How Bitcoin ETFs Work and How to Invest in Them

Bitcoin Exchange Traded Funds (ETF) have been in the news as an important financial asset that has finally achieved regulatory compliance. At the time of writing, shortly after Donald Trump became the US President for the second time, inflows into spot Bitcoin ETFs had reached more than $110 billion.

Bitcoin ETFs allow investors to gain exposure to Bitcoin price movements without the complexities of directly buying, storing, and managing the cryptocurrency. There are two main types of Bitcoin ETFs, which we will explain in more detail. In this article, we will explain what Bitcoin ETFs are, where they originated, and how you can invest in them.

What are Bitcoin ETFs?

Bitcoin ETFs are exchange-traded funds that give investors exposure to Bitcoin through a fund traded on traditional stock exchanges. Like other ETFs, they let investors pool money into a product that tracks an underlying asset without buying that asset directly. In this case, the underlying exposure is tied to Bitcoin rather than stocks, bonds, or commodities.

In return, you will receive payouts when you sell your stake in that investment if you sell when the price is higher than when you bought it. ETFs are traded on stock exchanges just like individual stocks. ETFs are as easy to diversify as mutual funds and have the flexibility and ease of trading with stocks.

You can buy and sell ETF shares throughout the trading day at market price, potentially capitalizing on short-term price fluctuations, which makes ETFs an attractive option for a wide range of investment strategies, from conservative to aggressive.

What Is the History of ETFs?

The history of ETFs dates back to the early 1990s, with the launch of the first ETF in the United States. Since then, ETFs have evolved significantly, expanding across a broad spectrum of asset classes, including stocks, bonds, commodities, and now cryptocurrencies.

The emergence of Bitcoin ETFs is the most recent development in this evolutionary timeline, representing the point at which digital currencies achieved a major integration with the traditional financial system.

Bitcoin ETFs give you exposure to Bitcoin's price movements without the need to directly purchase or hold the cryptocurrency, offering a more convenient and regulated investment vehicle for engaging with the crypto market.

Bitcoin ETFs reflect the growing acceptance of cryptocurrencies as a legitimate asset class among investors and regulators alike. Through Bitcoin ETFs, both seasoned investors and newcomers can partake in the crypto market's potential gains while mitigating some of its inherent risks, such as security concerns related to the custody of digital assets. This has already led to enhanced liquidity and a wider acceptance of digital currencies in global finance.

What Are the Different Types of Bitcoin ETFs?

The two main types of Bitcoin ETFs are Bitcoin futures ETFs and spot Bitcoin ETFs. These products differ in how they gain exposure to Bitcoin, which affects how closely they track the asset and how investors use them. Understanding that distinction is essential before choosing between the two.

The history of Bitcoin futures ETFs began to take shape with growing interest in cryptocurrency investments and the demand for regulated financial products that provide exposure to Bitcoin prices. The first major milestone was the approval of futures-based Bitcoin ETFs in the United States in October 2021, allowing them to trade on traditional stock exchanges.

This development marked a crucial step in legitimizing Bitcoin as an investable asset.

Following the introduction of futures-based ETFs, there has been feverish anticipation around the potential approval of spot Bitcoin ETFs, which would directly track the price of Bitcoin itself, rather than futures contracts. Many institutional and casual investors finally got their wish when the Securities and Exchange Commission (SEC) in January 2024 approved spot Bitcoin ETFs.

It had been a long time coming. By comparison, spot Gold ETFs were first introduced in 2003, more than two decades before!

These developments underscore the evolving landscape of cryptocurrency investment products, reflecting both growing investor interest and regulatory evolution.

Bitcoin Futures ETFs

So, what is the difference between the two types of ETFs? Bitcoin futures ETFs are a type of exchange-traded fund designed to track the future prices of Bitcoin, rather than its current spot price. These ETFs invest in futures contracts of Bitcoin, which are agreements to buy or sell the digital currency at a predetermined price on a specific future date. This lets investors speculate on Bitcoin’s future price without holding the cryptocurrency, gaining exposure through a regulated, exchange-traded product.

The structure of Bitcoin futures ETFs offers investors the advantage of trading in a familiar market environment while mitigating some of the risks and technical challenges associated with the direct ownership of cryptocurrencies. Some of these risks and challenges include handling crypto wallets, which could expose you to hacking or loss of the wallet itself.

Spot Bitcoin ETFs

Enter spot Bitcoin ETFs.

These financial instruments are designed to track the current market price of Bitcoin directly, providing you with exposure to the actual price movements of Bitcoin rather than through derivatives like futures contracts. This direct exposure means that the performance of a spot Bitcoin ETF closely mirrors the real-time value of Bitcoin, offering a more accurate reflection of the cryptocurrency's market price.

Which Is Better, Spot or Futures Bitcoin ETFs?

Spot Bitcoin ETFs are often considered more attractive than Bitcoin futures ETFs for several reasons:

Direct exposure to Bitcoin prices:

Spot Bitcoin ETFs are based on the current, or "spot," price of Bitcoin, offering investors direct exposure to the actual price movements of the cryptocurrency, rather than through futures contracts that may predict future prices. This way, you are more in tune with what is happening in the moment, rather than speculating about what might happen in the future. It’s a much more engaging way to trade.

Reduced Contango impact:

It’s worth explaining a little about what Contango impact is. This phenomenon refers to the situation in futures markets where the futures prices are higher than the spot price of the underlying asset. It affects investors by increasing roll costs and eroding the fund's returns over time. There is also performance drag, as the cost of maintaining exposure to the futures contracts can result in returns that lag behind the actual movements of the underlying asset's spot price. This is one of the classic drawbacks of futures markets.

The performance of futures-based ETFs can be negatively impacted by Contango.

Lower costs:

Spot Bitcoin ETFs can potentially have lower costs compared to futures ETFs. Futures ETFs may incur rollover costs as they buy and sell futures contracts to maintain exposure.

Simplicity and transparency:

Spot Bitcoin ETFs provide a straightforward and transparent way to invest in Bitcoin, as they directly hold the cryptocurrency. This can be easier for investors to understand than futures contracts and the strategies used to manage a futures-based ETF. Still, there are still some evergreen crypto trading strategies you would be advised to follow.

Market structure impact:

Contango often reflects the market's expectations of future price increases of the underlying asset. While it can signal positive sentiment about future prices, Contango typically hurts futures-based investment products because of the costs of rolling contracts.

Regulatory clarity:

While both types of ETFs are subject to regulatory oversight, the approval and operation of spot Bitcoin ETFs may offer clearer regulatory implications for investors, given their direct investment in the cryptocurrency. Regulation that governs in events and prices in the present has naturally fewer complexities than regulation discussing a possible future scenario.

How Do You Invest in Bitcoin ETFs?

You can invest in Bitcoin ETFs by choosing a fund listed on major stock exchanges and buying it through a brokerage account. Before investing, compare available options carefully, including whether the fund is a spot Bitcoin ETF or a futures-based product. Investors should also weigh the key factors that affect suitability and risk.

• The ETF's performance history

• ETF management fees

• The nature of the underlying futures contracts it holds

Opening an account with a brokerage that offers access to the exchange where the ETF is listed is essential. After setting up an account, you can buy and sell shares of the ETF much like you would with traditional stocks. Keep in mind that you should monitor the performance and adjust your investment strategy as needed. It's also advisable to stay informed on the latest market trends and regulatory developments related to Bitcoin and cryptocurrency investments.

What Are the Main Bitcoin ETFs?

The main Bitcoin ETFs are a few widely known funds that give investors access to Bitcoin exposure through the public market. This section highlights several notable ETFs, though it is not a complete list of every product available. Investors can research further to compare additional fund options in detail.

Bitcoin Futures ETFs

Bitwise Bitcoin Strategy Optimum Roll ETF: Launched in 2023, this fund aims for capital growth by managing its exposure to Bitcoin futures contracts. These are standardized, cash-settled futures contracts that are traded on commodity exchanges registered with the CFTC, with Bitcoin serving as the underlying asset. Additionally, the Fund invests in short-term debt securities.

ProShares Bitcoin Strategy ETF: This actively managed investment aims to deliver results, prior to fees and expenses, that mirror the performance of Bitcoin. To meet its investment goal, the fund adviser primarily utilizes managed exposure to bitcoin futures contracts. The inception date of this fund was in 2021.

Bitwise Bitcoin and Ether Equal Weight Strategy ETF: The Bitwise BTC/ETH Equal Weight Strategy offers equal-weighted exposure to Bitcoin and Ethereum, rebalanced quarterly.

ProShares Bitcoin & Ether Equal Weight Strategy ETF: The Bitcoin and Ether Equal Weight Strategy ETF targets the equal-weighted performance of bitcoin and ether in a single investment.

Spot Bitcoin ETFs

Franklin Templeton Digital Holdings Trust: This fund seeks to reflect generally the performance of the price of bitcoin before payment of the fund's expenses. It is convenient and cost-effective, lowering the barrier of entry into the crypto market. It is offered by Franklin Templeton, custodied by Coinbase, and registered under the Securities Act of 1933.

Fidelity Wise Origin Bitcoin Fund: This is an exchange-traded fund domiciled in the USA. The Fund aims to track the performance of spot Bitcoin as measured by the performance of the Fidelity Bitcoin Reference Rate. To achieve its investment objective, the Trust holds Bitcoin.

Valkyrie Bitcoin Fund: This exchange-traded fund issues common shares to hold Bitcoin. The fund's investment objective is for the shares to reflect the performance of the value of a Bitcoin as represented by the CME CF Bitcoin Reference Rate—New York Variant, minus the Trust’s liabilities and expenses.

Grayscale Bitcoin Trust: This trust was first launched over a decade ago. Shares were originally offered through a private placement, but in mid-2015, shares began trading publicly on OTC Markets under the symbol GBTC. This continued until 2024 when GBTC was uplisted to NYSE Arca as a spot Bitcoin ETF.

As we have mentioned, there are currently many more ETFs on the market than there were at the inception of this asset form.

Pros and Cons of Trading Bitcoin ETFs

Trading Bitcoin ETFs offers several benefits, enhancing their appeal to a wide range of investors. However, there are also some drawbacks, which we will discuss here. This list applies to both types of ETFs.

Pros:

Accessibility: Bitcoin ETFs provide accessibility, allowing individuals to invest in Bitcoin through traditional brokerage accounts without the need for a cryptocurrency exchange or wallet. This accessibility opens Bitcoin investment to those unfamiliar with the complexities of crypto markets.

Security: These financial assets offer increased security, as investors don’t directly hold the cryptocurrency, reducing the risk of loss through hacking, scams, or mismanagement.

Diversification: Bitcoin ETFs allow for diversification within investment portfolios, offering exposure to the cryptocurrency market while mitigating the volatility typically associated with direct Bitcoin investments.

Margin: Many major brokerage firms allow margin trading on Bitcoin ETFs, just like with other ETFs. However, margin requirements vary. In the US, the SEC permits margin trading on ETFs, including Bitcoin ETFs, but brokers set specific margin rules.

Cons:

Tracking errors: In some instances, the ETF's performance may not exactly match that of Bitcoin's price, due to the fund's management fees or the mechanics of futures contracts, such as Contango. This is particularly relevant for futures contracts.

Regulatory uncertainty: This is another concern. The cryptocurrency market's evolving regulatory landscape can impact Bitcoin ETFs, affecting their performance and availability. Even though spot Bitcoin ETFs were approved this year, the brokerages that offer them had to go through years of fierce advocacy for them to be approved.

Market volatility: This remains a significant risk, as the price of Bitcoin and, consequently, Bitcoin ETFs can experience rapid and unpredictable swings, affecting investment value. Cryptocurrency has and foreseeably will be characterized by intense volatility. From our analysis of major crypto-linked exchange-traded products over the past 12 months, the largest investor misunderstandings have usually appeared during sharp price swings, when tracking differences, liquidity conditions, and fee drag become much more noticeable than they seem in calmer markets.

Best Practices for Trading Bitcoin ETFs

The best practices for trading Bitcoin ETFs are the same core habits used in financial investing more broadly. Because these funds still carry market risk, investors benefit from disciplined planning, research, and consistent decision-making. Applying proven trading practices can help manage volatility and improve long-term results.

Comprehensive market analysis:

Study the markets and watch the news. This is crucial to understanding the broader market trends and how they might impact Bitcoin's price.

Use effective risk-management strategies:

Set stop-loss orders; this is also available in Bitcoin ETF circles in the same way as it is available in many other types of financial investing. Only invest funds you can afford to lose.

Diversify your investment portfolio:

This advice will never get old. By including Bitcoin ETFs alongside other assets, you can reduce your risk and improve potential returns. This approach balances exposure to the high-reward potential of cryptocurrencies with the stability of traditional investments.

What Is the Regulatory Landscape for Bitcoin ETFs?

The regulatory landscape for Bitcoin ETFs is complex and continuously evolving. The first Bitcoin futures ETF was approved by the SEC in 2021.

On January 10, 2024, the SEC approved the first-ever spot Bitcoin ETFs, including those from Fidelity, BlackRock, and Invesco. In total, the SEC approved 11 spot Bitcoin ETFs on that first day. Within 48 hours, 10 of the 11 had started trading.

Until then, the regulators had been reluctant to approve any spot Bitcoin ETF applications, citing concerns over market manipulation, fraud, custody, and investor protection. Now, regulators in various worldwide jurisdictions are scrutinizing Bitcoin ETF proposals closely. The outlook suggests continued dialogue between industry participants and regulators, leading to clearer guidelines and more approvals as the market matures and concerns are addressed.

What Is the Future of Bitcoin ETFs?

The future of Bitcoin ETFs appears positive, with growing trading volumes and broader acceptance of digital currencies in mainstream markets. The launch of spot Bitcoin ETFs marked an important step forward, even though Bitcoin prices later experienced a correction. Overall, these developments suggest rising integration of crypto-related products into traditional finance.

The new spot Bitcoin ETFs in particular are expected to increase direct demand for Bitcoin and lure institutions and other new investors into cryptocurrencies. Many analysts say we are at the beginning of the first-ever institutional bull market in crypto — and spot ETF momentum is a key part of the momentum

Soon after the SEC approved spot Bitcoin ETFs, the price of Bitcoin spiked to 20-month highs above $45,000 and briefly reached $50,000. At the time of writing, it had reached nearly $112,000.

It is clear that spot Bitcoin ETFs have streamlined exposure for traditional players who have been slower to enter the ecosystem, allowing billions in institutional capital to come off the sidelines.

The future of Bitcoin ETFs is poised for continued evolution, driven by technological advancements and positive regulatory changes. As blockchain technology continues to mature, we may see improvements in the security and efficiency of Bitcoin ETFs, making them even more attractive to investors.

Regulators worldwide are gradually recognizing the importance of cryptocurrencies, potentially leading to clearer guidelines and stronger frameworks for Bitcoin ETFs. This regulatory clarity could lead to the approval of ETFs based on other crypto coins, such as Ethereum. In totality, the road thus far has been filled with setbacks, but the crypto industry can look forward to the future with optimism.

Conclusion

Bitcoin ETFs, especially spot Bitcoin ETFs, have made it easier for both retail and institutional investors to access Bitcoin through a regulated, familiar investment vehicle. As this article has shown, understanding how Bitcoin ETFs work, the difference between futures and spot funds, and the costs, risks, and advantages of each option is essential before investing.

While market volatility and regulatory uncertainty still matter, Bitcoin ETFs continue to strengthen the link between crypto and traditional finance. If you are considering adding them to your portfolio, take time to compare funds carefully, review fees and structure, and make sure your choice fits your risk tolerance and long-term strategy.