Bitcoin is the largest and original cryptocurrency which represents the entire crypto market. From the humble beginnings of valued at less than $1, it is now playing around the $100,000 price level. A flood of Bitcoin ETF approvals reported in Q1 2024 marked a crucial milestone in the history of Bitcoin and the crypto world.
Bitcoin ETFs enhance BTC adoption and offer a convenient way to invest in Bitcoin without directly buying it. Whether you are a beginner or a professional investor, learning Bitcoin ETFs is a must for you. The present article gives a deep insight into everything you must know about this financial instrument.
What are Bitcoin ETFs?
Bitcoin ETF is an exchange-traded fund that holds Bitcoin as an underlying asset. It tracks the market price movements of Bitcoin and trades on traditional stock exchanges such as Nasdaq and NYSE. Crypto ETFs are the best financial assets to all the investors who are adamant to gain direct exposure to cryptocurrencies.
BlackRock, Grayscale, and VanEck are a few of the popular global firms that launched their own versions of Bitcoin ETFs. Bitcoin created a history in traditional finance when 11 out of all the BTC ETFs went live in January 2024. Today, Bitcoin ETFs hold over $115.93 billion assets under management (AUM), with a total market capitalization of $117 billion, as per Coinglass.
How Do Bitcoin ETFs Work?
Any exchange-traded fund of an asset tracks the market price of its underlying asset. Thus, the Bitcoin ETF tracks the market price of Bitcoin. To make it more simpler, one share of a Bitcoin exchange-traded fund price will move in line with the price of 1 Bitcoin.
When Bitcoin price goes up, its ETF value would also increase and when it goes down, the ETF value would drop. Bitcoin ETFs offer a convenient way to leverage the price movements of Bitcoin without actually owning it.
As we mentioned before, it trades on traditional stock exchanges. But, how is it possible for a crypto to trade on conventional stock exchanges?
It is possible because the asset that is trading is not exactly the same as a cryptocurrency. Even though a Bitcoin ETF tracks BTC, it is a completely different financial instrument. Unlike cryptocurrencies that trade on partially regulated DEXs and CEXs, crypto ETFs trade on fully regulated stock exchanges.
Types of Bitcoin ETFs
There are two types of Bitcoin ETFs based on the underlying asset they track. We can categorize them as “Physically backed Bitcoin ETFs” or “Synthetic Bitcoin ETFs.” The main difference between them is while physically backed Bitcoin ETFs actually buy and hold Bitcoins, synthetic Bitcoin ETFs hold derivative products of Bitcoin.
Bitcoin Spot ETFs and Bitcoin Futures ETFs are the simple terms we use daily to differentiate these funds. Let us understand them in detail in this section.
Bitcoin Spot ETFs
Bitcoin spot ETFs track the current spot market price of Bitcoin. These ETFs hold actual Bitcoins as their underlying assets. Thus, they offer direct exposure to Bitcoin market prices while offering the security and reliability of traditional stock exchanges. Bitcoin spot ETFs come under the category of Physically backed Bitcoin ETFs. Their functionality is simple to understand and investors can access them without any ambiguity.
Bitcoin Futures ETFs
Bitcoin futures ETFs hold Bitcoin futures contracts as their underlying assets. Bitcoin futures contracts are agreements to buy or sell Bitcoin at a predetermined price on a future date. Instead of directly tracking the market price of BTC, they track the price of Bitcoin futures contracts.
The market value of spot ETFs and futures ETFs differ as they have slightly different approaches in terms of their underlying assets. Bitcoin futures ETFs come under the category of synthetic Bitcoin ETFs. And, they are complex for beginners to understand. Because they involve understanding of futures contracts and how they influence the market value of futures ETFs.
How to Invest in Bitcoin ETFs?
Investors must follow a series of steps to invest in Bitcoin ETFs.
Select a Bitcoin ETF: There are numerous types of Bitcoin ETFs available. BlackRock’s iShares Bitcoin Trust, Fidelity, Grayscale, and more global firms have their own Bitcoin exchange-traded funds. Choose a product that suits your investment goals and risk tolerance. Bitcoin ETF fees, liquidity, and its track record some of the other important factors to consider before choosing a Bitcoin ETF.
Open a Brokerage Account: Select a brokerage account after a careful consideration of its features such as fees, investment methods, customer support, user interface, etc. Open an account on the platform by registering with your details.
Fund Your Account: Research all the available payment methods by the brokerage platform. Add funds to your account by using your preferred payment method. Also, verify whether the brokerage account supports the Bitcoin ETF that you would like to invest in.
Place an Order: Place a buy order on your brokerage account to buy your preferred Bitcoin ETF. This process is similar to the buying process of stocks on traditional stock exchanges. Several marketplaces offer different types of buy orders such as market orders, limit orders, etc. Buy your selected fund using your preferred buy order.
Monitor Your Investment Regularly: Making an investment is only a partial part of the process. You must monitor how your Bitcoin ETF is performing regularly to make adjustments to your investment. Since the Bitcoin ETF space is dynamic with a lot of changes happening across the global level, you must keep a track of regulations around these products as well.
Impact of Bitcoin ETFs on the Crypto Market
One of the first notable things is the flood of institutional investment into crypto that happened through the ETF products. Bitcoin ETFs offer a secure, convenient, and reliable way to get exposure to the Bitcoin market. This is absent when it comes to trading cryptocurrencies on crypto exchanges.
Investors don’t have to go through the complex process of buying and storing crypto. Creating a crypto wallet and securing its public and private keys is a risky process compared to investing in ETFs.
With the increase in investment from investors across the globe, market liquidity of Bitcoin ETFs increases. As the investment becomes more simple, it lowers the barrier to entry to Bitcoin ETF investment. The price volatility also reduces over time, stabilizing the price of Bitcoin over time, as a result of increased investments.
Bitcoin’s position as a global asset strengthens as the number of Bitcoin ETFs enter the market increases. Referring to the 11 Bitcoin ETFs approved in Jan 2024, Head of Coinbase Institutional stated, “This is the moment that crypto’s gone mainstream,” at Chainalysis Links NYC 2024. Bitcoin ETFs not only offered an additional product to diversify portfolios but also increased the standard of the entire crypto industry.
What Does the Future Hold for Bitcoin ETFs?
We might witness an increase in the no. of Bitcoin ETFs approved with a pro-crypto environment in the US government. The re-election of Donald Trump’s impact on crypto is clearly noticeable with the new crypto executive order and appointments given to pro-crypto leaders.
The conversion of cryptocurrencies into ETF will not only limit Bitcoin. Several global firms have already started filing for the SEC approval of other crypto ETFs such as Litecoin ETF, XRP ETF, Solana ETF, Cardano ETF, and more. While some filings such as Litecoin ETF have moved forward with an open period of public comments, others like Ethereum ETF Options are still waiting in the line.
Bitcoin ETFs have already been successful in narrowing the gap between traditional finance and cryptocurrencies. Soon, the line between these two largest financial spaces will get blurred. The refinement of regulations across several countries will further improve, playing a major role in the mainstream adoption of cryptocurrencies.
