What are Bitcoin ETFs? Why does it matter?

By Romeo F.

8 Nov 2023

8 min read

A Bitcoin ETF is a financial product designed to simplify and streamline the process of investing in Bitcoin, the pioneering cryptocurrency. It enables both individual and institutional investors to gain exposure to the price movements of Bitcoin without the complexities associated with direct ownership and management of digital assets.

Why do we need Bitcoin ETFs?

While there is an argument for technical complexities and ETFs making it easier for the average non-tech Joe to be able to own Bitcoin, that is not the primary reason to buy Bitcoin ETFs.

It is true that managing crypto wallets and DEXs are challenging for beginners but as the crypto landscape evolves, owning crypto is getting more and more easier. Dyor is certainly a contributing member of this change.

So what are the primary reasons for Bitcoin ETFs?

Breaking down the regulatory boundaries and getting trillions of dollars of institutional money in crypto.

Once the institutional money hits the Bitcoin market, the most widely speculated belief is that the price will shoot off starting the next Bitcoin bull market. Similar to what happened with gold when the first gold ETF was listed on New York Stock Exchange in 2004.

A screenshot of a chart showing the point at which the first gold ETF got listed on NYSE

Right now, the regulations are extremely subjective from countries to countries and state to state. While institutional investors are interested in crypto and have been dipping their toes for quite some time, they are holding back due to regulatory uncertainties.

How Bitcoin ETFs Offer a Solution

Enter Bitcoin Exchange-Traded Funds (ETFs), a financial innovation that addresses these challenges head-on. Bitcoin ETFs offer a simplified and more accessible path to participate in the cryptocurrency market without the complexities of direct Bitcoin ownership.

These ETFs, managed by reputable financial firms, handle the intricate technical aspects of Bitcoin ownership on behalf of investors. When you invest in a Bitcoin ETF, you do not need to concern yourself with crypto wallets, Bitcoin addresses, or private key management.

The responsibility for securing these digital assets is transferred from the individual to the ETF manager.

Furthermore, Bitcoin ETFs handle the regulatory and compliance aspects of Bitcoin investment, reducing the complexity of tax reporting and other regulatory obligations.

This shift in responsibility makes it easier for investors to navigate the often uncertain and evolving regulatory environment in the cryptocurrency sphere.

Understanding How Bitcoin ETFs Work

Bitcoin Exchange-Traded Funds (ETFs) represent a significant evolution in the world of cryptocurrency investments, simplifying the process for investors. In this chapter, we will delve into the core concept of Bitcoin ETFs, their management, their listing on traditional stock exchanges, and explore the key differences that set them apart from traditional ETFs.

Core Concept of Bitcoin ETFs

At its core, a Bitcoin ETF is designed to offer investors exposure to the price movements of Bitcoin without requiring them to engage directly in the complexities of cryptocurrency ownership.

These ETFs bridge the gap between traditional financial markets and the world of digital assets, making it accessible to a wider range of investors, from individuals to institutions.

The primary objective of a Bitcoin ETF is to track and replicate the price movements of Bitcoin itself. Unlike traditional ETFs, which often include a diverse portfolio of equities, bonds, or commodities, Bitcoin ETFs focus solely on mirroring the price of Bitcoin, creating a seamless investment vehicle for those interested in cryptocurrency.

How Bitcoin ETFs Are Managed

Bitcoin ETFs are managed by financial firms or institutions that hold actual Bitcoin in their portfolios. These firms ensure that the ETF's price is directly pegged to the value of the Bitcoin held within the fund.

They handle the acquisition, storage, and management of the digital assets, taking on the responsibilities that investors would otherwise need to manage themselves when owning Bitcoin directly.

The process of managing a Bitcoin ETF involves purchasing and securely storing the underlying Bitcoin assets, thereby providing investors with a straightforward means of gaining exposure to the cryptocurrency market.

Listing on Traditional Stock Exchanges

One of the key features that make Bitcoin ETFs accessible to a broad audience is their listing on traditional stock exchanges. This means that investors can buy and sell Bitcoin ETF shares just like they would with any other publicly traded stock.

The availability of Bitcoin ETFs on widely recognized stock exchanges makes them convenient to trade, providing a familiar and user-friendly experience for investors.

The presence of Bitcoin ETFs on traditional exchanges also aligns with regulatory and compliance standards, offering a level of oversight and security that appeals to both individual and institutional investors.

Spot Bitcoin ETFs Futures Bitcoin ETFs

To understand the significance of spot Bitcoin ETFs, it's essential to differentiate them from their futures-based counterparts. While both types of ETFs provide exposure to the price of Bitcoin, they do so through fundamentally different mechanisms.

Futures-Based Bitcoin ETFs:

Futures-based Bitcoin ETFs utilize Bitcoin futures contracts as their underlying assets.
Futures contracts are agreements to buy or sell Bitcoin at a predetermined price on a specific future date.
These ETFs track the performance of these contracts, rather than the actual spot price of Bitcoin.
As a result, they may not perfectly mirror the price movements of Bitcoin.

Spot Bitcoin ETFs:

Spot Bitcoin ETFs directly hold and represent the actual Bitcoin itself in their portfolios.
The value of these ETFs is inextricably linked to the real-time spot price of Bitcoin.
They offer a more direct and accurate exposure to the cryptocurrency's price fluctuations.
The key difference lies in the direct ownership of Bitcoin in spot ETFs, making them more akin to physically backed commodity ETFs.

Crypto Spot Trading vs. Futures Trading — Credit: Binance

Why Spot Bitcoin ETFs are the real deal?

So far, the SEC has approved quite a few Bitcoin Futures ETFs such as The ProShares Bitcoin Strategy ETF, 2x Bitcoin Strategy ETF etc.

Spot Bitcoin ETFs hold immense significance for the cryptocurrency market, investors, and the financial industry at large. The introduction of spot ETFs is expected to bring several notable benefits:

1. Direct Ownership:

Spot Bitcoin ETFs provide investors with an opportunity for direct ownership of Bitcoin, which aligns with the original intention of ETFs to provide exposure to the underlying asset.

This direct ownership may attract more traditional investors who prefer the clarity and simplicity of owning the actual asset.

2. Enhanced Accuracy:

Futures-based ETFs can exhibit disparities in price performance due to the nature of futures contracts. Spot Bitcoin ETFs eliminate this discrepancy by directly reflecting the real-time spot price of Bitcoin.

This accuracy is crucial for investors seeking precise exposure to the cryptocurrency's price movements.

3. Broadened Investor Base

The availability of spot Bitcoin ETFs is expected to expand the investor base, attracting those who have been hesitant to enter the cryptocurrency market due to the complexities associated with Bitcoin ownership.

Institutional investors, in particular, may find spot ETFs more appealing, as they offer the familiarity of traditional assets.

Who are the front runners in BTC Spot ETF applications?

A flurry of asset managers and investment firms applied for Bitcoin ETFs in 2023. There are a group of frontrunners that are the ones most likely to be approved by the SEC.

Although, the SEC has been a consistent antagonist for crypto, it’s fair to say that if anyone has got a chance, it’s these guys.

P.S. The last date to approve or reject BTC ETF applications is between Jan-March of 2024. By then, we will have a definitive answer from the SEC.

1. BlackRock

Registration statement — Blackrock’s BTC ETF Application Document

Application Date: June 15, 2023

BlackRock, the world's largest asset manager, made headlines by filing an application for a Bitcoin spot ETF. This application signaled strong institutional interest and was praised by experts in the field.

It's worth noting that BlackRock has a history of winning SEC approvals for ETFs, making this application quite promising. The initial wave of applications raised concerns for the SEC, but BlackRock later clarified its intentions and entered the official review process.

2. Bitwise

Application Date: Filed in October 2019 and subsequently re-filed.

Bitwise initially filed for a Bitcoin ETF based on Bitcoin futures in 2019. However, the SEC had reservations, leading to a re-filing focusing on Bitcoin itself rather than futures. While the SEC's concerns were addressed, they didn't result in approval, so the chances remain moderate.

3. WisdomTree

Application Date: First application filed in March 2021, re-filed in 2023.

WisdomTree initially filed for a Bitcoin ETF in 2021 and sought re-approval in 2023. Although they have experience running a Bitcoin ETF in Switzerland, the SEC rejected their previous application, making the likelihood of approval uncertain.

4. Invesco Galaxy Bitcoin ETF

Application Date: Filed on September 22, 2021, re-filed in 2023.

Invesco and Galaxy Digital joined forces to propose a physically backed Bitcoin ETF, potentially boosting their credibility. The application was docketed on the same day as BlackRock's, indicating the industry's growing interest. However, the SEC has raised concerns about various Bitcoin ETF applications, which may impact the approval odds.

5. Valkyrie Investments

Application Date: First application in January 2021, multiple re-filings.

Valkyrie Investments entered the race in 2021, initially proposing a Bitcoin ETF referring to the Chicago Mercantile Exchange's reference price for Bitcoin. After a series of rejections, Valkyrie filed another application in 2023, highlighting their determination to secure approval.

6. Ark Invest

Application Date: Initial filing in June 2021, followed by re-filings.

Ark Invest, led by Cathie Wood, filed for the Ark21Shares ETF. Despite CEO Cathie Wood's advocacy for Bitcoin, the application faced initial rejections. Ark Invest is now on its third application, amending it in June 2023 to address SEC concerns, including potential risks associated with Bitcoin's underlying code. Approval remains uncertain.

7. VanEck

Application Date: First filing in 2018, followed by re-filings.

VanEck initially proposed the VanEck SolidX Bitcoin Trust in 2018. While the application was withdrawn in 2019, subsequent attempts faced multiple rejections. The filing's timing shortly after former SEC chair Jay Clayton's departure aimed to capitalize on regulatory changes, but approval remains elusive.

8. Fidelity/Wise Origin

Application Date: Initial filing in March 2021, followed by re-filings.

Fidelity submitted the Wise Origin Bitcoin Trust application, highlighting the cryptocurrency's unique advantage over gold. Despite this, the application faced rejection and subsequent re-filings. Fidelity continues to refine its proposal, but approval remains uncertain.