Bitcoin advocates had to wait for eight long years to get an ETF based on the cryptocurrency. And when it finally arrived in October 2021, they had not one, not two, but three different funds to cheer.
And this is just the beginning: Business Insider estimates there are more than half a dozen new bitcoin ETFs in the pipeline. After years of false starts and repeated SEC rejections, the tide is slowly turning.
Granted, these are not bitcoin spot ETFs – the “holy grail” for institutional investor acceptance. Instead, proponents are taking an easier route to SEC acceptance by way of EFTs based on bitcoin futures. (In other words, you’re betting on the future price of bitcoin, not holding it directly.)
In this blog post, we will take an in-depth look at bitcoin ETFs, with a quick update regarding the current crypto ETF market in the US. After assessing the investment benefits of bitcoin ETFs, we will also try to map the path ahead from futures ETF to proper spot ETFs.
What Is a Bitcoin ETF?
An exchange-traded fund, commonly known as an ETF, is a type of investment fund that tracks the price of an underlying asset, such as gold, oil, an index, or a basket of stocks. A bitcoin ETF, then, is an investment fund that tracks the price of bitcoin.
ETFs trade on exchanges in the same way as stocks. That means that any investors – retail or institutional – can buy and sell holdings in an ETF to other market participants over the stock exchange.
ETFs are usually cheaper than mutual funds since they are passive index-tracking funds. As a result, they allow investors – even private investors – to access asset classes and niche markets where it would otherwise be difficult to invest.
|Buying Bitcoin ETFs||Buying Bitcoin|
|Invest in bitcoin indirectly (through a fund)||Invest in bitcoin directly (by owning it)|
|Available in brokerage accounts||Not available in brokerage accounts|
|Someone else manages it||You have to manage it|
Buying Bitcoin ETFs vs. Buying Bitcoin
A bitcoin ETF, such as the one proposed by the Winklevoss twins way back in 2013, would have the digital currency bitcoin as an underlying asset. That means that by purchasing a bitcoin ETF, an investor would be indirectly purchasing bitcoin, as they would be holding the bitcoin ETF in a portfolio, as opposed to buying and holding the digital currency itself.
However, as the ETF would closely track the price of bitcoin, for the investor, it should make little difference whether they are holding a bitcoin ETF or the actual digital currency. The main difference between buying a bitcoin ETF versus bitcoin itself is that investors are purchasing a regulated investment vehicle, instead of buying and owning a crypto asset.
Thus, a bitcoin ETF has several benefits for investors:
It’s more convenient: For starters, you don’t have to worry about the security concerns of properly storing bitcoin. There’s no need to learn the intricacies of using a wallet or dealing with a crypto exchange. Buying an ETF simplifies the whole process of investing in cryptocurrencies.
It’s regulated: As a decentralized and often unregulated asset class, access to bitcoin is fraught with regulatory complications in many jurisdictions. ETFs trade under strict institutional oversight in mainstream market exchanges. This is useful from a legal as well as tax efficiency perspective.
It can diversify risk: there is no denying the high volatility and risk exposure that investing in bitcoin brings to a portfolio. This is where an ETF model can make a huge difference – you may be able to find funds that mix bitcoin with other popular altcoins, traditional commodities, AAA stocks, and more for additional diversification. It gives you more options for risk management while still getting a look into the dynamic crypto markets.
Proshares (BITO): The First US Bitcoin ETF
Since 2013, the standard SEC playbook on bitcoin ETF applications was to reject them outright. The reasons cited have remained consistent over the years – concerns related to manipulation risk in bitcoin markets and the lack of adequate measures to protect investors.
At least ten bitcoin EFT applications have been rejected since 2017. Things then took a dramatic turn in August 2021, when the current SEC Chairman Gary Gensler voiced his approval for ETFs that looked at bitcoin futures instead of holding the actual crypto itself.
Crypto advocates were quick to latch onto the opportunity. Using the tacit approval of the SEC for a bitcoin futures ETF under the rules of the 1940 Investment Company Act, funds filed multiple applications. The first to reach the market was the Proshares Bitcoin Strategy ETF (BITO) on October 19.
The fund AUM ballooned to $1 billion within two days. That same week, the second bitcoin futures ETF – the Valkyrie Bitcoin Strategy Fund (BTF) – had a low-key launch. Finally, the VanEck Bitcoin Strategy Fund (XBTF) joined the party in mid-November.
How to Invest in a Bitcoin ETF
As of this writing, there are three bitcoin futures ETFs for investors:
Nowhere is the adage “the early bird gets the worm” as fitting as in the case of Proshares. The BITO currently holds the record of the fastest ETF to reach an AUM of $1 billion. Since its debut on the NYSE in October, the Proshares Bitcoin ETF has attracted stupendous investor interest.
Its primary strategy involves investing in cash-settled bitcoin futures contracts on the Chicago Mercantile Exchange (CME). Investors get buy-in in return for a 0.95% fee. In the grand scheme of things, that is not too bad – funds with an expense ratio above 1.5% are the ones to avoid among ETFs.
The second Bitcoin ETF to launch with tacit SEC approval is slightly different from Proshares. Instead of focusing solely on bitcoin futures contracts, Valkyrie combines them with other instruments like treasury bills, bonds, corporate debt securities, and cash.
Though it collected $5 million in investments within a day after launch, Valkyrie has not evolved into a runaway success like the Proshares BTO. However, the smaller upstart may still have some legs, given the sustained investor interest in bitcoin. Plus, the Valkyrie expense ratio is at the 0.95% market, just like Proshares.
The New York-based VanEck investment fund has floated several bitcoin ETFs, mainly on European exchanges. Its XBTF fund is the third of its kind launched after October 2019. While most of those funds charge between 1% and 1.5% fees, VanEck has opted to undercut its competition in the US bitcoin futures arena.
The XBTF is available at an expense ratio of 0.65%, making it one of the least expensive crypto futures ETFs anywhere in the world. Buying bitcoin futures from the Chicago Board Options Exchange (CBOE), this VanEck EFT has another trick up its sleeve: it is a C-Corporation, which may bring future tax advantages to investors.
Apart from these three US-based bitcoin future ETFs, investors also have options in Canada and the European Union. The main advantage of EU exchanges is their support for crypto spot ETFs. The following are some of these bitcoin spot ETFs with their respective expense ratios:
|The VanEck Vectors Bitcoin ETN||VBTC||Deutsche Böerse Xetra||Spot||2%|
|The Bitcoin Investment Trust from Grayscale||GBTC (on the OTCQX ticker)||Off-exchange, via registered dealers||Spot||2%|
|XBT Provider ETN||CXBTF||Nasdaq Stockholm Stock Exchange||Spot||2.5%|
|WisdomTree Bitcoin ETP||BTCW||SIX Swiss Exchange||Spot||0.95%|
|CI Galaxy Bitcoin ETF||BTCX||Toronto Stock Exchange||Spot||0.45%|
Bitcoin Futures ETFs vs. Bitcoin Spot ETFs
For the SEC, the difference between the two types of ETFs essentially boils down to regulatory oversight. Bitcoin trades on cryptocurrency exchanges across the globe that are not under any significant regulatory oversight. Therefore, any ETF based directly on holding bitcoin – a spot ETF – cannot realistically guarantee the level of investor protection demanded by the SEC.
The situation is markedly different concerning bitcoin futures. These are bitcoin derivatives that trade on established exchanges like the Chicago Mercantile Exchange (CME). The CME is regulated by the Commodity Futures Trading Commission (CFTC), making any futures on it palatable to the SEC in a Bitcoin-based ETF.
Instead of directly buying bitcoin, a futures ETF buys bitcoin futures contracts. These contracts work similar to other traditional commodity futures contracts – you promise to buy/sell the commodity at a fixed price at a future date, hedging a bet on the futures price being to your advantage at the date of the sale.
A futures contract ETF will not directly track the value of bitcoin, unlike a spot ETF. But the futures contract will still be influenced by fluctuations in the value of bitcoin.
Where to Buy Bitcoin Spot ETFs
Nowhere, yet. While the SEC has given the green light for Bitcoin futures ETFs, it remains firm in its opposition to spot ETFs at the moment. The clearest signal came on November 12 when it categorically rejected a VanEck application to launch a Bitcoin spot ETF. Industry insiders and bitcoin experts expected this move.
The SEC simply reiterated its long-held stance on the issue: the bitcoin markets are still far too volatile and vulnerable to abuse. In the absence of comprehensive surveillance-sharing arrangements and other regulations, it is hard to see approval for Bitcoin spot ETFs any time soon.
Unfortunately, many of these SEC requirements are antithetical to the core principles of cryptocurrencies – namely, an absence of centralized authorities. But this does not mean that we will never see a Bitcoin spot ETF in the US in the future.
Europe has shown us that it is possible for crypto spot ETFs and regulations to coexist. It may take 2-3 years, maybe a little more, but we can expect Bitcoin spot ETFs sometime in the coming future, just not in the next 12 months.
The scope of cryptocurrencies expands with each passing year. The arrival of Bitcoin futures ETFs in the US market is a significant step in the right direction. Investors deserve to have more innovative, high-yield options to balance their portfolios.
While a spot ETF remains the ultimate dream, Bitcoin futures are not without merits. In a challenging economic climate, they could potentially fill a void and provide attractive high-growth options at reduced risk for retail and institutional investors.
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