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What is a Bitcoin ETF?
A bitcoin exchange-traded fund (ETF) lets investors benefit from changes in bitcoin’s price without the need to own any bitcoin.
Shares of a bitcoin ETF are traded on traditional stock exchanges, making it easier for investors to participate in the cryptocurrency market.
ETFs are popular with both individual and institutional investors because they provide a simpler and more regulated way to invest in bitcoin. They are especially appealing to those who worry about the security, legal issues, or technical difficulties of directly buying and managing Bitcoin.
There are two main types of bitcoin ETFs: spot and futures.
A spot ETF, in the context of bitcoin, is an exchange-traded fund that directly holds bitcoin as its underlying asset. The fund aims to closely follow the real-time price of bitcoin, providing investors with exposure to bitcoin’s price movements without having to own the cryptocurrency themselves.
Shares of a bitcoin spot ETF can be bought and sold on traditional stock exchanges, making it easier for investors to participate in the bitcoin market. This type of ETF is appealing because it offers a regulated and straightforward way to invest in bitcoin, avoiding the complexities and risks of direct cryptocurrency ownership.
A physically-backed bitcoin ETF holds actual bitcoin as part of its assets, meaning the ETF directly owns and stores the cryptocurrency. This type of ETF allows investors to gain exposure to bitcoin’s price movements without needing to buy and store the bitcoin themselves.
It is similar to a spot bitcoin ETF, but while a spot bitcoin ETF focuses on closely tracking the current price of bitcoin, a physically-backed bitcoin ETF emphasizes the direct ownership and storage of the cryptocurrency. This provides a secure and regulated way for investors to participate in the bitcoin market.
Futures-based ETFs for Bitcoin don’t directly hold the cryptocurrency itself; instead, they utilize Bitcoin futures contracts to track its price movements. These contracts allow investors to speculate on future Bitcoin prices.
Compared to spot Bitcoin ETFs, futures-based ones may operate differently and involve additional costs related to managing futures contracts. Some of these ETFs are designed to offer leveraged or inverse exposure to Bitcoin’s price, potentially magnifying both profits and losses.
Given the evolving regulatory landscape and product offerings in the Bitcoin ETF space, it’s crucial to stay informed about the latest developments, including emerging product types. Moreover, the availability and structure of Bitcoin ETFs can vary across countries and regions due to regulatory factors and market demand.
The SEC has approved both Bitcoin futures ETFs and spot Bitcoin ETFs in the U.S. The first Bitcoin futures ETF, the ProShares Bitcoin Strategy ETF, received approval on October 19, 2021. Following this, VanEck, Valkyrie, Simplify Asset Management, and GlobalX also launched their Bitcoin futures-linked ETFs.
On January 10, 2024, the SEC finally approved spot Bitcoin ETFs after a turbulent and confusing Bitcoin ETF approval process. The initial batch of 11 approved spot Bitcoin ETFs came from firms such as Bitwise, Grayscale, Hashdex, BlackRock, Valkyrie, BZX, Invesco, VanEck, WisdomTree, Fidelity, and Franklin.
Trading for these spot Bitcoin ETFs commenced on January 11, 2024, with an impressive $4.6 billion in trading volume on the first day alone, of which $1 billion was attributed to BlackRock’s ETF. Over the first week, these ETFs saw a total trading volume of $20 billion.
Within the first month, spot Bitcoin ETFs accumulated significant assets under management (AUM). By the end of January, BlackRock’s IBIT had garnered $2.7 billion in assets, while Fidelity’s FBTC reached $2.3 billion.
The Grayscale Bitcoin Trust (GBTC) was a widely-used investment vehicle enabling investors to access Bitcoin without directly owning the cryptocurrency. GBTC operated as a publicly traded trust, where shares represented partial ownership of Bitcoin held within the trust.
Transitioning GBTC into an ETF offered several benefits over its previous trust structure, including reduced fees, increased liquidity, and broader accessibility to both institutional and retail investors.
In 2021, Grayscale sought to convert GBTC into a spot Bitcoin ETF, but the SEC rejected the proposal in June 2022. Grayscale pursued legal action, and in August 2023, the courts ruled in favor of Grayscale, mandating the SEC to review its ETF proposal.
Around November 8, 2023, Grayscale resumed discussions with the SEC to transform the trust into a spot Bitcoin ETF. Ultimately, the SEC approved the conversion on January 11, 2024, simultaneously greenlighting spot Bitcoin ETF filings from 10 other firms.
Spot Bitcoin ETFs charge fees to cover fund management and operational expenses. Before approval, ETF issuers engaged in a competitive race to lower their fees, aiming to attract more customers. Following approval, some providers further reduced their fees due to intense competition.
Here are several spot Bitcoin ETF prices as of February 1, 2024:
Seven of these ETFs (Franklin, Bitwise, Ark 21Shares, Fidelity, Valkyrie, Invesco, WisdomTree) offer 0% in waived fees until specific conditions are met, after which the stated fees will apply. BlackRock’s iShares Bitcoin Trust (IBIT) offers a reduced fee of 0.12% for the first year or until the fund reaches $5 billion in assets.
The demand for a Bitcoin ETF primarily arises from the desire for increased accessibility, convenience, and exposure to Bitcoin as an asset class. Here are some key reasons why people are interested in Bitcoin ETFs:
ETFs are traded on traditional stock exchanges, making it simpler for mainstream investors to buy, hold, and trade Bitcoin-related assets through their existing brokerage accounts. This accessibility is particularly attractive to investors unfamiliar with cryptocurrency exchanges or hesitant to use them.
A Bitcoin ETF would be subject to regulatory oversight, offering investors a level of protection and transparency. This oversight can alleviate concerns about fraud and market manipulation, which may be more prevalent in unregulated cryptocurrency markets.
Investors see Bitcoin as a potential diversification tool. By providing exposure to Bitcoin through an ETF, they can incorporate the cryptocurrency into their investment portfolios without the need to directly hold and manage digital assets.
The introduction of a Bitcoin ETF signals mainstream acceptance and integration of cryptocurrencies into traditional financial systems.
The cryptocurrency ETF landscape is set for significant evolution as the market matures. The approval of spot Bitcoin ETFs signals broader acceptance of digital assets and increased competition among providers, leading to lower fees and better accessibility. Regulatory developments will continue to shape the market, potentially introducing new products and expanding cryptocurrency ETP options.
As cryptocurrencies become more integrated into mainstream investment portfolios, cryptocurrency ETFs are likely to become essential tools for both retail and institutional investors. Staying informed about these changes will be crucial for navigating the evolving crypto investment landscape.
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