An ETF (Exchange-Traded Fund) is a type of investment that tracks the performance of a specific product, most often a commodity (like oil, natural gas, gold, or coffee, for example) or a group of assets (such as a basket of stocks or bonds). ETFs trade on a stock exchange and are a convenient option for investors because they can be bought and sold like a single stock.
Exchange-traded funds (ETFs) provide investors with several benefits, including diversification, low expense ratios, and the ability to trade them easily like a stock.
A Bitcoin ETF brings these advantages to the world of Bitcoin by allowing investors to trade shares of the ETF on traditional stock exchanges. Put simply, they offer a convenient and easy way to bet on the price appreciation of Bitcoin, without having to directly own it or custody it. Within the realm of Bitcoin, the term “custody” simply means to securely store your bitcoin, often using a digital wallet or custodial service.
Of course, the downside of Bitcoin ETFs is that you don’t actually own bitcoin. Rather, the ETF operator, which is a company like Fidelity or Blackrock, buys bitcoin. Then, you buys shares in their ETF. Thus, you can use Bitcoin spot ETFs to acquire indirect ownership of bitcoin.
The 11 Approved Bitcoin Spot ETFs
For historical reference, the first Bitcoin ETF application was submitted to the U.S. SEC for review in mid-2013. However, it took a full decade and a major lawsuit to force the U.S. SEC to approve the first Bitcoin ETFs in January of 2024.
Specifically, on January 10, 2024, 11 spot Bitcoin ETFs were approved by the U.S. SEC, making this a major day in Bitcoin history.
Below are the companies that got their spot Bitcoin ETF approved this past January (in alphabetical order):
- ARK 21Shares Bitcoin ETF (NYSE:ARKB)
- Bitwise Bitcoin ETF (NYSE:BITB)
- Blackrock’s iShares Bitcoin Trust (NASDAQ:IBIT)
- Franklin Bitcoin ETF (NYSE:EZBC)
- Fidelity Wise Origin Bitcoin Trust (NYSE:FBTC)
- Grayscale Bitcoin Trust (NYSE:GBTC)
- Hashdex Bitcoin ETF (NYSEARCA:DEFI)
- Invesco Galaxy Bitcoin ETF (NYSE:BTCO)
- VanEck Bitcoin Trust (NYSE:HODL)
- Valkyrie Bitcoin Fund (NASDAQ:BRRR)
- WisdomTree Bitcoin Fund (NYSE:BTCW)
What Is a Bitcoin ETF?
A Bitcoin ETF is simply a financial product that custodies (owns) Bitcoin on your behalf so you can benefit from its price movement. Unlike purchasing Bitcoin directly, which involves navigating cryptocurrency exchanges, securing a wallet, and dealing with its volatility, a Bitcoin ETF buys and stores bitcoin for you so you don’t have to do it yourself.
In exchange, the Bitcoin ETF will charge you a fee, called an Expense Ratio.
For some Bitcoin ETFs, like the Franklin Bitcoin ETF (EZBC), that fee is relatively low. Currently, the Franklin Bitcoin ETF charges only 0.19% as their Expense Ratio. However, other Bitcoin ETFs charge higher fees. For example, the Grayscale Bitcoin Trust ETF is currently charging its customers am appalling 1.5% Expense Ratio.
Of course, adding the ETF structure on top of Bitcoin introduces a layer of professional management and oversight, which can be done by firms like Yardi Consultants, or others. On the upside, this ensures that the companies adherence to regulatory standards and mitigate some of the risks associated with direct cryptocurrency investments.
Why Does a Bitcoin ETF Matter?
A Bitcoin ETF is important because it makes it easier for people to get into Bitcoin investing without having to deal with the learning curve of buying and storing bitcoin themselves.
Accessibility
Bitcoin is really cool but also can be a little complicated if you’re not familiar with it. A Bitcoin ETF makes it easier for everyone to be part of the Bitcoin world. You don’t need to learn all the techy stuff or worry about keeping your Bitcoin safe.
Just buy the ETF like you would a regular stock, and you get to benefit if it rises in price. It’s like being able to play a video game without needing to know how to make the game.
As mentioned though, we will pay the Bitcoin ETF issuers a small fee for this privilege.
Simplicity
A Bitcoin ETF is simple, really simple. You do it just like buying any other thing that’s easy to buy. Just enter the ticker symbol for the ETF you want to buy, click “submit”, and boom, you’re in.
Tax Efficiency
Tax stuff can be boring, but it’s tremendously important. With a Bitcoin ETF, it’s treated like a regular stock, so it will fit into the tax forms you’re already used to using.
For some folks who like to keep their accounting simple, this might mean less headaches at tax time.
Retirement Accounts
Currently, most tax-advantaged and tax-deferred retirement accounts—like 401Ks, ROTH IRAs, and Traditional IRAs, for example—don’t support direct ownership of Bitcoin. However, most of these account will allow you to buy Bitcoin ETFs, because they are regulated and trade on public stock exchanges.
In my opinion, you really should have the right to buy Bitcoin directly in these accounts, but at present you don’t, so Bitcoin ETFs are your next best choice if you want to establish exposure to Bitcoin in these accounts.
Professional Money Managers
At present, it is also complicated and difficult for professional money managers to buy and custody bitcoin on behalf of their clients.
In part, this is because a professional money manager would need to custody Bitcoin on their clients’ behalf, but in Bitcoin, there is often a fine line between securing your bitcoin and risking losing it if something were to happen to you or incapacitate you.
Thus, if a professional money manager believes that a client should have a percentage of their portfolio allocated to Bitcoin, then a Bitcoin ETF would provide an easy and convenient way for this to happen.
Public Companies
Finally, publicly owned companies that are holding large cash positions (such as Apple or Google, for example) can’t buy Bitcoin without having to go through a tremendous amount of regulatory and legal hurdles. One of the main reasons for this is that Bitcoin can be lost forever if it is not custodied correctly and no person or entity can reverse this if it happens.
For this reason, only one public company in the world currently owns a large stockpile of Bitcoin and is using it to preserve and grow its cash position. This company is MicroStrategy Inc (NASDAQ:MSTR), which is led by the famous Michael Saylor. Understandably, it went through a tremendous amount of legal, regulatory, and financial work to make this happen and this effort took it several years to implement.
Thus, it is probable that some public companies will elect to buy positions in Bitcoin ETFs rather than attempt to deal the direct ownership of bitcoin.
Learn All About Bitcoin ETFs
In conclusion, Bitcoin ETFs provide a “shortcut” for getting into Bitcoin. This is because you can buy and sell shares of these ETFs just like you would buy or sell a stock.
However, it does come with a price in the form of an annual fee called an “Expense Ratio” that gets charged by whatever ETF issuer you choose to use.
Would you buy a Bitcoin through an ETF? Or would you prefer to have direct ownership of Bitcoin, in which you own and custody your keys? I know my answer. Feel free to guess my preference in comments below.
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*Disclaimer: I’m not a financial planner and nothing in this article should be construed as financial advice. Before making any decisions, you should consult with a professional adviser, such as a financial planner or CPA.