Exploring Bitcoin ETFs: A Full Guide to Crypto ETF

Recently, a Twitter account belonging to the U.S. Securities and Exchange Commission (SEC) was compromised, resulting in a spurious message about a cryptocurrency exchange-traded fund (ETF). Interestingly, even this unauthorized tweet caused a surge in Bitcoin’s value, highlighting the potential impact of an ETF launch on cryptocurrencies. This incident underscores why ETFs are so pivotal in the crypto industry.

In the digital currency world, Bitcoin ETF allows investors to invest in the prices of various digital tokens without directly owning them. This introduces a regulated, familiar investment avenue for both retail and institutional investors, further integrating cryptocurrencies into the broader financial market retail and institutional investors a familiar and regulated way to invest in digital assets.

SEC Approves First Spot Bitcoin ETFs

Following up on the news of the hacking of the US Securities and Exchange Commission’s (SEC) Twitter account, another significant piece of news has emerged. 

The SEC has officially approved the creation of 11 spot Bitcoin ETFs. This development opens new horizons for investors interested in investing directly in Bitcoin using traditional financial instruments.

Unlike previous ETFs based on futures contracts, the new funds will directly own bitcoins. This will provide a more accurate reflection of the cryptocurrency’s exchange rate performance. Among the approved ETFs are products from well-known market participants such as ARK 21Shares, BlackRock’s iShares and Grayscale.

This SEC decision could dramatically change the landscape of cryptocurrency investing, making it more accessible to a wide range of investors and simplifying the investment process.

What are Crypto and Bitcoin ETFs?

Crypto ETFs, or Cryptocurrency Exchange-Traded Funds, are investment vehicles that track the performance of cryptocurrencies or cryptocurrency-related assets. They come in various forms, each offering a unique approach to crypto investment:

• Investment in Blockchain Technology: Some crypto ETFs focus on investing in companies that integrate blockchain technology into their business models. This approach extends beyond cryptocurrencies and taps into the broader application of blockchain in various industries;

• Diverse Investment Channels: These ETFs diversify investments across a range of crypto assets and related financial instruments. This includes not only direct cryptocurrency holdings managed by entities like Bitwise or Grayscale but also derivatives such as futures and options linked to the performance of cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and others;

• Bitcoin ETFs and Beyond: Initially, Bitcoin ETFs, which were primarily futures-based, sought to mirror the value of Bitcoin via the futures markets. However, with the recent SEC approval, there are now spot Bitcoin ETFs that directly hold Bitcoin, offering a more direct exposure to its market movements. This marks a significant evolution in the structure and approach of crypto ETFs;

• Examples in the Market: Notable examples include the previously launched ProShares Bitcoin Strategy ETF (BITO) and others like Valkyrie (BTF) and VanEck (XBTF), which initially focused on futures. The market now also includes various spot Bitcoin ETFs approved by the SEC, representing a new phase in regulated financial products within the cryptocurrency space.

How Does a Crypto and Bitcoin ETF Work?

Previously, most cryptocurrency ETFs were structured around derivatives such as futures and options or other crypto-related financial instruments rather than holding the actual cryptocurrencies. These ETFs aimed to track the price movements of the underlying digital currencies indirectly. However, this approach often led to discrepancies in tracking, as the value of the ETF might not align precisely with the market value of the cryptocurrency.

Now, with the SEC’s approval of spot Bitcoin ETFs, a new category of cryptocurrency ETFs has emerged:

• ETFs Backed by Physical Crypto Assets: This new type of ETF directly holds the cryptocurrency it tracks, offering a closer alignment with the actual market movements of the crypto assets. Spot Bitcoin ETFs are an example of this type, where the ETFs hold actual Bitcoin, providing more direct exposure to its price movements;

• Synthetic ETFs: These ETFs continue to track the price movements of cryptocurrency derivatives, like futures and options, rather than the cryptocurrencies themselves. They remain a viable option for investors looking for exposure to crypto markets without directly owning cryptocurrencies.

The significance of cryptocurrency ETFs, including the newly approved spot Bitcoin ETFs, lies in their ability to offer diversified investment portfolios. They provide an opportunity for investors to include cryptocurrencies in their investment mix, which is particularly appealing for those looking to diversify beyond traditional equity markets. This allows for investments in popular cryptocurrencies like Bitcoin and Ethereum through a more regulated and familiar investment vehicle like ETFs.

In light of these developments, it’s important for investors to understand the distinct characteristics of these two types of cryptocurrency ETFs and choose the one that aligns best with their investment strategy and risk tolerance.

What is the Best Cryptocurrency ETF?

In the past year, cryptocurrency funds exhibited remarkable performance within the investment sector, achieving gains of approximately 100% or more. Here, we examine five exceptional crypto ETF listings from that period.

Valkyrie Bitcoin Mining ETF

This actively managed fund specializes in companies deriving at least half of their income from Bitcoin mining or related services. It invests in common stocks and American depositary receipts listed on international markets, excluding direct Bitcoin holdings or Bitcoin futures exposure;

• 2023 Performance: 108.28%;

• Assets Under Management: $14 million;

• Expense Ratio: 0.75%;

• Reference Date: Sept. 30, 2023;

Bitwise Crypto Industry Innovators ETF

This ETF aims to mirror a modified market-cap-weighted index of global firms active in the cryptocurrency economy, classifying them into two tiers based on their involvement in crypto assets;

• 2023 Performance: 97.64%;

• Assets Under Management: $74.8 million;

• Expense Ratio: 0.85%;

• Reference Date: Sept. 30, 2023;

Invesco Alerian Galaxy Crypto Economy ETF

Tracks an index of companies engaged in cryptocurrency, crypto mining, cryptocurrency purchasing, related technologies, traded products, and private investment trusts;

• 2023 Performance: 97.42%;

• Assets Under Management: $4.2 million;

• Expense Ratio: 0.61%;

• Reference Date: Sept. 30, 2023;

Global X Blockchain & Bitcoin Strategy ETF

An active fund focused on the long-term growth potential of blockchain companies and Bitcoin futures without direct investment in Bitcoin;

• 2023 Performance: 73.68%;

• Assets Under Management: $11.7 million;

• Expense Ratio: 0.65%;

• Reference Date: Sept. 30, 2023.

Hashdex Bitcoin Futures ETF

Tracks an index representing average settlement prices for near-month Bitcoin futures contracts listed on the Chicago Mercantile Exchange, based on the USD Bitcoin Reference Rate;

• 2023 Performance: 51.73%;

• Assets Under Management: $1.7 million;

• Expense Ratio: 0.92%;

• Reference Date: Sept. 30, 2023.

The Best Bitcoin ETFs(not spot ones)

As of November 2023, the landscape of Bitcoin ETFs has evolved, with several key players dominating the market. These funds, while not holding actual Bitcoin, have carved out niches in the cryptocurrency investment space through various strategies.

ProShares Bitcoin Strategy ETF (BITO)

• AUM: $904 million;

• Expense Ratio: 0.95%;

• Investment Focus: Bitcoin futures;

• Highlights: BITO, the pioneer Bitcoin ETF in the U.S., focuses on capital appreciation via Bitcoin futures contracts. Launched in October 2021, it rapidly gained popularity, securing about $1 billion in assets shortly after its debut. Besides futures, it may also include Treasury securities and cash in its holdings.

ProShares Short Bitcoin ETF (BITI)

• AUM: $69 million;

• Expense Ratio: 0.95%;

• Investment Focus: Inverse Bitcoin futures;

• Highlights: Unique in its approach, BITI, launched in June 2022, aims to track the inverse of Bitcoin’s daily performance. It operates through the cash-settled futures market, offering an alternative perspective on Bitcoin investment.

VanEck Bitcoin Strategy ETF (XBTF)

• AUM: $45 million;

• Expense Ratio: 0.76%;

• Investment Focus: Bitcoin futures;

• Highlights: XBTF, starting in November 2021, seeks capital appreciation through BTC futures. A notable feature is its C-corp structure, offering tax efficiency by not mandating distributions of long-term capital gains as dividends.

Valkyrie Bitcoin Strategy ETF (BTF)

• AUM: $25 million;

• Expense Ratio: 1.20%;

• Investment Focus: Bitcoin futures;

• Highlights: BTF, launched in October 2021, closely follows BITO and predominantly invests in Bitcoin futures, supplementing with U.S. government securities, money market funds, and corporate bonds.

Simplify Bitcoin Strategy PLUS Inc ETF (MAXI)

• AUM: $22 million;

• Expense Ratio: 0.97%;

• Investment Focus: Bitcoin futures;

• Highlights: MAXI, the newest addition as of September 2022, not only invests in BTC futures for capital appreciation but also engages in short-dated put or call spreads on global equity indices to generate income.

Global X Blockchain & Bitcoin Strategy ETF (BITS)

• AUM: $11 million;

• Expense Ratio: 0.65%;

• Investment Focus: Bitcoin futures and blockchain stocks;

• Highlights: BITS, active since November 2021, diversifies between Bitcoin futures and blockchain company stocks. It indirectly invests in blockchain via its sister ETF, the Global X Blockchain ETF (BKCH), covering a spectrum of blockchain-related businesses.

What are the Advantages of Cryptocurrency ETFs?

Cryptocurrency ETFs offer a number of advantages, especially for those who are just beginning to familiarize themselves with the volatile world of digital assets.

• Accessibility and Low Cost: Investing in ETFs provides an affordable entry into the volatile cryptocurrency market. This allows investors to participate in the crypto economy without the need to have significant capital;

• Simplified Investment Process: The complexity of analyzing and understanding the cryptocurrency market is the responsibility of professional analysts. This makes cryptocurrency ETFs a great choice for beginners or those who prefer a “free” approach;

• Cost-Effectiveness: Investors in cryptocurrency ETFs avoid the direct costs associated with owning cryptocurrency, such as custody fees, network fees, and transaction fees, making them a better option;

• Enhanced Security: It is the responsibility of the ETF provider to ensure the safety of the fund. This provides investors with protection against risks such as phishing, cryptojacking, and cryptocurrency theft;

• Diversification: Cryptocurrency ETFs allow you to diversify your portfolio without having to buy individual tokens. This is especially beneficial given the diversity of cryptocurrency exchanges, where not all tokens are available on every platform.

Are Cryptocurrency ETFs Safe?

Cryptocurrency Exchange-Traded Funds (ETFs) present a blend of traditional investment structures and the emerging digital currency market. Their safety, like any investment, depends on various factors.

• Regulatory Framework: ETFs are regulated financial products. This means they are subject to the rules and oversight of financial regulatory bodies, which can add a layer of security not always present in direct cryptocurrency investments;

• Market Volatility: Cryptocurrencies are known for their high volatility. While ETFs might mitigate some risk by diversifying holdings, they still expose investors to the inherent volatility of the crypto market;

• Operational Security: The security measures implemented by the ETF provider are of paramount importance. Sound fund management practices, including robust cybersecurity practices and insurance against theft and fraud, are vital to protecting your investment;

• Counterparty Risks: ETFs involve counterparty risks, where the other party in the investment might fail to meet their obligations. This risk is present in all forms of trading and investment;

• Market Risk: The overall performance of the cryptocurrency market affects ETFs. Market downturns can lead to losses, just as they can in any market-linked investment;

• Liquidity Risk: While typically more liquid than direct cryptocurrency investments, ETFs can still face liquidity risks, especially in times of market stress.

How to Invest in a Cryptocurrency ETF?

For those looking to broaden their investment experience, investing in a cryptocurrency ETF can be a convenient alternative to buying digital currencies directly.

• Initiate a Brokerage Account: Choose a brokerage platform, like Fidelity Investments or Robinhood, and complete their registration process to set up your account;

• Allocate Investment Funds: Determine the proportion of your investment capital that you wish to allocate to ETF;

• Deposit Funds and Select ETFs: Deposit Funds and Choose ETFs: Once your account is funded, locate your preferred ETFs by entering their ticker symbols into the search field;

• Execute Purchase Orders: To buy your chosen cryptocurrency ETFs, place a market order. Specify the number of shares your budget allows;

• Automate Your Investments: If you’re interested in gradually expanding your portfolio, consider setting up a regular investment plan with your brokerage.

Risks of Investing in a Crypto ETF

Investing in Bitcoin spot ETFs offers direct exposure to Bitcoin’s price but is not without its share of risks. Here are some key considerations:

Trust in ETF Providers

Bitcoin ETF investors must place their trust in the ETF provider to purchase and securely store Bitcoin. This reliance introduces the risk of fraud and mismanagement. As investors do not own the actual Bitcoin itself but rather shares in a fund controlled by the provider, there are inherent storage and operational risks involved.

Centralization Risks

The involvement of large traditional financial institutions, such as BlackRock, in Bitcoin investments can potentially centralize power within the cryptocurrency ecosystem. In the event of a blockchain fork, these institutions might have the influence to dictate which version of Bitcoin is considered the “real” one, regardless of consensus among other smaller investors or Bitcoin users. This centralization could have significant market implications, including the potential devaluation of the unselected Bitcoin variant.

Contradiction with the Bitcoin Document

The Bitcoin paper emphasizes the lack of trust in third parties to verify transactions. This principle of no trust is the basis of Bitcoin’s peer-to-peer network, where transactions are publicly announced, and nodes work collectively to reach consensus, reducing the need for trust. However, Bitcoin ETFs reintroduce the element of trust in third parties, which is contrary to Bitcoin’s original intent and potentially exposes investors to unforeseen risks.

Investors considering Bitcoin ETFs should carefully evaluate these risks along with the potential rewards before making investment decisions.

Disclaimer

The information provided in this article is for informational purposes only and should not be construed as investment advice. The content discussed here does not constitute financial or investment advice, and the authors and this platform do not assume any responsibility for the accuracy, completeness, or timeliness of the information provided. Your financial decisions are your own, and you bear sole responsibility for them.