Bitcoin ETF: Definition, How It Works, and How to Invest

Understanding Bitcoin ETFs

A Bitcoin ETF is an exchange-traded fund composed of assets related to Bitcoin's price. They are traded on a traditional exchange instead of a cryptocurrency exchange. Currently, the underlying assets within Bitcoin ETFs are Bitcoin futures contracts . These are traded on the Chicago Mercantile Exchange. A futures contract is a standardized contract where two parties agree to exchange a specific quantity of assets on a specific day for a particular price. These ETFs are created by purchasing futures contracts from the CME Group and bundling them into a fund. The company then offers the fund on an exchange for investors, actively managing the futures contracts in the fund.

Bitcoin ETF History

The first concept for a Bitcoin ETF emerged shortly after investors and brokers noticed that bitcoin prices were trending upward and the cryptocurrency was becoming more popular. Most importantly, there appeared to be an opportunity to generate returns from buying and selling bitcoin. As Bitcoin's price rose above several thousand dollars, retail and average investors lost the opportunity to invest in Bitcoin directly. Brokerages, responding to demand for investor access to Bitcoin, began to design Bitcoin exchange-traded funds. Applications with the Securities and Exchange Commission (SEC) for approval started in 2013 with the Winklevoss brothers. In an exchange-traded fund that tracks stocks, the fund purchases the stocks. These are the fund's holdings, and the company that bought them offers fractionalized shares on exchanges, which trade nearly 24 hours per day, seven days per week. In many crypto fan's minds, a Bitcoin ETF would consist of bitcoin purchased by a company, which would securitize them and offer shares to investors. However, the Security and Exchange Commission continues to reject these proposals; there is no cryptocurrency ETF directly representing an underlying coin.
The first official Bitcoin-linked ETF was the Proshares Bitcoin Strategy ETF (BITO), approved by the SEC in October 2021 and listed on the New York Stock Exchange.

Goals of Bitcoin ETFs

In their current form—and the form desired by many investors—Bitcoin ETFs are designed to allow more people to invest in Bitcoin without the necessary expenses and hassles of buying them. They eliminate the need for security procedures and excessive funds while providing a familiar investment type.

Security

While you don't technically have cryptocurrency in your wallet , you have security keys that you need to safeguard. If you buy your cryptocurrency through an exchange, you can choose to have your keys stored on that exchange if it offers that service. However, wallets and exchanges can be hacked and keys stolen—which means your cryptocurrency can be stolen. You can store your keys offline using several methods, but none of these methods are 100% secure or guaranteed. An ETF doesn't require you to own any cryptocurrency, store keys safely, or move the keys back and forth between different types of storage—you own shares of the fund, which doesn't own any cryptocurrency either.

You can store your keys in a" hot wallet " (connected to the internet) or " cold storage " (an offline method). Each has its own benefits.

High Prices

One of the most significant obstacles for average investors is price. Bitcoin (BTC) set a record high of nearly $69,000 per BTC shortly after the Proshares Bitcoin ETF was listed on the NYSE. Over the next few years, its price dropped under $17,000, then rose to between $20,000 and $30,000. So, even at low prices, retail investors may not have the assets to purchase 1 BTC. An ETF allows you to gain exposure to BTC within your budget, risk tolerance , and investing goals.

ETFs are Better Understood

Perhaps most importantly, ETFs are much better understood across the investment world than cryptocurrencies. So, if you're only interested in becoming involved in digital currency investing, an ETF lets you focus on trading an asset you already understand rather than learning about blockchain, mining, decentralized exchanges, distributed ledgers, key storage, and cryptocurrency.

How to Invest in Bitcoin ETFs

If you're looking to invest in Bitcoin ETFs, you can purchase them through your broker or advisor if they offer them. There are several Bitcoin ETFs that trade on exchanges such as the New York Stock Exchange ARCA and Nasdaq:

Proshares Bitcoin Strategy ETF (BITO)

Valkyrie Bitcoin Strategy ETF (BTF)

VanEck Bitcoin Strategy ETF (XBTF)

Global X Blockchain & Bitcoin Strategy ETF (BITS)

On April 6, 2022, the SEC approved the Teucrium Bitcoin Futures Fund (BCFU), so the list of approved Bitcoin ETFs continues to grow.

It's important to note that these ETFs are not entirely comprised of Bitcoin futures. For the most part, they invest in traditional securities, holding Bitcoin futures contracts when it meets the fund's strategy. For example, the Proshares Bitcoin Strategy Fund is designed to hold Bitcoin futures contracts only when positions are profitable. Otherwise, it can hold securities of Bitcoin-related companies and money market instruments. It can also borrow using reverse repurchase agreements .

CAn You Buy a Bitcoin ETF?

There are several Bitcoin ETFs available to investors for trading. ProShares Bitcoin Strategy Fund, Valkyrie’s Bitcoin Strategy ETF, and Van Eck’s Bitcoin Strategy ETF are a few examples.

The Bottom Line

Bitcoin ETFs are funds that bundle Bitcoin futures contracts. They provide investors without the means or desire to invest directly in cryptocurrency a way to gain exposure to these volatile, and sometimes lucrative, assets. You can purchase them on official exchanges.
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U.S. Securities and Exchange Commission. " Winklevoss Bitcoin Trust ."

Proshares. " ProShares Bitcoin Strategy ETF ." Click 'Summary Prospectus.'

Valkyrie. " Valkyrie Bitcoin Strategy ETF ."

VanEck. " VanEck Bitcoin Strategy ETF ."

Global X. " Global X Blockchain & Bitcoin Strategy ETF ."

U.S. Securities and Exchange Commission. " Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 2, to List and Trade Shares of the Teucrium Bitcoin Futures Fund under NYSE Arca Rule 8.200-E, Commentary .02 (Trust Issued Receipts) ."

A cryptocurrency wallet is a software program that stores your cryptocurrency keys and lets you access your coins. Discover how crypto wallets work. NYSE Arca is an electronic securities exchange in the U.S. on which exchange-traded products and equities trade. A communication industry ETF invests in securities in the communication sector, including telecommunications, media, and internet companies. A new fund offer is the first subscription offering for any new fund offered by an investment company. Discover how to invest in an NFO. Cold wallets, a type of crypto wallet, are digital cryptocurrency storage on a platform not connected to the internet, which protects them from hackers. Crypyo tokens are a type of cryptocurrency and represent digital assets that reside on their own blockchains.