What Is a Bitcoin ETF? Everything You Need to Know

As cryptocurrencies continue gaining traction in the global financial landscape, an increasing number of retail and institutional investors seek exposure to this exciting new asset class without directly dealing with the complexities of buying and storing digital coins. 

Enter Bitcoin ETFs — a game-changer in the world of cryptocurrency investing. This comprehensive guide will walk you through everything you need to know about Bitcoin ETFs, their importance, how to invest in them, and the potential risks and rewards of this innovative investment vehicle. 

So buckle up, and let’s dive into the world of Bitcoin ETFs!

An exchange-traded fund (ETF) is a basket of securities that trades on the stock market. It usually tracks a particular index, sector, industry, or asset. One great example would be the SPDR S&P 500 ETF Trust which tracks the performance of the 500 leading companies that are publicly traded in the US. 

Bitcoin ETF, or exchange-traded fund, is a stock market financial instrument primarily investing in Bitcoin as an asset. It exposes investors to the price of Bitcoin or Bitcoin-related assets without needing to buy or hold the cryptocurrency themselves. There are two main types of Bitcoin ETFs: 

• Bitcoin Spot ETFs, which track its spot market price and are backed by actual BTC. 

• Bitcoin Futures ETFs, which deal with Bitcoin futures contract trading and are not backed by BTC itself. 

Both types of ETFs trade on stock exchanges, just like other traditional exchange-traded funds.

Bitcoin ETFs vs. Traditional ETFs

At their core, Bitcoin ETFs function the same as traditional ETFs. While traditional ETFs (like the ETFs following the S&P 500) follow a portfolio of stocks or bonds, Bitcoin ETFs follow the current or future price of Bitcoin. Both ETFs can provide diversification, liquidity, and ease of trading, making them attractive options for investors seeking exposure to different asset classes.

Note: While countries worldwide have approved Bitcoin Spot ETFs, the US is still to do so. As of August 2023, the world's largest economy only supports Bitcoin Futures ETFs. 

Learn more about Bitcoin NFTs by reading our guide on Bitcoin Ordinals. 

Bitcoin Spot ETFs provide investors with exposure to the cryptocurrency without having to own it directly. The idea of a spot Bitcoin ETF is appealing because it simplifies the investment process and eliminates the need to deal with cryptocurrency exchanges, wallets, or any type of custody. 

Two companies usually create spot Bitcoin ETFs: 

• The company that applies for the ETF filing (usually a large fund with a good track record in dealing with regulators).

• Crypto custodian (a company that holds custody of all the BTC on behalf of the ETF).

Spot Bitcoin ETFs have existed for quite some time in countries like Canada, Switzerland, and Germany. On the other hand, the U.S. Securities and Exchange Commission (SEC) has not yet approved a spot Bitcoin ETF, arguing that it cannot adequately protect the public interest and investors from potential manipulation and fraud. 

However, there is increasing hope that this could change soon as recent filings have attempted to address the previous concerns raised by the regulators. As of August 2023, the US SEC is examining six spot Bitcoin exchange-traded fund (ETF) applications. 

Several significant financial institutions, including BlackRock and Fidelity Digital Assets, have expressed interest in introducing these ETFs, generating excitement in the market. 

Nevertheless, spot Bitcoin ETFs remain an attractive option for investors in countries where they are available.

Unlike Spot ETFs, A Bitcoin Futures ETF issues publicly traded securities that offer exposure to the price movements of Bitcoin futures contracts. 

Since they offer exposure to Bitcoin futures, they don’t track the current BTC market, nor do they have to hold any BTC in custody. This is why numerous analysts came out saying that this type of ETF is not beneficial to the crypto ecosystem, as it completely avoids the underlying asset market. 

Bitcoin ETFs are important for several reasons. Namely, they:

1. Simplify the investment process for traditional investors, 

2. Provide a safe investment vehicle for those that don’t want to hold custody of the underlying asset, and 

3. Attract institutional investors to the cryptocurrency market. 

By offering a familiar investment structure, Bitcoin ETFs enable a wider range of investors to gain exposure to the cryptocurrency market.

In the following sections, we’ll explore Bitcoin ETFs' specific advantages in simplifying the investment process, enhancing security, and attracting institutional investors.

Simplified Investment Process

One of the primary benefits of investing in a Bitcoin ETF is its simplified investment process. By eliminating the need to deal with the complexities of buying and storing digital coins, Bitcoin ETFs make it easier for retail and institutional investors to gain exposure to the cryptocurrency market based on their budget, risk tolerance, and investment objectives.

Additionally, investing in a Bitcoin ETF allows investors to trade an asset they already understand rather than requiring knowledge of blockchain, mining, decentralized exchanges (DEXs), and other cryptocurrency-related concepts. 

This simplicity makes Bitcoin ETFs an attractive option if you want to enter the cryptocurrency market without the steep learning curve typically associated with direct crypto investing.

Enhanced Security Measures for Beginners

Another advantage of Bitcoin ETFs is the enhanced security measures they provide for beginners compared to directly owning Bitcoin. 

Note: It’s important to note that this is true only for beginners — investors who know how to hold custody of their private keys safely will always have the ultimate crypto security. 

By eliminating the need for beginner investors to manage private keys or worry about hacks or frauds, Bitcoin ETFs offer a more secure way to invest in the cryptocurrency market.

This increased security can be particularly appealing for investors who may be hesitant to enter the cryptocurrency market due to concerns about the safety of their investments. 

The security provided to Bitcoin ETF investors is twofold: 

• Their funds are insured by the underlying regulator (for example, US investors are FDIC insured for up to $250,000). 

• They don’t need to learn how to properly keep custody of their crypto investments, as the brokers will deal with this issue. 

Attract Institutional Investors

The availability of Bitcoin ETFs can also help attract institutional investors to the cryptocurrency market. By offering a regulated and well-known investment structure, access to liquidity and transparency, and the ability to track changes in the price of Bitcoin within established financial markets, Bitcoin ETFs can play a crucial role in encouraging institutional investors to enter the cryptocurrency market.

Furthermore, Bitcoin ETFs can notably impact institutional investors’ portfolio diversification and risk management strategies, which can ultimately lead to increased overall market capitalization and stability in the cryptocurrency market.

As the cryptocurrency market continues to evolve, several Bitcoin ETFs have emerged as top contenders to watch in 2023. These funds offer investors a variety of investment strategies and exposures to the cryptocurrency market, catering to different risk tolerances and investment goals. 

Each of these ETFs offers unique investment strategies and holdings, providing options that best suit your needs. For example, the Valkyrie Bitcoin Strategy ETF is an actively managed ETF that invests primarily in Bitcoin futures contracts. On the other hand, the Global X Blockchain & Bitcoin Strategy ETF has a more diversified approach, holding a mix of CME Bitcoin futures contracts and a selection of blockchain stocks. In addition, the ProShares Bitcoin Strategy ETF offers another alternative for investors interested in gaining exposure to Bitcoin futures.

Let’s see some popular Futures ETFs on the market, the pending requests, and some international ETFs.

International BTC ETFs

Pending Bitcoin ETF Applications in the US

BTC Futures ETFs in the US

By keeping an eye on these top Bitcoin ETFs in 2023, investors can stay informed of the latest developments in the cryptocurrency market and make more informed investment decisions.

Here are some factors you need to consider before choosing the ETF which is right for you: 

• As you have noticed from everything we’ve covered so far, there are two main types of Bitcoin ETFs: spot ETFs and futures ETFs. Be mindful of which ones you choose, depending on your investment goals and risk appetite.
• The fees charged by Bitcoin ETFs can vary significantly. You must compare the fees charged by different ETFs before making a decision.
• The liquidity of an ETF refers to how easy it is to buy and sell shares of the ETF. You need to choose an ETF that has good liquidity so that you can easily trade in and out of your positions if you need to. If you invest in a low-liquidity ETF, the bid-ask spread might be too large, meaning you might experience slippage if you want to enter or exit a larger position.
• The track record of an ETF indicates how it has performed in the past. Choosing an ETF with a good track record is crucial so that you can be confident that it will perform well in the future.

Now, let's look at more ''abstract'' factors:

• What are you hoping to achieve by investing in a Bitcoin ETF? Are you looking for a long-term investment or a short-term trade? What are your investment goals?
• How much risk are you comfortable taking? Bitcoin is a volatile asset, so you must be prepared for the possibility of significant losses. Assess your general tolerance to stress and risk, and tailor your steps accordingly.
• Check your investment horizon. When do you need to access your money? If you need to access your money in the short term, a Bitcoin ETF may not be the best option for you.

If you’re interested in investing in a Bitcoin ETF, the process is relatively straightforward. Like investing in any other ETF, you’ll need to open a brokerage account, find the right Bitcoin ETF, and understand the associated fees and expenses.

In the following sections, we’ll discuss each of these steps in more detail, helping you navigate the process of investing in a Bitcoin ETF confidently and efficiently.

Open a Brokerage Account

The first step in investing in a Bitcoin ETF is opening a brokerage account. When selecting a brokerage, consider factors such as fees, types of investments available, customer service, and the trading platform. Once you’ve chosen a brokerage, complete the application, submit the required documents, and fund your account with cash or securities.

With your brokerage account open, you’re now ready to find the right Bitcoin ETF and invest in this exciting asset class. 

Find the Right Bitcoin ETF for You

To find a suitable Bitcoin ETF, research and compare different ETFs based on factors such as investment strategy, holdings, expense ratio, as well as the region you are located in. Consider whether a spot (depending on location) or futures-based ETF is more suitable for your investment strategy and risk tolerance.

Keep in mind that while spot-based ETFs are not currently available in the US, there are several futures-based Bitcoin ETFs to choose from and international options for those seeking exposure to spot-based ETFs.

Understand Fees and Expenses

Before investing in a Bitcoin ETF, you must know the fees and expenses associated with this type of investment. These include management fees, which are reflected in the ETF’s expense ratio, and trading and tarnsaction costs, such as commissions for buying and selling shares in the fund.

Be sure to compare the expense ratios of different Bitcoin ETFs to find the most cost-effective option for your investment strategy.

For investors in the United States, Bitcoin ETF options are currently limited to futures-based offerings due to regulatory concerns. Instead of holding Bitcoin directly, these ETFs invest in Bitcoin futures contracts. While this may not provide the same level of direct exposure to Bitcoin as spot-based ETFs, these US-based ETFs offer investors a regulated way to gain exposure to the cryptocurrency market within the confines of the US financial system.

Several US-based Bitcoin ETFs are available for investors, each with unique investment strategies and holdings.

If you want to diversify your portfolio beyond the US market, international Bitcoin funds are available in countries with more lenient regulations, such as Canada and many European countries. They may also include spot-based ETFs that hold Bitcoin directly.

By investing in international Bitcoin ETFs, you can gain access to the digital asset market in countries with more relaxed regulations, providing additional opportunities for portfolio diversification and exposure to the growing cryptocurrency market.

In conclusion, Bitcoin ETFs offer a simplified and secure way to invest in the cryptocurrency market, making them an attractive option for investors seeking exposure to this growing asset class. However, as an investor, you should know the risks and considerations associated with investing in Bitcoin ETFs, such as market volatility and regulatory concerns.

By seeking professional advice and carefully researching the available options, investors can make informed decisions about whether investing in a Bitcoin ETF is right for their financial goals and risk tolerance.

Did you find this article useful and interesting? Follow KuCoin Learn for more amazing educational content. Happy trading!

1. Is there an ETF that owns Bitcoin?

There are numerous international Bitcoin Spot ETFs that hold Bitcoin. However, the US currently has only Futures BTC ETFs, which are not required to hold any BTC.

2. What does ETF mean for Bitcoin’s value?

A Bitcoin ETF (exchange-traded fund) is an investment vehicle that tracks the value of Bitcoin on the spot or futures market and allows investors to gain exposure to this digital asset through their stockbroker. ETFs are publicly traded, and shares can be bought or sold on a traditional stock exchange.

3. What is the difference between Bitcoin ETF and Bitcoin (BTC)?

Bitcoin is a cryptocurrency you can buy and sell on supported platforms. At the same time, a Bitcoin ETF is a security that trades on the stock market and tracks the value of Bitcoin on the spot or futures market, allowing investors to gain exposure without direct ownership.

A Bitcoin ETF is more suitable for those who prefer not to manage their investments actively and are looking to diversify their portfolio and those who don’t know how to properly custody their coins. 

If you are unsure whether you want to buy into the Bitcoin ETF or straight-up BTC, check our guide on the differences between crypto and traditional trading. 

4. What will happen when the Bitcoin Spot ETF gets approved?

Numerous analysts have speculated on BTC’s price movement after a Bitcoin Spot ETF approval in the US. The consensus between them is that the approval will bring in capital from institutional investors and the Gen X and Baby Boomer generation of retail investors. 

If only the funds that filed a Bitcoin Spot ETF application invested 1% of their total assets under management into the ETF, BTC could easily reach a six-figure price mark. 

We could also compare this event to the first time Gold ETF came to the stock markets, where its price increased ten times.

5. Can I trade ETFs 24/7 like Bitcoin?

Traditional hours for US equity markets are from 9:30 a.m. to 4:30 p.m., but plenty of trading occurs in pre-market and post-market hours. Some brokerages have recently started allowing 24/7 ETF trading on weekdays. 

However, ETFs are not traded 24/7 in the same sense Bitcoin is, as the BTC market is completely open at any time.