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As the price of Bitcoin soared, investors sought ways to get a piece of the cryptocurrency action. Financial firms have rushed to come up with products that feed investors’ crypto appetite, leading to the arrival of a long-awaited Bitcoin futures exchange-traded fund (ETF) in 2021.
It was the first time investors could speculate on Bitcoin in their brokerage accounts without direct exposure to the asset.
ProShares Bitcoin Strategy ETF (BITO) is the first Bitcoin ETF to hit the market. Investors can buy and sell the fund like they would any other stock trading on an exchange, making it simple to get started.
Other ETFs that track bitcoin futures have hit the market since, including VanEck Bitcoin Strategy ETF (XBTF) and Simplify Bitcoin Strategy Plus ETF (MAXI).
A Bitcoin ETF that directly tracks the price of the cryptocurrency, known as a spot Bitcoin ETF, might become a reality as soon as next year.
Here’s what you should know about Bitcoin ETFs.
What is a Bitcoin ETF?
A Bitcoin exchange-traded fund (ETF) pools investor money to purchase Bitcoin futures contracts, or agreements to buy or sell an asset later for an agreed-upon price. A Bitcoin ETF is managed by a firm and listed on a traditional stock exchange.
While it’s down more than 60 percent since its November 2021 all-time high, Bitcoin is still up 64 percent since the start of 2023. Naturally, the increase in price has many people wondering how they can get in on the action.
Trading directly through a crypto exchange can be complicated for some investors. But with the introduction of ETFs tied to Bitcoin, the process of investing could become much simpler.
Currently, Bitcoin ETFs can only hold Bitcoin futures contracts. You can also own funds that track companies with exposure to Bitcoin and blockchain technology.
“By opening up the doors to mainstream investors through Bitcoin ETFs, numerous investors can participate in indirectly investing into Bitcoin but without actually holding the digital asset itself, which can help alleviate the fears that many newcomers have,” says Peter Jensen, CEO of blockchain payments company RocketFuel Blockchain.
For now, the number of Bitcoin ETFs available remains small in the U.S., but other jurisdictions, including Canada and Europe, have approved more funds.
Who should invest in Bitcoin ETFs?
Investing in a Bitcoin ETF could be a good option for people who are looking for a more traditional way of investing in the digital currency. Investing directly in Bitcoin can be complicated and involves questions of how the asset will be stored and which exchange to purchase on. ETFs remove some of that complexity by packaging crypto futures contracts into ETF form.
The ETF structure could also make it easier for some institutional investors to enter the crypto market, which could help keep demand for Bitcoin high.
“Bitcoin ETFs allow mainstream institutional investors to access Bitcoin without having to worry about Bitcoin storage in hot wallets, which are more susceptible to hacks,” says Kay Khemani, managing director at Spectre.ai, a broker-less trading platform.
Where do you purchase Bitcoin ETFs?
Bitcoin ETFs are available through most online brokers who offer traditional securities like stocks and bonds. Some of these brokers may also offer the opportunity to invest in Bitcoin directly, while others only allow you to trade Bitcoin futures.
ETFs trade on traditional exchanges such as the New York Stock Exchange or the Nasdaq. If you’re interested in the widest offering of cryptocurrencies and are looking to directly invest in digital coins, you’ll need an account with a crypto exchange, such as Binance or Kraken.
Are Bitcoin ETFs regulated?
All ETFs that trade on U.S. exchanges are regulated by the Securities and Exchange Commission. Meanwhile, Bitcoin futures contracts, which Bitcoin ETFs track, are regulated by the Commodity Futures Trading Commission. Spot Bitcoin ETFs, which directly track the price of Bitcoin, are not regulated by either the SEC or CFTC.
“Regulatory concerns surrounding ETFs include their management fee structures, questions around Bitcoin’s true intrinsic value and of course, the fact that the underlying asset in question still has an uncertain regulatory future,” says Khemani.
However, approval of a spot ETF may be on the horizon.
In August 2023, an appeals court ruled against the SEC for rejecting an application from cryptocurrency asset manager Grayscale Investments to list its spot Bitcoin ETF on the New York Stock Exchange.
The court ruled that the SEC was “arbitrary and capricious” to reject Grayscale’s application, since its proposed Bitcoin ETF is “materially similar” to already-approved Bitcoin futures ETFs.
In October, the SEC chose not to appeal the decision. Now the court decides what comes next: It could force the SEC to approve Grayscale’s application, or at least mandate the agency revisit it.
The landmark decision is fueling optimism from cryptocurrency enthusiasts and major financial institutions alike. BlackRock, Fidelity and Investo have similar applications for a spot Bitcoin ETF pending SEC approval, according to Reuters.
“Crypto ETFs are inevitable,” says Chris Kline, COO and co-founder of cryptocurrency platform Bitcoin IRA. “A product like this will eventually come to fruition since there is a demand for it.”
Other types of crypto-related investments
If you’re not satisfied with the limited current offering of crypto-related ETFs, you have some other options for investing in the digital currency world.
Invest in crypto directly
You can always choose to invest directly in cryptocurrencies through a broker or crypto exchange. Some brokers offer a limited number of options for investing in crypto, typically offering only the major coins. If you’re looking for a broad offering, you’ll need to go through a crypto exchange, but be careful to watch out for costly fees associated with buying and selling.
Another way to make crypto-adjacent investments is to invest in ETFs focused on blockchain, which is the technology behind cryptocurrencies like Bitcoin and Ethereum. Blockchain ETFs hold stocks of companies that are using blockchain technology as part of their current and future business plans. Holdings often include a combination of crypto companies, tech giants and financial institutions.
Stock in crypto companies
There is also the option of investing in stocks of companies that are directly involved in cryptocurrency. Coinbase, a large crypto exchange, went public in 2021 and other companies such as PayPal and Robinhood have also made a push into cryptocurrencies. Be sure to thoroughly research each company and understand how much of their business is tied to crypto before investing.
Grayscale Bitcoin Trust
The Grayscale Bitcoin Trust (GBTC) started in 2013 as a private investment with a six-month lockup that prevented investors from reselling it into the public market for that period. But some investors have since sold their shares into the market, so now anyone can buy shares in the fund. The fund charges a fee of 2 percent of assets under management annually.
Traders eagerly awaiting a Bitcoin ETF got their wish in 2021 when the first Bitcoin-linked ETF began trading on the NYSE. But crypto enthusiasts will likely have to wait a bit longer for a flood of these ETFs on the market due to regulatory concerns from the SEC. Still, there are ways to get in on the crypto action through stocks and ETFs that are indirectly tied to crypto or blockchain technology. You can also invest directly through a crypto exchange.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.