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. As of February 25, 2022, it has a market cap of $742 billion, and its price wildly fluctuates all the time. Bitcoin is traded on crypto exchanges (such as Bitbuy) and crypto trading platforms (such as Wealthsimple Crypto) that let you let you buy Bitcoin and other cryptocurrencies.

Only a few years ago, Bitcoin was only available on a few crypto exchanges. There was no option to trade Bitcoin on a traditional stock market, which kept many investors and large institutions away from adding the world’s largest digital currency to their portfolio. Back then, the only option to get exposure to cryptocurrency was to invest in blockchain companies (firms that have business operations in blockchain technology).

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But now, to add Bitcoin to your portfolio, you can invest in a Bitcoin exchange traded fund (ETF), which is a fund that attempts to track the price of Bitcoin. Just like any other ETF, you can trade it on a traditional stock market. You don’t have to keep your crypto portfolio separate from your stocks and shares portfolio anymore.

There are currently many bitcoin ETFs available on the stock market. One of the most popular is ProShares Bitcoin Strategy ETF (BITO), which is owned by ProFunds Group. Valkyrie Bitcoin Strategy ETF (BTF) and VanEck Bitcoin Strategy ETF (XBTF) are also popular.

Bitcoin ETFs, explained

An exchange traded fund is a publicly traded fund that tracks some underlying asset. It’s a tidy financial product that lets investors trade, say, the price of gold or tech companies or the coffee industry, all at once. Instead of buying individual shares in Apple and Microsoft and Amazon, an ETF might sell shares in a fund that tracks tech stocks, giving investors exposure to the entire industry.

ETFs became popular in the 90s, largely because they’re relatively cheap to run and don’t require a lot of management like mutual funds do. 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 as a mutual fund. The price of a share of a Bitcoin ETF roughly tracks with 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.

Why Bitcoin ETFs were once blocked

As of February 2022, there are many operational Bitcoin ETFs available on the stock market. Before we explain which Bitcoin ETFs are available, let’s first understand why Bitcoin ETFs have been blocked (many new Bitcoin ETFs are still being 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 are unregulated. (The twins argued 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 judgement).

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.

Available Bitcoin ETFs

The Grayscale Bitcoin Trust (GBTC) was one of the first bitcoin ETFs ever launched. It was created in 2013 and trades on the OTCQX market. Since then, many Bitcoin ETFs have been publicly listed.

Some of the most famous Bitcoin ETFs available on the traditional stock markets are ProShares Bitcoin Strategy ETF, 3iQ CoinShares Bitcoin ETF, Purpose Bitcoin ETF, and Valkyrie Bitcoin Strategy ETF. As of now, most of the popular Bitcoin ETFs are future-based (also known as Bitcoin Futures ETFs).

Before investing into any Bitcoin Futures ETFs, remember that these future-based ETFs are slightly different than regular ETFs. Bitcoin Futures ETFs don’t actually hold any Bitcoins. Instead they buy “future” contracts. These Bitcoins futures contracts are a legal agreement to buy/sell the asset in the future at a prearranged price. However, investing into Bitcoin futures ETFs will help you get exposure to Bitcoin.

Recently, Fidelity gained approval for a spot Bitcoin ETF in Canada. You can easily buy, sell, and hold the Fidelity Advantage Bitcoin ETF and Fidelity Advantage Bitcoin ETF Fund using your traditional brokerage accounts.

So, there are a few different options available when it comes to investing in Bitcoin ETFs. Which one is right for you will depend on your investment and risk tolerance. Each of them offers different benefits, so be sure to do your research before making any decisions.

Other available options

If for any reason, you don’t have access to any Bitcoin ETF, there are other ways to get exposure to Bitcoin on the stock market.

  • Invest in blockchain companies: 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.

  • Invest in cryptocurrency companies: 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.

  • Invest in close traded funds: Close traded funds, such as the Bitcoin Fund, are also available on the stock market. 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 represents Bitcoin owned by the ETF. The management fee of The Bitcoin Fund is 2%—fairly high, and typical for an actively managed fund. Also: Bitcoin ETFs are algorithmically programmed to track 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.

What you should look for in a bitcoin ETF

According to crypto experts, a strong bitcoin ETF should have the following:

  • A good custodian

  • Good liquidity

  • The ability to short the ETF

Make sure you understand what these things mean before investing. For example, a good custodian is important because it ensures your money is safe. You don’t want to invest in an ETF that doesn’t have good liquidity because you may not be able to sell it when you want to. And finally, the ability to short an ETF means that you can make money if the price of bitcoin goes down.

However, there are also some risks associated with buying a bitcoin ETF. For example, the SEC could reject the ETF or there could be a security breach at the custodian. So make sure you are aware of all the risks before making a decision.

Why net asset value is an important concept to understand

When it comes to ETFs, net asset value is an important metric because it can tell you how much each share in an ETF is worth. This calculation is also used to determine if an ETF is trading at a premium or discount to its net asset value.Net asset value (NAV) is the market value of all assets owned by a company, minus the liabilities. The calculation is: Assets - Liabilities = Net Asset Value. This equation gives you the total worth of all the assets held by a company. It’s important to note that this calculation does not include any debt or outstanding obligations.

Advantages of bitcoin ETFs

Bitcoin ETFs have certain advantages over traditional investments, such as:

  1. They’re available on all traditional exchanges. Bitcoin ETFs are easily available and traded on nearly all traditional stock exchanges. They can be bought and sold like any other stock. This allows you to keep your stocks and shares portfolio together with your crypto portfolio.

  2. They’re safe: As these ETFs are traded on traditional stock markets, they are highly regulated. Within the ETF markets, their price can’t be manipulated.

  3. They’re convenient. Even if you don’t have any crypto knowledge, you can easily buy, sell, and hold shares of a Bitcoin ETF. 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. A Bitcoin ETF involves none of this.

Disadvantages of Bitcoin ETFs

However, it isn’t all sunshine and rainbows. Bitcoin ETFs can be expensive, and there are a few other potential drawbacks to consider, such as:

  1. Bitcoin ETFs may be subject to high fees. As compared to traditional ETFs, Bitcoin-related funds tend to have higher management fees. At first, you might think these charges are not that high, but over time, they may rack up and take a considerable chunk out of your investment. If you invest in Bitcoin yourself, you won’t have to pay anyone a management fee and would be in complete control of your funds.

  2. Investing in a Bitcoin ETF is highly speculative. The whole cryptocurrency market and the concept of blockchain is relatively new. While some people might think that digital currencies are revolutionary, there are still many bugs in this system that need to be fixed, and there’s no guarantee of consumer adoption on a global level in the near future. So, any investment in Bitcoin or a Bitcoin ETF is highly speculative, and you should be well-prepared for the risks that come with it.

  3. The value of Bitcoin ETFs can be volatile. Investing in Bitcoin involves huge risk as it’s a highly volatile asset. Just because it’s an ETF doesn’t mean that you won’t face wide swings in value over short periods of time. Although Bitcoin ETFs are regulated, Bitcoin is not.

Deciding to buy a Bitcoin ETF

If you’re looking for exposure to Bitcoin without having to deal with the underlying asset, then a Bitcoin ETF could be a good option for you. However, if you’re looking for long-term growth or unwilling to take on more risk, then you might want to invest in traditional assets like stocks or bonds.

Bitcoin is a high-risk, volatile investment, but it can pay huge rewards if you play the cards right. As recommended by crypto experts, you should only invest what you can afford to lose. Instead of putting all your life savings in one asset, it’s suggested to diversify your portfolio and put only 2%-5% in.

Can you become a millionaire in the future with Bitcoin? That is a possibility. Can you lose all your money in crypto? Yes, you certainly can. Crypto is risky and highly speculative.

As always, it’s important to do your own research before investing in Bitcoin ETFs, or any other cryptocurrency ETFs.

How to buy Bitcoin ETFs

You can buy Bitcoin ETFs through a well-known and trusted brokerage platform like Wealthsimple. These online trading platforms make it easy for investors to diversify their portfolio and invest in Bitcoin ETFs, as they can use the same trading account they use for other exchange funds. You won’t be charged any commission fees while buying/selling stocks and Bitcoin ETFs on these brokerage services.

For new investors, these two platforms are a great option. They are very user-friendly and filled with all the latest features that can make the trading process much easier. To start your Bitcoin investing journey, you just have to open a trading account in one of these platforms, deposit your funds using the given payment methods, and you’re all set.

Last Updated April 18, 2022

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