Bitcoin ETF: A Comprehensive Guide For Beginners

Bitcoin (BTC), the world’s first and largest cryptocurrency, has experienced a meteoric rise in popularity. However, direct investment in Bitcoin can be daunting for some investors due to its volatility and perceived technical complexity. Entry of the Bitcoin exchange-traded fund (ETF), a revolutionary financial instrument is expected to bridge the gap between traditional finance and the crypto world.

What is a Bitcoin ETF?

It is an investment product that tracks the price of Bitcoin. Unlike physically owning Bitcoin, which requires specific storage solutions and security measures, investing in a BTC ETF allows you to gain exposure to its price movements without the underlying asset. This makes investing in Bitcoin more accessible and familiar to stock market investors who are accustomed to traditional trading platforms and regulations.

Classification of Bitcoin ETFs

There are two types of BTC ETFs. The first one is Spot and the Second one is Futures.

Spot Bitcoin ETF

Spot Bitcoin ETFs give price exposure without actual BTC ownership, but it diverges from Bitcoin’s principle of financial sovereignty. Spot ETFs broaden access to digital assets without direct management complexities.

The term “Spot” denotes the current price of the Bitcoin. A bitcoin spot ETF closely tracks the real-time price of bitcoin by holding it as an underlying asset.

Futures Bitcoin ETFs

Futures Bitcoin ETFs deal in the futures contracts of BTC rather than holding actual bitcoin. A Bitcoin futures contract enables investors to speculate on and wager on the price of the asset in the future.

BTC ETFs that track futures may operate differently compared to those that follow the actual price of Bitcoin. There could be additional expenses involved in managing futures contracts, such as those incurred during the rollover or settlement processes. 

Certain Future BTC ETFs based on futures are structured to offer either multiplied or opposite returns relative to Bitcoin’s market price, which can significantly increase both profits and losses for investors.

Users have to update with the latest developments in the BTC ETF before investing directly in it.

How Does Spot Bitcoin ETF Work?

Bitcoin ETFs typically start by purchasing a specific amount of BTC and storing it in a secure digital wallet managed by a custodian. The bitcoins are kept in cold storage wallets, which means that the keys are stored offline and cannot be accessed online. This ensures their safety and security.

After completing the process, ETFs offer shares representing stored bitcoins. These share prices reflect Bitcoin’s current value and can be traded on stock exchanges.

List of Spot Bitcoin ETFs

Here are List of 11 SEC-approved Spot ETFs as of January 31, 2024:

Top Five Largest Bitcoin ETFs 

Here’s a breakdown of the top five most heavily traded Spot BTC ETFs as of March 2024. In first place is Grayscale Bitcoin Trust, with a share price of $63 and a net asset value of $43.7 billion. In second place is iShares Bitcoin Trust, with a share price of $40 and a net asset value of $14.1 billion. 

In third place is Fidelity Wise Origin Bitcoin Trust, with a share price of $62 and a net asset value of $6.2 billion. In fourth place is ARK 21Shares Bitcoin Trust, with a share price of $71 and a net asset value of $2.0 billion. Finally, in fifth place is Bitwise Bitcoin ETP, with a share price of $39 and a net asset value of $1.5 billion.

Bitcoin vs Bitcoin ETF Investing

Bitcoin ETFs: Advantages And Disadvantages

Advantages of spot ETF

• As ETFs buy and sell large blocks of Bitcoin, more liquidity will flow into the crypto market.

• Low trading fees when compared to Bitcoin investment is another major benefit of spot ETF. The trading fees of spot ETFs are around 0.25% to 1.25%.

• Additionally, an upsurge in prices over time with the increased demand and purchasing of bitcoin can benefit the investors.      

Disadvantages of spot ETF

• Highly regulated securities are an advantage as well as a disadvantage to spor ETFs. It is regulated by the SEC and any legal action against Bitcoin can affect the price of spot ETFs.

• No custody of Bitcoin is another flaw as the investor can’t take custody of the assets. Additionally, annual fees make spot ETFs more expensive in comparison to Bitcoin investment.  

How to Buy a Bitcoin ETF

To begin with the journey, open an account with a brokerage firm that offers them. Next, fund your account with the desired investment amount. Then, locate the specific BTC ETF you’d like to purchase, specify the number of shares, and place your order. Once filled, you’ll officially own a piece of this innovative asset class.

Conclusion

Bitcoin ETFs provide a compelling opportunity for investors of all experience levels to gain exposure to Bitcoin. They offer convenience, familiarity, and potential portfolio diversification benefits without the complexities of directly owning the digital asset. With increasing regulatory oversight and growing institutional adoption, it is poised to play a significant role in the future of crypto investing.

FAQs

Is investing in a spot ETF safe?

While the concept offers regulatory oversight, they are still subject to market volatility and potential risks associated with underlying Bitcoin prices.

What are the fees associated with BTC ETFs?

It typically charges management fees, which cover the fund’s operational costs. These fees can vary depending on the specific ETF.

Can I invest in a BTC ETF with a retirement account?

Some BTC ETFs are available for investment within certain retirement accounts, such as IRAs, but regulations and availability may vary.