Bitcoin ETFs: Definition

Many financial assets have ETFs,these are investment vehicles that provide exposure to a basket of related assets. For example, there are ETFs for technology stocks, semiconductor stocks, defense-sector stocks, corporate bonds, government bonds, and much more.

Bitcoin ETFs provide a regulated avenue for investors to gain exposure to Bitcoin's price movements. Shares in these funds represent ownership of underlying Bitcoin assets, traded on traditional exchanges with the familiarity of individual stocks.

Types of Bitcoin ETFs

Not all Bitcoin ETFs are created the same. Depending on the type of ETF, investors could be purchasing very different products. The two main types of Bitcoin ETFs are Bitcoin futures ETFs and spot Bitcoin ETFs. 

Unlike futures-based ETFs, spot bitcoin ETFs directly hold the underlying asset, eliminating the complexity associated with derivative contracts. Although management fees and commissions remain unavoidable, these are potentially outweighed by the convenience and cost savings compared to individual bitcoin ownership.

Prior to January 2024, the U.S. market predominantly offered Bitcoin futures ETFs. These instruments tracked Bitcoin price movements through derivative contracts, essentially agreements to buy or sell Bitcoin at a predetermined future date. While aiming to mimic Bitcoin's performance, they did not directly hold the underlying asset. This often resulted in higher fees and increased volatility compared to the subsequently introduced spot ETFs.

Bitcoin ETFs Regulatory Landscape

United States

In 2022, the U.S. established a novel regulatory framework for the cryptocurrency sector, empowering existing market authorities like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to oversee its activities. The SEC has already demonstrated its active role in this space with numerous legal actions against various crypto-related businesses and projects, including Ripple, Coinbase, and Binance, concerning their offerings and services.

UK

In October 2022, the lower house of the British Parliament recognized crypto assets as regulated financial instruments. The Financial Services and Markets Bill became The Financial Services and Markets Act 2023 and extended existing laws regarding all crypto assets, services, and providers.

Under the purview of the Office of Financial Sanctions Implementation (OFSI), crypto exchanges and custodian wallet providers are now subject to mandatory reporting obligations. These entities must promptly notify OFSI of any known or suspected instances of individuals operating on their platforms who are either subject to financial sanctions or actively engaging in related offenses.

EU

Cryptocurrency is legal throughout most of the European Union (EU), although exchange governance depends on individual member states. Meanwhile, taxation also varies by country within the EU and ranges from 0% to about 48%.

In a significant move towards regulating the cryptocurrency sphere, the European Parliament approved measures in April 2023 that paved the way for legislation requiring certain crypto service providers to obtain an operating license. This follows the provisional agreement on the Markets in Crypto-Assets Regulation (MiCA) in 2022, which came into effect in July 2023. MiCA equips regulatory bodies with enhanced tools to monitor and potentially prevent the misuse of crypto assets for illicit activities such as money laundering and terrorism financing, while concurrently aiming to safeguard user interests and promote responsible market practices.

Japan

Recognizing the potential of cryptocurrencies, Japan implemented a progressive regulatory framework with the Payment Services Act (PSA) granting them legal status as property. Crypto exchanges operating within the country must be registered with the Financial Services Agency (FSA) and adhere to Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations. Furthermore, the establishment of the Japanese Virtual Currency Exchange Association (JVCEA) in 2020 fosters collaboration and compliance among member exchanges. Finally, Japan's tax system classifies crypto trading gains as miscellaneous income, ensuring clear financial accountability.

Bitcoin ETFs Pros and Cons

Note just because a spot Bitcoin ETF might be good for the overall crypto market doesn’t necessarily mean that it's good for your portfolio. Here's a closer look at the pros and cons.

Pros

For individual investors, spot Bitcoin ETFs represent a compelling entry point into the cryptocurrency market by circumventing traditional barriers. Eliminating the need for navigating complex cryptocurrency exchanges, establishing and managing individual blockchain wallets, and deciphering intricate tax regulations, spot ETFs offer a convenient and accessible alternative. This simplified investment vehicle allows individuals to gain exposure to Bitcoin's price movements within the familiar framework of traditional brokerage accounts.

Moreover, a spot Bitcoin ETF will help to remove much of the perceived "sketchiness" of the crypto industry and potential volatility of the cryptocurrency industry. By operating within the established regulatory framework overseen by the Securities and Exchange Commission (SEC) and attracting participation from reputable Wall Street institutions, this investment vehicle offers the potential to legitimize and stabilize Bitcoin's presence in the broader financial landscape.

And, most importantly, any spot Bitcoin ETF will be audited, monitored, tracked, and highly transparent. In short, you won't have to worry about a guy in the Bahamas walking away with all of your Bitcoin holdings 😉

Cons

While spot Bitcoin ETFs offer increased accessibility and convenience for investors, it is important to acknowledge the implications of not holding the underlying asset directly. Unlike owning Bitcoin and holding it in a personal crypto wallet, which facilitates its utilization for transactions such as purchasing a car or obtaining a loan, ownership through an ETF is limited to shares representing the fund's Bitcoin holdings.

Moreover, with a Bitcoin ETF, you are paying highly compensated professionals on Wall Street (via fund management fees and expenses) to do something that you can easily do yourself.

Top 3 Bitcoin ETFs

Grayscale Bitcoin Trust

Ticker: GBTC
Issuer: Grayscale
Custodian: Coinbase
Type: Spot
AUM: $20.28B
Fee: 1.50%
Market cap: $26.66B
YTD Performance: 4.5%

iShares Bitcoin Trust

Ticker: IBIT
Issuer: BlackRock
Custodian: Coinbase
Type: Spot
AUM: $1.99B
Fee: 0.25% (Fee waiver 0.12%)
Market cap: $1.91B
YTD Performance: -7.4% (Started trading on January 11)

Fidelity Wise Origin Bitcoin Trust

Ticker: FBTC
Issuer: Fidelity
Custodian: Self-custody
Type: Spot
AUM: $1.75B
Fee: 0.25%
Market cap: –
YTD Performance: -7.5% (Started trading on January 11)