The Bitcoin ETF – What Is It?

| 6 min read
Bitcoin ETF

What Is a Bitcoin ETF?

A Bitcoin ETF (Exchange-Traded Fund) is an investment fund that tracks the price movements of Bitcoin (BTC). It is specifically designed for institutional investors trading on stock exchanges. A Bitcoin ETF allows investors to gain exposure to Bitcoin without having to actually purchase the cryptocurrency. “In essence, you buy a share in a fund that follows the price of Bitcoin. Here’s how it works: investors buy a share in the fund, and that share represents a certain exposure to the value of Bitcoin. The ETF gives investors the confidence of traditional investment structures while making it possible to invest in innovative technologies like Bitcoin.”

Looking at the impact of Bitcoin ETFs, the introduction of the first Spot ETF in 2024 was a major milestone in Bitcoin adoption. It lowered the barrier for investors who lack direct crypto experience and want to avoid the risks of trading crypto. In addition, institutional providers offering the ETF, such as BlackRock and Fidelity, must purchase Bitcoin to back it. Providers are required to hold the same amount of Bitcoin. Rising demand for Bitcoin ETFs therefore indirectly increases demand in the broader market.

Key Takeaways

  • A Bitcoin ETF (Exchange-Traded Fund) tracks the price of Bitcoin and allows investors to gain exposure without buying or storing Bitcoin themselves.
  • There are two main types of Bitcoin ETFs: Spot ETFs and Futures ETFs.
  • Spot ETFs purchase and hold real Bitcoin, while Futures ETFs trade futures contracts that track the projected price.
  • The introduction of Spot Bitcoin ETFs in 2024 lowered the barrier for institutional and retail investors.
  • Bitcoin ETFs bring advantages such as accessibility, institutional inflows, professional custodian storage, and high liquidity.

The Two Types of Bitcoin ETFs

There are two main types of Bitcoin ETFs, each taking a different approach to tracking Bitcoin’s value:

Bitcoin Spot ETF

This type of ETF buys and holds actual Bitcoin in a regulated and secure environment, usually with specialized custodians. The value of ETF shares moves almost in sync with the market price of Bitcoin.

Examples: iShares Bitcoin Trust (IBIT) from BlackRock, Fidelity Wise Origin Bitcoin Fund (FBTC).

Bitcoin Futures ETF

Instead of holding Bitcoin, the fund holds futures contracts that reflect the projected future price of Bitcoin. Because futures are often more expensive than spot prices (contango) or cheaper (backwardation), this can lead to deviations from the actual Bitcoin market.

Example: ProShares Bitcoin Strategy ETF (BITO), launched in October 2021 and the first approved Bitcoin ETF in the U.S.

How Does a Bitcoin ETF Work?

A Bitcoin ETF uses the familiar structure of traditional investment funds but combines it with elements of the crypto market. There’s a difference between the investor’s experience and the technical mechanics of a Bitcoin ETF.

User Experience of a Bitcoin ETF

A Bitcoin (Spot) ETF is purchased through a fund manager. They buy actual Bitcoin and store it securely, typically with a custodian. These Bitcoins are then split into tradable shares offered on the stock exchange.

The investor can buy these shares, which track Bitcoin’s price. You’re not buying actual Bitcoin. Instead, you’re indirectly exposed to Bitcoin’s price movements. You don’t need to worry about storing Bitcoin or securing private keys.

While investors can also buy Bitcoin via providers like Finst and hold it in their own wallets, many prefer buying through an exchange and later transferring Bitcoin to an external wallet. This requires technical knowledge and carries risks such as loss of access and security breaches. A Bitcoin ETF removes these concerns: the fund manager handles Bitcoin purchases and custody. As an investor, all you see is your share balance.

Technical Mechanics of a Bitcoin ETF

The inner workings of a Bitcoin ETF are complex. For users, buying is simple, but behind the scenes, much happens. Specialized parties called Authorized Participants (APs) play a key role.

  • Creation of ETF shares: An AP delivers Bitcoin (for a spot ETF) or futures contracts (for a futures ETF) to the fund. In return, the fund manager issues new Bitcoin ETF shares.
  • Redemption of ETF shares: If the Bitcoin ETF price diverges too much from the underlying Bitcoin market price, the AP can return shares and request the underlying Bitcoin. This arbitrage process helps keep the ETF price closely aligned with the real market value.

With a spot ETF, the link is very tight since the fund holds actual Bitcoin. With a futures ETF, it relies on contracts, which more frequently cause deviations due to roll costs and futures vs. spot price differences.

Impact of the Bitcoin ETF on Price

The introduction of Bitcoin ETFs has had a major impact on Bitcoin and the crypto market. They’ve influenced the price and will continue to play a key role since rising or falling demand for ETFs directly affects Bitcoin’s price.

The launch of Bitcoin ETFs has had the following effects:

  • Rising demand: Spot ETFs opened the door for large and institutional investors, including companies that previously couldn’t or wouldn’t buy Bitcoin directly. This drives structural demand higher.
  • Price surge in 2024: After the U.S. SEC approved the first Bitcoin Spot ETF in 2024, Bitcoin’s price rose by about 70% in just a few months.
  • More liquidity: ETFs boost trading volumes, making price discovery more efficient and the market more mature.
  • Scarcity: Since institutional providers offering Bitcoin Spot ETFs (including BlackRock, Fidelity, Grayscale, and VanEck) must actually purchase Bitcoin, more scarcity is introduced to the market. Less Bitcoin is left available for retail investors who want to buy real BTC.
  • Stronger correlation: The introduction of Bitcoin ETFs may increase Bitcoin’s correlation with traditional indices like the S&P 500 and Nasdaq 100, potentially weakening Bitcoin’s role as an “alternative” or “hedge.”

Whether Bitcoin adoption will continue to grow depends on external factors like regulation and economic developments, which can affect both Bitcoin and ETFs positively or negatively.

Advantages of Bitcoin ETFs

The introduction of Bitcoin Spot ETFs and Bitcoin Futures ETFs provides several benefits:

  • Accessibility: They made crypto investing more accessible for institutional investors and also retail investors who don’t want to buy Bitcoin directly, or who want to invest via retirement accounts without technical crypto knowledge.
  • Custody: Bitcoin is stored with professional custodians, so you don’t need to worry about securing your BTC.
  • Liquidity: Bitcoin (or a representation of it) is tradable on major traditional exchanges thanks to ETFs. This increases trading volumes and thus liquidity, helping the market mature.
  • Diversification: Bitcoin can easily be added to existing stock and bond portfolios by both institutional and retail investors through ETFs.
  • Spot ETFs: A Bitcoin Spot ETF tracks Bitcoin’s price very closely, ensuring it accurately reflects the real price.
  • Institutional inflows: Enables participation from entities like pension funds and asset managers, who often cannot invest directly in crypto.

Disadvantages of Bitcoin ETFs

Alongside the benefits, Bitcoin ETFs also come with drawbacks. Here are the main disadvantages for investors:

  • Costs: ETF providers often charge annual management fees (usually between 0.2% – 1%), and futures ETFs incur additional roll costs. On top of that, you pay transaction fees when buying or selling ETF shares. When buying or selling real BTC through a crypto provider like Finst, you pay fixed transaction fees. At Finst, these are 0,15%, with no subscription, management, or hidden fees.
  • Tracking errors: Futures ETFs often follow Bitcoin’s spot price less accurately. Spot ETFs can also temporarily deviate.
  • Trading hours: ETFs can only be traded during market hours, while Bitcoin trades 24/7.
  • No direct ownership: Investors holding Bitcoin ETFs don’t own actual crypto. This means they cannot move or store the Bitcoins themselves.
  • Regulatory risk: An ETF is a regulated financial product. This means it could be revoked or conditions tightened. Owning actual Bitcoin gives you more control, as your BTC cannot be taken away.
  • Loss of independence: Growing correlation with stock markets makes Bitcoin less unique as a hedge or “digital gold.”

Final Thoughts

The introduction of Bitcoin ETFs marks an important step in the maturation of the crypto market. Spot Bitcoin ETFs in particular lowered the barrier to entry and brought more liquidity, transparency, and institutional inflows. At the same time, there are concerns such as costs, regulatory risks, and the lack of direct Bitcoin ownership for investors.

The arrival of Bitcoin ETFs has also opened the door to other crypto ETFs, including the first Ethereum ETF. It’s likely that in the future, other major crypto projects will also become tradable via ETFs. This would further integrate crypto into the traditional financial system and accelerate adoption.

For those who want easy, regulated Bitcoin exposure, ETFs provide a safe and accessible solution. For those who want full autonomy and ownership, holding real Bitcoin remains the purest form of investment.

About Finst

Finst is one of the leading cryptocurrency providers in The Netherlands and offers a best-in-class investment platform together with institutional-grade security standards and ultra-low trading fees. Finst is led by the ex-core team of DEGIRO and is authorized as a crypto-asset service provider by the Dutch Authority for the Financial Markets (AFM). Finst offers a full suite of crypto services including trading, custody, fiat on/off ramp, and staking for both retail and institutional investors.

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