What is a Bitcoin ETF?

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robertstevens

Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.

Bitcoin is the world’s largest cryptocurrency. It has a market cap of several hundred billion dollars, and its price wildly fluctuates all the time. But one of the only ways to get in on Bitcoin is to buy it directly or to work with a broker who’ll handle things on your behalf.

That’s because Bitcoin doesn’t trade on a stock exchange, but on bespoke cryptocurrency exchanges: platforms that only let you trade cryptocurrencies for other cryptocurrencies. That means you’ll have to keep your crypto portfolio separate from your stocks and shares portfolio.

There are, however, a few workarounds—ways to trade Bitcoin directly on the stock market. The most promising is called the Exchange Traded Fund, or ETF, which is a fund that tracks the price of Bitcoin. You can trade it just like any other fund.

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However, financial regulators have routinely blocked Bitcoin ETFs, and none are operational as of November 2020. The US Securities and Exchange Commission—one of the most influential regulators for crypto products—has blocked proposals for Bitcoin ETFs numerous times, and most of the products on the market today are patchwork solutions.

What is a Bitcoin ETF?

ETFs became popular in the 90s, largely because they’re fairly cheap to run and don’t require a whole lot of management. They’re convenient, too, because you don’t have to watch the market or foot the bill for a small army of mutual fund managers.

The premise of a Bitcoin ETF is the same. The price of a share of one would roughly track the price of Bitcoin, providing you with exposure to Bitcoin without having to buy cryptocurrency directly, understand how it works, or work out how to store it. More than that, you can trade it on publicly-traded stock markets, alongside shares in the companies that run companies like Applebees or Pizza Hut.

Available Bitcoin ETFs

There are no operational Bitcoin ETFs—securities commissions have blocked proposals for them. Before we explore what options remain, let’s first understand why Bitcoin ETFs have been blocked and describe their short, tortuous history.

Most of the drama takes place in the USA, where the US Securities and Exchange Commission acts as a gatekeeper over the industry. The edicts of the SEC have rippled out across the world.

Cameron and Tyler Winklevoss, the twin Bitcoin billionaires who alleged that Mark Zuckerberg stole the idea for Facebook from them, first filed a proposal for a Bitcoin ETF with the SEC in 2013.

The SEC blocked the proposal on the grounds that the Bitcoin market is easily manipulated and its cryptocurrency exchanges unregulated. (The twins had tried to argue the opposite. “The arguments submitted in support of this claim are incomplete and inconsistent, and are unsupported or contradicted by data,” retorted the SEC in its judgment).

Even a Bitcoin ETF that only tracked prices from regulated and reputable cryptocurrency exchanges wouldn’t work, it said, since unregulated trading on other exchanges could flip the price of Bitcoin.

The SEC has rejected over a dozen proposals for Bitcoin ETFs since then.

The closest the world has come to a crypto ETF product is the Bitcoin ETF that’s listed on the Bermuda Stock Exchange. It’s a joint venture with Brazilian crypto fund manager Hashdex and Nasdaq, the US stock exchange.

But as of November 2020, it’s not trading, and it’s unclear which cryptocurrencies the ETF represents. Some people think that this crypto ETF may encourage regulators in other jurisdictions to sanction crypto ETFs on their own turf, but it’s too early to call it.

What options remain?

The good news is that similar products to Bitcoin ETFs are available on the market. The most popular are closed-end funds. One of these, 3iQ’s “The Bitcoin Fund,” is listed on the Toronto Stock Exchange.

The Bitcoin Fund came about like this: A group of people gave 3iQ a lot of money to buy Bitcoin. Then 3iQ bought that Bitcoin from cryptocurrency exchanges and OTC desks and listed the fund on the Toronto Stock Exchange. Private investors in the fund sold their shares on the Toronto Stock Exchanges (the ticker’s QBTC.U), and the price of the share roughly tracks the price of Bitcoin.

(Coincidentally, the custodian for the Bitcoin in The Bitcoin Fund is a crypto company called Gemini, which is run by the Winklevoss twins—who had their own application for a Bitcoin ETF rejected by the SEC in 2013).

The main distinction between The Bitcoin Fund and a Bitcoin ETF is that the former represents shares in a pool of money that actively invests in Bitcoin, whereas a Bitcoin ETF would represent Bitcoin owned by the ETF.

There are a few practical differences, too. Since Bitcoin ETFs are comparatively passive, they would, theoretically, would charge lower fees. The management fee of The Bitcoin Fund is 1.95%—fairly high, and typical for an actively managed fund.

Second, Bitcoin ETFs are algorithmically programmed to track the price of Bitcoin. Since The Bitcoin Fund represents shares in an actively managed fund, it can trade at a significant discount or premium to the price of Bitcoin.

The largest of these types of funds is the Grayscale Bitcoin Trust, a US-based financial vehicle that sells publicly-traded shares that represent the $7.2 billion lodged in its Bitcoin investment fund.

Some more options:

Not interested? There are other ways to get exposure to Bitcoin on the stock market.

One way to get indirect exposure to Bitcoin is to invest in blockchain companies. For instance, an investment in Galaxy Digital Holdings, a large firm that invests in blockchain infrastructure, companies and cryptocurrencies themselves, would provide exposure to the crypto industry. Shares are listed on the Toronto Stock Exchange.

Another is to invest in ETFs that represent shares in cryptocurrency companies. In the absence of direct investment in a Bitcoin ETF, it’s a way to remain exposed to the cryptocurrency market. On the Toronto Stock Exchange, Harvest Portfolios offers the Blockchain Technologies ETF, which tracks companies that use blockchain. Tracked stocks include Galaxy Digital Holdings, as well as huge tech firms that use—but by no means depend on—blockchain technology, such as Visa or Microsoft.

Theoretical Advantages of a Bitcoin ETF

What if, through some regulatory miracle, a Canadian stock exchange were to list a true Bitcoin ETF? What would be the advantage of investing in one compared to, say, buying Bitcoin itself? (For the sake of practicality, this consideration includes existing investments in products that provide indirect exposure to Bitcoin, namely those like the The Bitcoin Fund).

Reason #1: A Bitcoin ETF may be tax-efficient

Most pension funds or tax shelters don’t allow for direct purchases of Bitcoin. This, in part, is because the cryptocurrency market is new and unregulated. However, a Bitcoin ETF would be regulated, and likely eligible for tax-sheltered investments.

Reason #2: A Bitcoin ETF is convenient

An investor in a Bitcoin ETF doesn’t need to understand how Bitcoin works or consider how to store that Bitcoin. Opening a Bitcoin wallet and buying cryptocurrencies directly from an exchange is still a fairly technical process.

If you lose access to your wallet’s password, you’ll lose your Bitcoin forever. It’s the same if your computer’s hacked. And if you accidentally send Bitcoin to the wrong address, you could lose access to your Bitcoin. Bitcoin brokerages, such as Coinbase and Wealthsimple, have simplified the process somewhat, but charge fees for the convenience. A Bitcoin ETF handles all of those things on your behalf.

Reason #3: A Bitcoin ETF could be combined with other investments on the stock market.

Imagine a Bitcoin ETF, listed right there on the Toronto Stock Exchange. Take a step back in your mind’s eye, and further imagine another ETF that comprised several different stocks, like a Bitcoin ETF, shares in Galaxy Digital, Microsoft, and Visa.

This basket of assets would provide you with additional exposure to the cryptocurrency market in a way that would be inconvenient to replicate if you split up your crypto investments and your regular stock.

Theoretical Disadvantages of a Bitcoin ETF

Reason #1: It’d probably be cheaper to buy Bitcoin itself.

A Bitcoin ETF would charge management fees. Even though these may be smaller than those charged by publicly-traded Bitcoin trusts or closed-end funds, over time they may rack up and take a considerable chunk out of your investment.

Further, a Bitcoin ETF may incorrectly track the price of Bitcoin. More accurate and cheaper may be to invest in Bitcoin itself. If you did it yourself, you wouldn’t have to pay anyone a management fee and would be in complete control of your funds.

Reason #2: You can trade Bitcoin for other cryptocurrencies

Bitcoin is one of thousands of cryptocurrencies, each with distinct characteristics, communities and markets. Bitcoin can be traded for each of these on cryptocurrency exchanges like Binance and Coinbase.

Since most of these cryptocurrencies are unregulated and highly volatile, most won’t make it to regular stock markets.

Reason #3: Owning Bitcoin can be useful.

Bitcoin’s a hedge against central banks and private companies. Nobody but the investor holds custody over that Bitcoin, and the Bitcoin network isn’t reliant on central banks. The treasury can’t control the supply of Bitcoin, nor can it shut the network down or block your access to your wallet.

Second, the Bitcoin blockchain is private. Though all transactions are publicly recorded on the blockchain, you don’t have to tell anyone the address to your Bitcoin wallet. This, obviously, is different to a Bitcoin ETF listed on a highly-regulated stock exchange; it’s not hard for the government to find out who’s invested in the fund.

Sure, these reasons are niche, vaguely libertarian and highly political. But they’re the foundation upon which the cryptocurrency economy was founded.

Reason #4: A Bitcoin ETF doesn’t exist

The main disadvantage of a Bitcoin ETF is that it doesn’t exist! Until it does—if it ever does—you’ll have to find another way to invest in Bitcoin.

Last Updated October 10, 2018

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