The concept of an exchange-traded fund (ETF) is to track the value of an underlying commodity or index; however, when it comes to tracking a commodity such as bitcoin — a commodity that does not exist physically, therefore, cannot be held in a physical portfolio — this becomes quite complex. Thus, the concept of an exchange-traded fund (ETF), specifically a bitcoin exchange-traded fund (ETF), is created to track the price of bitcoin. As mentioned previously, an ETF is a financial instrument that allows investors to purchase shares of an asset that mirrors the price of the underlying asset. This allows individuals who want to invest in bitcoin, but do not want the hassle of buying, selling, or storing their own bitcoin to participate in the growth of the cryptocurrency market.
In essence, bitcoin exchange-traded funds (ETFs) are designed to allow institutional investors and individual investors alike to invest in bitcoin. This is done through a traditional stock exchange, similar to other ETFs. Historically, there were no traditional stock exchange venues where investors could buy and sell shares of an ETF that mirrored the price of bitcoin. Therefore, the first bitcoin ETF came into existence on February 15, 2021, in Canada. The Ontario Securities Commission (OSC) approved the first bitcoin ETF and began trading on the Toronto Stock Exchange (TSX).
There are two main types of bitcoin ETFs:
Spot ETFs, also referred to as “Physical ETFs” mirror the price of bitcoin in real time and are backed by actual bitcoin assets. These types of ETFs are traded on traditional stock exchanges in the same manner as other ETFs.
Futures ETFs focus on bitcoin futures contracts and do not directly hold bitcoin. These types of ETFs are also traded on traditional stock exchanges, but they do so by focusing on the futures contracts of bitcoin rather than the price of bitcoin itself.
At the time of writing (January 2024), several countries have now adopted bitcoin Spot ETFs. While bitcoin Spot ETFs have been adopted in several countries and are being used to expand the opportunities for investors, bitcoin Futures ETFs remain the only type of ETF that has been approved to trade in the United States.
Both Spot ETFs and Futures ETFs operate in a similar manner to other ETFs. However, both types of bitcoin ETFs track either the current or future price of bitcoin.
Bitcoin ETFs provide many benefits to investors. For example, they offer a way to diversify a portfolio, increase liquidity, and make trading easier and more accessible.
Bitcoin ETFs will play a significant role in making it simpler for people to invest in bitcoin, reduce the risk associated with owning the asset, and attract institutional investors.
One of the most appealing aspects of investing in a bitcoin ETF is the regulated, transparent, and liquid nature of these investment vehicles. Additionally, their inclusion in a diversified portfolio can help to improve the overall diversification and risk management characteristics of that portfolio. Furthermore, the adoption of bitcoin ETFs will likely lead to increased market capitalization and stability in the cryptocurrency market.
To begin investing in a bitcoin ETF, you need to open a brokerage account, find a bitcoin ETF that fits within your investment strategy, and understand the fees and expenses associated with your chosen bitcoin ETF.
Due to regulatory constraints, the options available to U.S.-based investors for bitcoin ETFs are limited to those that are based on futures contracts. On the other hand, international investors may choose from a variety of options, including spot-based ETFs, which are available in many countries that have less stringent regulations.
Prior to purchasing a bitcoin ETF, you should consider the potential risks and regulatory issues associated with investing in this asset class. The cryptocurrency market is known to be volatile, and this volatility can significantly affect the performance of bitcoin ETFs. Prior to investing in a bitcoin ETF, you should consult with a financial advisor and perform adequate research to ensure that your investment decisions are consistent with your financial goals and risk tolerance.
