What is a Bitcoin ETF?

A Bitcoin exchange-traded fund (ETF) allows buyers to invest in Bitcoin without buying the actual asset. This investment method streamlines the buying process, enabling users to circumvent signing up for an exchange or dealing with crypto wallets. 

In traditional investing, an ETF is a form of investment that tracks the price of an asset or a group of assets. ETFs represent an easy way to invest in multiple assets concurrently without actually holding said assets. 

In Bitcoin’s case, a Bitcoin ETF is an asset that simply tracks the price of Bitcoin (BTC). By investing in a Bitcoin ETF, users can still profit from Bitcoin’s gains without acquiring Bitcoin, such as signing up for an exchange and going through various verification methods.

That said, until recently, Bitcoin ETFs were quite limited. The first so-called Bitcoin ETF — the ProShares Bitcoin Strategy ETF (BITO) — launched in October 2021. However, this ETF doesn’t invest directly in the asset but in Bitcoin futures contracts as an alternative.

What is a Bitcoin futures ETF?

The majority of Bitcoin futures ETFs hold Bitcoin futures contracts. Futures contracts provide users the ability to bet on Bitcoin’s price, having them agree to buy or sell Bitcoin at a specific price on a set date. 

A Bitcoin futures ETF is an exchange-traded fund that owns Bitcoin futures contracts, which are an agreement in which one will buy or sell Bitcoin at a specified price on a pre-determined date. For example, when buying via the ProShares Bitcoin Strategy ETF, an investor is buying into a fund that holds futures contracts. However, the ETF ensures the user can avoid investing in futures themselves, and can instead trade BITO like they would a traditional stock.

Futures contracts are generally used for speculative or hedging purposes. Sure, one could simply just buy any amount of Bitcoin at any time without ProShares but a futures ETF ensures that users can invest in digital assets and Bitcoin futures contracts without inconveniencing themselves via exchanges.

This method also costs less in fees when compared to most crypto exchanges. However, a futures ETF doesn’t involve investing in Bitcoin at its spot price, which is why some enthusiasts might not consider the offering a “real” crypto adoption.

Also, companies that offer a Bitcoin futures ETF may charge annual fees, which can leave many wanting an alternative ETF option in which to invest.

What is a spot Bitcoin ETF?

An investment vehicle that enables investors to gain exposure to Bitcoin without having to buy and hold the cryptocurrency directly is called a spot Bitcoin ETF. 

Unlike other types of Bitcoin ETFs that might track futures contracts or related equities, a spot ETF invests directly in the Bitcoin asset, offering more direct exposure to the cryptocurrency’s market movements.

Spot Bitcoin ETFs have experienced a history of regulatory resistance because of concerns about market manipulation and volatility in the cryptocurrency space. However, on Jan. 10, the United States Securities and Exchange Commission (SEC) approved 11 spot Bitcoin ETFs, marking a significant shift in the SEC’s stance toward crypto. The approved ETFs include those from major financial institutions, such as ARK Invest, 21Shares, Bitwise, BlackRock, Grayscale and Fidelity — among others.

Spot Bitcoin ETFs seek to mimic the fluctuations in the Bitcoin market more precisely than futures-based ETFs, which can perform differently from the actual price of the cryptocurrency. Spot Bitcoin ETFs’ direct holding strategy gives investors a more aligned means of being exposed to Bitcoin price fluctuations than conventional investment platforms.

Spot Bitcoin ETFs vs. Bitcoin futures ETFs

How does a spot Bitcoin ETF work?

A spot Bitcoin ETF provides the same streamlined investment capabilities as a Bitcoin futures ETF, but it only allows users to invest at Bitcoin’s spot price rather than a future value.

A spot Bitcoin ETF brings all the benefits of a futures ETF, such as investing in Bitcoin without using an exchange, paying less in fees than on a crypto exchange and streamlining the process overall. But a spot ETF invests in Bitcoin on the spot.

That’s right, a spot ETF invests in Bitcoin at its spot price, meaning buyers will be holding Bitcoin within the fund, similar to buying a stock. Enthusiasts view a spot ETF as a more legitimate investment method because a spot ETF involves holding Bitcoin. 

After the approval of spot Bitcoin ETFs, the products are now available for trading like regular stocks. For instance, BlackRock’s iShares Bitcoin Trust ETF, which trades on the Nasdaq, operates similarly to traditional ETFs but with a focus on Bitcoin. Investors buy and sell shares of the ETF through regular brokerage accounts, just like they would with stocks. The price of these shares reflects the current market value of Bitcoin.

The trading process is streamlined, is familiar to regular stock traders, and it doesn’t require investors to deal with the complexities of cryptocurrency exchanges, wallets or security concerns associated with direct Bitcoin ownership.

Are spot Bitcoin ETFs better than futures?

Bitcoin spot ETFs and Bitcoin futures ETFs both have their pros and cons.

While spot Bitcoin ETFs are certainly more “legitimate” than Bitcoin futures ETFs as they involve actually buying Bitcoin, it’s hard to say which is better.

After all, a Bitcoin futures ETF might not involve buying in at Bitcoin’s spot price, but it streamlines the buying process and allows investors to bet on the market whether they choose to short it or otherwise. In that same vein, some Bitcoin futures ETFs struggle to accurately track Bitcoin’s price, and many charge annual fees. BITO, on the other hand, has accurately tracked the price of Bitcoin futures since its inception.

Conversely, a Bitcoin spot ETF, according to many Bitcoin enthusiasts, will bring “legitimacy” to the asset as it’s allowing users to invest in Bitcoin without actually holding it — and doing so at Bitcoin’s actual price point.

How many Bitcoin ETFs are there?

Several Bitcoin ETFs are available for investment, including futures-linked and the newly approved spot Bitcoin ETFs. 

Futures-linked ETFs, such as BITO, track the price of Bitcoin through futures contracts and are available for trading. The recent approval of several spot Bitcoin ETFs in the U.S. marked a significant development. This diversification in the types of Bitcoin ETFs available to investors expands ways that investors can gain exposure to BTC’s price movements.

Bitcoin ETFs, which provide greater accessibility and give Bitcoin legitimacy as an investment, are a huge benefit for the financial and cryptocurrency markets. As regulated financial instruments, they improve market liquidity, lessen the volatility frequently connected to direct Bitcoin investments and offer a safer alternative for risk-averse investors. 

Additionally, because Bitcoin has a generally low correlation with other asset classes, Bitcoin ETFs offer an alternate asset class to traditional markets, aiding portfolio diversification. Moreover, this integration promotes market efficiency and innovation in the cryptocurrency industry. However, investors should be aware of the risks and regulatory uncertainty concerning Bitcoin ETFs.