Exchange-Traded Funds (ETFs) are a staple in the investment world. They’re a collection of securities traded on exchanges like individual stocks or shares.
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An ETF is a popular choice with first-time investors because there are stacks of investment options, a smaller investment threshold, and low expenses.
Bitcoin and other crypto are similarly fast-growing, so it was only a matter of time before these two sectors would collide – and create a Bitcoin ETF as a new possibility that isn’t without controversy.
This guide looks at what a Bitcoin ETF is, the pros and cons, and why diversification is key to managing your overall portfolio risk.
What Is a Bitcoin ETF – and How Does it Work?
Many ETFs track index funds. A Bitcoin ETF does the same but is measured against the value of Bitcoin as opposed to a more conventional stock market tracker.
As an investment vehicle, an ETF is attractive because you can diversify your investment portfolio and gain from asset performance without purchasing the asset (or group of assets) that you’re tracking.
Put simply, you can invest in a Bitcoin ETF without buying any cryptocurrency.
Using ETFs is a common way to invest without the risks of trading specific stocks, and if you have an ETF with a broad basket of tracked securities, you can diversify pretty easily without a lot of work.
It’s a more accessible route to crypto investment without the inherent security risks.
Bitcoin ETFs v Conventional Bitcoin
The question is – if you were confident that Bitcoin is a sound investment, why would you bother with an ETF rather than just buying some crypto coins outright?
This decision is all about balancing risk, making streamlined investments, and diversifying your crypto to ensure all of your invested wealth isn’t solely reliant on the performance of a single token or coin. Most people are familiar with the volatility of Bitcoin, which has caused cryptocurrency investors to make or lose millions of pounds in minutes.
Advantages of Bitcoin ETFs Over Standard Bitcoin
An ETF is a viable option for investors that want to diversify and reduce their risk, so they might combine crypto trades with ETFs to balance their exposure.
- Investors can buy into an ETF without additional security measures essential in crypto trades.
- There is no need to set up exchange accounts or deal with complex exchanges.
- The ETF is an investment vehicle, not Bitcoin, so investors can short sell to profit from anticipated valuation drops, which you can’t do with normal crypto investment.
One of the big draws is that an ETF is a known entity, whereas a cryptocurrency is a little less accessible without any means of controlling the value.
Investors keen to get into digital currency or incorporate an element of Bitcoin in their portfolio can buy into an established ETF without some inherent issues in a fairly unregulated and turbulent market.
The Regulation of Bitcoin ETFs
The problem here is that ETFs need to be approved. While the process looks a little different depending on the jurisdiction, that usually means authorisation by either:
- The UK Listing Authority (UKLA) via the Financial Conduct Authority (FCA), or
- The Securities and Exchange Commission (SEC) in the States.
In essence, a prospective ETF manager acts as the sponsor and submits their plan to the regulator. The sponsor then needs to:
- Set up an agreement with an authorised participant, normally a large institutional investor or a similar specialist.
- Wait for that participant to acquire the stock shares, place them in a trust, and form an ETF with specific units, which bundle the stock into lots.
- The trust then offers ETF shares, which act as legal claims on the share in the trust, to the participant.
- Finally, the participant can sell those ETF shares on the market like any other stock.
As it stands, the lack of regulation or control over crypto means that it’s extremely difficult to create a Bitcoin ETF – the SEC rejected a proposal in November 2021 that would have tracked Bitcoin spot prices.
The SEC rejected the spot Bitcoin ETF application because it felt there was a chance of wash trading, where one institution could hold both sides of a trade with little risk but generating additional fees.
Another issue is around whales manipulating Bitcoin prices and potentially using stable coins to impact the Bitcoin spot valuation to their advantage.
However, a US Bitcoin-related ETF is now traded on the Chicago Mercantile Exchange (CME).
This ETF tracks Bitcoin prices through futures contracts – not spot prices – and is called the ProShares Bitcoin Strategy ETF.
It’s a start but not tied to the spot price, which means that fund yields might differ from those returned by the crypto. Investors also lose out where lengthier futures contracts have higher prices.
Bitcoin Spot ETFs in Canada and Europe
Interestingly, regulator approaches vary depending on the country.
Fidelity launched an ETF of this kind in Canada back in March 2021. The ETF is traded on the Toronto Stock Exchange.
You’ll also find the Invesco Physical Bitcoin ETP, listed on Deutsche Börse Xetra in Germany, which tracks the CoinShares hourly Bitcoin index, less a fee of 0.99 per cent.
In February 2022, the US firm Fidelity announced plans to launch a new Physical Bitcoin ETP to institutional investors and professionals in Europe, listed on the same Frankfurt exchange, expected to start trading in a few weeks.
Predictions for a New Spot Bitcoin ETF
It’s difficult to forecast with certainty when the first Bitcoin spot ETF in the US or UK will be approved because there is a tussle between regulators and investment managers.
Crypto has no limitations so that investors can trade it anytime. In contrast, stocks can only be bought, sold or exchanged during market hours, so the regulators aren’t keen on approval or have repeatedly delayed decisions.
The rejection in November 2021 impacting the VanEck Bitcoin ETF application was due to concern about the potential for fraud or market manipulation, so there are some big hurdles to overcome.
It seems that, while EU investors are now exploring the potential of Bitcoin ETFs linked to the spot price, it may be some time before the SEC in the US decides to offer approval.
Investing In Bitcoin ETFs FAQ
What is a cryptocurrency ETF?
A crypto ETF is a fund made up of crypto assets. A standard ETF tracks an index, or a collective of stocks, whereas a crypto ETF tracks the price of a digital token or several tokens.
Because crypto prices change rapidly and daily, the share price of a crypto ETF is likely also to fluctuate.
Investing in an ETF can be an alternative to purchasing cryptocurrencies, as the share is held in the fund, not in the crypto asset itself.
How can I invest in a Bitcoin ETF?
Currently, there aren’t many options since Bitcoin ETFs are being met with resistance from regulators.
There are no spot Bitcoin ETFs in the UK or USA, but you can invest in BITO, the ProShares Bitcoin Strategy ETF, linked to futures contracts.
Elsewhere, if you set up a foreign securities account, you can invest in spot ETFs on the Frankfurt Stock Exchange or the Toronto Stock Exchange.
Are ETFs worth buying?
Like any investment decision, the right options depend on your current portfolio, how much you wish to invest, your attitude to risk and how you intend to diversify your assets.
ETFs, also known as passive investment vehicles, can be a good option for new investors looking for low-cost opportunities to invest in various financial markets.
The primary advantage over stocks is that you don’t necessarily need to have a thorough understanding of the underlying company to gain an advantage and don’t need a sizable capital investment to get involved.
How many Bitcoin ETFs are available?
Bitcoin ETFs are emerging slowly and in limited jurisdictions.
In the meantime, you can consider options such as:
- Grayscale Bitcoin Trust – an investment trust rather than an ETF but the largest fund in the US that tracks Bitcoin.
- ProShares Bitcoin Strategy ETF – an ETF tracking Bitcoin futures.
- Bitwise 10 Crypto Index Fund – a fund made up of 60 per cent Bitcoin, with the remainder of other cryptocurrencies.
What’s the difference between a futures Bitcoin ETF and a spot price ETF?
Spot prices are the price a share, stock or asset is available to buy or sell for now, whereas futures contracts set a value based on a predetermined date.
A spot ETF can potentially retain the same position indefinitely, and futures ETFs need to roll the position forward as contracts expire.
ETF futures work like any other futures contract, so this type of investment means you don’t buy the asset but keep your capital moving from one collection of futures to the next – without the exposure.
Bitcoin ETFs tracking the spot rate can be very tumultuous since valuations change dramatically and quickly, which is one of the reasons regulators are reluctant to offer authorisation.
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