Bitcoin ETFs have been a topic of discussion in crypto markets since the Winklevoss twins first attempted to list one in 2013. Bitcoin futures ETFs have been traded on U.S. exchanges for several years. Spot Bitcoin ETFs were finally approved on January 10, 2024 and began trading the following day.
In this guide, you will learn about Bitcoin ETFs, how they work and which ones you can already invest in.
This is partner content from Laura Shin is wild and published by CoinDesk.
What is a Bitcoin ETF?
Bitcoin ETFs are publicly traded investment funds that allow investors to gain exposure to bitcoin (BTC) without actually owning the cryptocurrency. Unlike cryptocurrencies traded on cryptocurrency exchanges, ETFs are traded on traditional securities exchanges, such as the New York Stock Exchange and Nasdaq.
When you invest in a Bitcoin ETF, you are not directly purchasing Bitcoin itself. Instead, you buy shares in a fund that holds Bitcoin. This regulated investment vehicle is designed to make it easier for traditional investors to gain exposure to bitcoin price movements without having to purchase and securely store the digital currency, thereby alleviating the technological hurdles of investing in bitcoin. cryptography.
How do Bitcoin ETFs work?
Bitcoin ETFs work in a similar way to traditional exchange-traded funds that you may be familiar with. An ETF issuer, usually an asset management company, purchases the underlying asset and stores it securely with a custodian. It then issues shares in its fund to give investors access to the underlying asset held in the fund.
In exchange for an annual fund management fee, the financial institution manages the purchase, storage, and custody of bitcoin on behalf of the ETF’s investors.
When you invest in a Bitcoin ETF, you are essentially buying shares in a pool of Bitcoin. This process involves the creation of new ETF shares to meet demand. Conversely, when you sell your shares, they are bought back, thereby adjusting the total number of ETF shares outstanding.
ETF Stocks and Bitcoin Price
The share value of a Bitcoin ETF reflects the performance of Bitcoin. As the price of bitcoin changes, the value of the ETF’s shares adjusts accordingly.
To ensure that ETF actions remain in sync with Bitcoin prices, market makers actively buy and sell, maintaining a balance between supply and demand. If the price of the ETF begins to deviate from the true price of Bitcoin, market makers step in to restore balance, thereby making a profit.
Why is a spot Bitcoin ETF considered such a big deal?
The introduction of a spot bitcoin ETF is considered an important development in the cryptocurrency space for several reasons:
Widespread adoption: A spot bitcoin ETF is expected to attract a wider range of investors, including institutional investors, who are reluctant to invest directly in cryptocurrency markets for regulatory reasons. This could lead to increased adoption of bitcoin as an investment asset.
Regulatory approval: The launch of spot Bitcoin ETFs required regulatory approval from the SEC, which could provide an additional level of legitimacy and oversight to cryptocurrency markets. This could pave the way for greater regulatory clarity and acceptance of cryptocurrencies.
Convenience and accessibility: A spot Bitcoin ETF makes it easier for retail investors to gain exposure to Bitcoin without the technical challenges of portfolio management and private key security. It offers a friendlier and more familiar investment vehicle.
Market maturity: The launch of spot bitcoin ETFs could mean that the cryptocurrency market has reached a point where it can support regulated and standardized investment products. This could attract more institutional capital and increase market stability.
Although Bitcoin futures ETFs have been available for some time, the introduction of a spot Bitcoin ETF promises widespread adoption, regulatory clarity, and market maturity for Bitcoin as an asset class.
The main distinction between a Bitcoin futures ETF and a spot Bitcoin ETF is the underlying assets they invest in.
A Bitcoin Futures ETF invests in futures contracts that derive their value from the expected future price of bitcoin. These contracts allow investors to speculate on bitcoin price movements without holding the actual cryptocurrency.
A Bitcoin Spot ETF invests directly in bitcoin itself. Investors in a spot Bitcoin ETF own a share of the actual cryptocurrency, and the value of the ETF is directly correlated to the market price of Bitcoin.