Crypto

11 min read

November 05, 2021

What is a Bitcoin ETF?

It’s time to understand how cryptocurrency ETFs work, especially as they are on the cusp of entering the United States market.

If you’ve ever invested your money, chances are you’ve come across the term “ETF.” An ETF, or an exchange traded fund, is a financial instrument that tracks the value of a collection of assets. Its main benefit is that it allows investors to diversify their holdings without actually owning any specific stocks or assets themselves. 

Most ETFs track larger baskets of names with something in common, for example a collection of companies focused on sustainability, or stocks focused solely on the biotech industry. For individuals who want to just focus on gains and losses, ETFs are a simple way to invest, forgoing the slightly tricker process of actually buying and selling individual assets. 

What is a Bitcoin ETF? 

Now that we know a little about ETFs, what is a crypto ETF? Like any ETF, a Bitcoin ETF would track the value of Bitcoin without the process of actually having to buy Bitcoin. For many investors, navigating cryptocurrency exchanges, paying cryptocurrency taxes, and eventually selling cryptocurrency for a profit is a complicated process. 

As such, a Bitcoin ETF allows investors to buy and trade Bitcoin on the regular market exchange without personally dealing with any of these complexities. 

ETFs are also highly regulated, given that they are traded on traditional exchanges, making them a safer investment than other forms of investment. Even crypto exchanges and wallets are highly susceptible to hacking or theft, so a Bitcoin ETF protects against these risks without forcing you to even own any cryptocurrency. 

Bitcoin ETFs have just been launched in Canada, Brazil, Europe, and Dubai this year. Approval from the SEC would spur the adoption of cryptocurrency ETFs worldwide, given that the US represents a large portion of the world’s financial market, and give further legitimacy to cryptocurrency in the process. 

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How Does a Bitcoin ETF Work?

The main appeal of Bitcoin or cryptocurrency ETFs is that they operate exactly like a traditional ETF.

There are two forms of ETFs: physical-backed and futures-backed. 

  • Physical-Backed: A physical-backed crypto ETF is created when an asset management company buys actual cryptocurrency coins from the market, just as it would buy shares for a traditional ETF. The firm can then set up a fund that represents the value of the crypto assets it holds and list it for trading as an ETF on the stock exchange. When the value of the digital coins rises, the value of the ETF goes up, too.
  • Futures-Backed: A futures-backed ETF is based on crypto futures contracts instead of actual coins. A futures contract is used in finance and is an agreement to buy or sell an asset at a predetermined price at a specified time in the future. These are less risky than physical-backed ETFs as there is no physical asset to be protected and the SEC is planning to approve this type of an ETF for Bitcoin. 

Finally, Bitcoin ETFs are slightly different from traditional ETFs in that you should not expect a dividend payment. For some ETFs that may track the S&P 500, for example, you will receive a cut of the dividends that a company in the ETF pays to their shareholders. 

Since Bitcoin is decentralized, this won’t happen with a Bitcoin ETF. But, you will still have to pay fees on the Bitcoin ETF, as with any ETF, though a portion of your fees will go towards the purchase and storage of the Bitcoin that underlies the ETF. 

How to Invest in a Bitcoin ETF

Traditionally, ETFs are bought and sold on securities exchanges, which means that you can trade them via your regular online brokerage account. After searching the ticker symbol of the ETF you want to invest in, place a market order and your broker will be able to execute the trade during market hours (as cryptocurrency ETFs trade on the regular market, not the cryptocurrency market which operates 24/7). Finally, set up an automatic investing plan with your broker if you want to invest on a more regular basis. 

Given that the SEC has yet to approve any cryptocurrency ETFs, there are few options of Bitcoin ETFs to invest in in the United States. In fact, the only Bitcoin ETF currently in the United States is the ProShares Bitcoin Strategy ETF ($BITO). 

Outside the U.S. there are various options for investing in Bitcoin ETFs. For instance, the Frankfurt Stock Exchange lists the Bitcoin ETF BTCE. Note that you will need a foreign securities account to invest on the Frankfurt Stock Exchange and will need to account for foreign currency transaction fees and exchange rates.  

Investing in Bitcoin vs. Investing in Bitcoin ETFs

Likely, you've been wondering...what is the difference between investing in Bitcoin and investing in a Bitcoin ETF, anyway? Well, first and foremost, investing in Bitcoin requires knowledge of investing in cryptocurrency, including a digital wallet, familiarity with cryptocurrency exchange platforms, and the filing of cryptocurrency taxes. 

More importantly, though, ETFs are much better understood in the investment world than cryptocurrencies are. As such, more investors feel comfortable investing in a Bitcoin ETF than buying the cryptocurrency itself. 

An added advantage to savvy investors is that investors can sell short shares of a Bitcoin ETF if they believe the price of Bitcoin will go down in the future. This cannot be done in the traditional cryptocurrency market and is a benefit you gain by investing in the Bitcoin ETF versus Bitcoin itself. 

Upcoming Bitcoin ETFs to Invest In

As mentioned above, the Bitcoin ETF market is still minimal, given that the SEC has yet to rule on cryptocurrency ETFs. That being said, the first Bitcoin ETF in the United States launched on October 19, 2021

Up until then, ETFs in the United States had non-direct exposure to Bitcoin, whether through ETFs that invested in foreign Bitcoin ETFs or those that invested in companies that had significant Bitcoin exposure. 

Here is a round-up of 5 ETFs in the United States to consider investing in: 

  1. ProShares Bitcoin Strategy ETF (BITO): The first ETF in the United States, with an expense ratio of 0.95%, BITO invests in Bitcoin futures-contracts. These are regulated by the Commodity Futures Trading Commission, making this a futures-backed versus physical-based ETF. 
  2. Amplify Transformational Data Sharing ETF (BLOK): With $1.3bn assets under management and an expense ratio of 0.71%, the BLOK ETF is primarily invested in equities. At least 80% of its assets are companies that are involved in developing blockchain technologies. Outside of that, though, the ETF invests in Canadian Bitcoin ETFs, like Purpose Bitcoin ETF and 3iQ CoinShares Bitcoin ETF, which track Bitcoin. 
  3. Bitwise 10 Crypto Index Fund (BITW): With $1.2bn assets under management and an expense ratio of 2.5%, the BITW ETF tracks the performance of the ten largest investable cryptocurrencies. Bitcoin accounts for 65% of the portfolio, more than double Ethereum, at 25%. 
  4. Bitwise Crypto Industry Innovators ETF (BITQ): With $80.8mn assets under management and an expense ratio of 0.85%, this is another equity-focused cryptocurrency ETF. The companies in the index this ETF tracks must generate at least 75% of their revenues from the cryptocurrency system or have 75% of their net holdings in Bitcoin or another liquid cryptocurrency asset.
  5. Bitcoin Strategy ProFund Investor (BTCFX): This ETF, with $14.6mn assets under management and an expense ratio of 1.15%, invests in Bitcoin futures contracts. It also invests in Canadian ETFs that invest in Bitcoin directly. 

These ETFs are all available to trade on U.S. exchange markets, which is why they often have exposure to Bitcoin through non-direct means. If you want direct exposure to Bitcoin, you will have to invest in Canadian or other foreign ETFs--at least until the SEC says otherwise. If you are willing to take the leap with foreign ETFs, and the added fees that may come with that, here is a roundup of some popular Canadian Bitcoin ETFs to invest in:

  1. Purpose Bitcoin ETF: This is listed on the Toronto Stock Exchange (TSX) and manages more than $1.4bn Canadian dollars. 
  2. Evolve Bitcoin ETF: This ETF has an expense ratio of 0.75% and has attracted $115mn CAD so far.
  3. 3iQ CoinShares Bitcoin ETF: Another ETF on the TSX exchange with over $1bn CAD in assets under management. The expense ratio is 1%. 

Ultimately, Bitcoin ETFs are a smart way to diversify your portfolio and gain exposure to cryptocurrencies without requiring an immense knowledge base of the industry. While they have their cons, they are nevertheless poised to be a popular investment once they enter the U.S. market.

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Keertana Anandraj
Keertana Anandraj is a recent college grad living in San Francisco. When she isn’t conducting international macroeconomic research at her day job, you can find her in the spin room or planning her next adventure.

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