What Is a Bitcoin ETF?

The SEC is expected to decide on Jan. 10, 2024, whether to approve bitcoin ETFs from the likes of BlackRock, Fidelity and others, which would give investors exposure to the biggest cryptocurrency without having to actually buy it.

AccessTimeIconOct 16, 2021 at 12:08 a.m. UTC
Updated Mar 8, 2024 at 4:34 p.m. UTC
  • The U.S. Securities and Exchange Commission is expected to decide soon on whether to approve bitcoin ETFs.
  • BlackRock's plan for a bitcoin ETF shocked the crypto and financial realms last year, and spurred other traditional financial firms to file their own applications.
  • Approval for bitcoin ETFs in the U.S. could, in theory, be a game-changer for bitcoin by bringing in a flood of investment into the original cryptocurrency since ETFs are relatively easy to trade and are available through conventional brokerage accounts.

A bitcoin (BTC) exchange-traded fund, or ETF, lets traders easily gain exposure to the biggest cryptocurrency via traditional brokerage accounts and stock markets, without needing to directly buy or sell the digital asset on a crypto exchange.

They are not authorized in the U.S., though Canada and several European countries allow them. The U.S. Securities and Exchange Commission is expected to decide whether to approve or reject them on Jan. 10, 2024. The U.S. does have something similar: bitcoin futures ETFs, which hold derivatives contracts whose value is tied to bitcoin.

But more direct exposure is not available through ETFs that actually own BTC – technically known as spot bitcoin ETFs. As of January 2024, the SEC is evaluating almost a dozen applications to list those – from would-be issuers including BlackRock and Fidelity as well as Grayscale, which wants to convert its Grayscale Bitcoin Trust into an ETF – and regulators are widely expected to finally give the green light soon.

Many experts believe U.S. approval could dramatically increase the investor base for bitcoin since bitcoin ETFs can be purchased through traditional investment channels, while also giving comfort to institutional investors who can only invest in regulated products.

What are ETFs?

ETFs are a gigantic part of conventional finance, with many trillions of dollars invested. They trade on exchanges just like stocks, but – instead of conveying an ownership stake in a single company – they represent ownership of a basket of assets. There are ETFs that track the S&P 500, bonds, commodities including gold, and much more.

They're as easy to purchase as a stock. This is why optimists are predicting a flood of investment into bitcoin ETFs.

History of bitcoin ETFs

Cameron and Tyler Winklevoss proposed creating a bitcoin ETF in 2013. Their plan was repeatedly rejected by the SEC. Regulators' rationale was that the bitcoin market is too volatile, lacked sufficient surveillance and was too easily manipulated.

The U.S. got something else in 2017: bitcoin futures contracts. These are primarily for investment professionals, not the mostly retail traders who buy ETFs, but these led to the SEC's 2021 approval of bitcoin futures ETFs.

Meanwhile, for years, Grayscale has offered a product called the Grayscale Bitcoin Trust (GBTC), which owns tens of billions of dollars worth of BTC. Like a bitcoin ETF, buying a share of GBTC gives the owner an economic interest in bitcoin. But there are drawbacks. It's not as widely available as an ETF. And, because of the trust's structure, new GBTC shares can be issued but existing ones cannot be canceled, which can cause its price to stray from the value of the bitcoin it holds. Such a supply/demand imbalance occurred in recent years, with GBTC in late 2022 sinking to a 50% discount to its so-called net asset value.

BlackRock's bitcoin ETF, Grayscale's good news

The tide began to shift in June 2023, with the shocking news that BlackRock, the world's biggest asset manager, wanted to offer a bitcoin ETF in the U.S. Support for the idea from one of the leading names in traditional finance led to enthusiasm that, after a decade of failed attempts, a spot bitcoin ETF might finally arrive in the nation with the largest capital market in the world. Other TradFi firms followed, including Fidelity, Franklin Templeton and Invesco (with support from crypto firm Galaxy), as well as crypto-native firms like Valkyrie and Bitwise.

In August 2023, Grayscale got good news about its attempt to turn the Grayscale Bitcoin Trust into an ETF. A U.S. court ruled that the SEC must reconsider its rejection of Grayscale's application, calling regulators' decision "arbitrary and capricious."

Bitcoin's price soared in late 2023 and GBTC's discount to NAV narrowed amid optimism the SEC would approve bitcoin ETFs.

Bitcoin ETF deadline

The SEC is widely expected to announce its decision on whether to approve or reject bitcoin ETFs between Jan. 8-10, 2024. Issuers and regulators have met repeatedly in the run-up to that deadline, leading to a series of revisions to regulatory filings. BlackRock and others have announced key partners, including the firms that will hold the bitcoin in custody for the ETFs as well as the so-called authorized participants tasked with keeping the products trading smoothly.

Bitcoin ETF FAQs

Who can invest in ETFs and how do you trade them?

You don't need to be an accredited investor to purchase ETFs. Anyone can invest in them.

All you need in order to begin investing in ETFs is to set up an online brokerage account or download one of the many mobile trading apps. From there, you'll be able to buy and sell a wide range of ETFs that track a number of different markets.

What are the pros and cons of trading bitcoin ETFs?

While it might seem counterintuitive to invest in a bitcoin ETF rather than buy bitcoin itself, there are a number of advantages to doing it this way, namely:

  • No need to go through the process of having to store crypto safely yourself.
  • ETFs are more regulated and bitcoin, which may provide comfort to some investors.
  • Conventional brokerages have a longer track record than crypto exchanges, which may also mollify skeptics.
  • There are much clearer tax implications and guidance for traditional financial products than digital assets.

There are, however, disadvantages to investing in a bitcoin ETF as opposed to buying the asset directly:

  • Crypto markets run 24/7, whereas ETFs can only be purchased when stock exchanges are open, and they are shut on weekends and weekday nights.
  • It's free to hold your own bitcoin, but ETFs charge management fees.
  • ETFs require you to trust third-party custodians.

Edited by Nikhilesh De.

This article was originally published on Oct 16, 2021 at 12:08 a.m. UTC


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