent opportunity for investors who may have been reluctant to enter the crypto market due to the intricate nature of buying, holding, and trading these crypto assets. The recent approval of ETFs by the SEC and the subsequent listing by traditional stock exchanges now means you’re at liberty to diversify your investment portfolio to include cryptocurrency-related assets. Whether you’re looking at spot bitcoin ETFs or futures bitcoin ETFs, investors now have a simplified and convenient exposure to Bitcoin.

With Bitcoin ETFs, investors are protected by the SEC, which reduces the potential for fraud or market manipulation. That said, you should still consider the management fees, price volatility, and the inappropriateness of retirement savings accounts before deciding to invest in Bitcoin ETFs.