In this guide
For years, the cryptocurrency community has been holding its breath for a Bitcoin exchange-traded fund (ETF) or any crypto ETFs for that matter. Just this year, investors in Canada got their first Bitcoin and Ether ETFs. So did investors in Brazil and Dubai. In Europe, a similar product arrived way back in December 2019.
But there’s still one country whose launch of a Bitcoin ETF is highly anticipated. That is the United States. The country saw the first-ever application for a Bitcoin ETF back in 2013, but it isn’t any closer to getting it eight years down the line.
What is an ETF?
An ETF (or exchange-traded fund) is a regulated financial instrument whose price tracks the value of underlying assets. For example, the price of a Gold ETF would track the value of the gold reserves that are represented within the ETF. Similarly, the price of an oil ETF, or a stock index ETF, or a crypto ETF would track the value of oil, the stock index, or the crypto assets, respectively. Just like stocks, an ETF can and is traded on regulated exchanges across the world. This then allows investors to trade ETFs through their brokerage accounts.
The basic idea behind an ETF is to have an instrument whose value is pegged to the value of an underlying asset. This way, an investor does not have to deal with the actual asset directly. For instance, if an investor wants to invest in gold but would rather not deal with the asset physically, an ETF tracking it would be a great way to get the gold exposure otherwise.
In this definition, you may have picked up one of the main selling points of ETFs, but later in this guide, we will dive deeper into the benefits of ETFs, especially as they apply to Bitcoin and other cryptocurrencies.
What is a Bitcoin ETF and how does it work?
A Bitcoin ETF is a tradable instrument that tracks the value of Bitcoin. The Bitcoin ETF can and is often listed on traditional exchanges where the ETF can be bought and sold, similar to equity stocks.
To create a Bitcoin ETF or any crypto ETF for that matter, a management company will acquire the actual coins from the market. These are used as reserves, just like how the management company will purchase stock to include in a traditional shares ETF. The company will then create a fund that represents the value of the Bitcoin it holds in custody and list it for trading on the stock exchange, where it is available to investors and traders.
Investing in a Bitcoin fund is extremely convenient to the average investor, who will thus not have to deal with the security and logistics risks inherent with handling the digital currency. The whole process of buying Bitcoin through a cryptocurrency exchange and figuring out a way to store your coins is admittedly clunky. And it is especially risky for the average investor who may not be technically inclined.
Investing in a Bitcoin ETF does not, however, eliminate all your investment risks. It is important to remember that cryptocurrencies are still highly volatile assets whether you invest directly or through an ETF.
In terms of how a Bitcoin ETF works, there are no surprises. Crypto ETFs work exactly like any other traditional asset-backed ETF. This is part of the allure of crypto ETFs. You do not have to understand blockchain and cryptocurrencies to take advantage of the crypto market’s volatility. Although, it does help to learn about the markets in which you want to invest.
As long as one has or can create a brokerage account, they can trade any crypto ETF supported through their brokerage account. For investors in the United States, where a Bitcoin ETF has yet to be launched, this may not be the case. However, this is a reality for investors in Brazil, Canada, Switzerland, Dubai, and a few other nondescript locations.
Trading a crypto ETF is as simple as logging into your brokerage account, selecting the trading symbol that represents the Bitcoin ETF, and proceeding to buy or sell the asset.
Watch: Bitcoin ETF explained in 3 minutes
History of Bitcoin ETFs in the United States
As of this publication date, the United States securities regulator, the Securities and Exchange Commission (SEC), has yet to approve a single application to launch a Bitcoin ETF.
The history of applications in the US dates back to 2013 when the first such application was made by Gemini exchange founders Cameron and Tyler Winklevoss. After the Winklevoss brothers, several other investors have shown interest in partaking in the race to bring US investors the first crypto ETF. Here is a brief rundown of some of the institutions chasing the highly elusive SEC greenlight.
- July 2013 – Winklevoss Bitcoin Trust application made by the Gemini co-founders Cameron and Tyler Winklevoss sponsored by Math-Based Asset Services LLC. The SEC rejected the application on March 10th, 2017.
- December 2017 – ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF applications filed by the ProShares Trust in conjunction with the New York Stock Exchange (NYSE). The two funds were to be listed on the NYSE Arca exchange, tracking the Bitcoin futures’ performance listed on CME and CBOE exchanges. The SEC rejected both applications on August 22nd, 2018.
- January 4th, 2018 – NYSE Arca applies to list five Bitcoin-related funds. The funds were Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear Shares. The SEC rejected the application on August 22nd, 2018.
- January 5th, 2018 – Cboe BZX Exchange applied to list shares of GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF. The SEC disapproved the application on August 22nd, 2018.
- January 2019 – NYSE Arca applies to list shares of Bitwise Bitcoin ETF Trust. This application was also rejected on October 9th, 2019.
- January 2019 – the Cboe BZX Exchange applies to list SolidX Bitcoin Shares Issued by the VanEck SolidX Bitcoin Trust. However, the exchange does not wait for a determination from the commission following several postponements. It withdrew the application on September 17th, 2019.
- June 2019 – the NYSE Arca exchange files another Bitcoin ETF application in conjunction with the New York-based investment management firm Wilshire Phoenix to list shares of the United States Bitcoin and Treasury Investment Trust. On February 26th, 2020, the SEC again rejected this application.
2021 has seen increasing growth in the number of applications to the SEC, possibly due to the change of guard at the commission’s helm.
In April 2021, former CFTC chief Gary Gensler assumed office as the new chief of the SEC, taking over from Jay Clayton. Gensler has a breadth of experience regulating the commodities industry. But more importantly, before joining the SEC, he was an MIT Sloan professor of Economics teaching a course on blockchain, digital currencies, FinTech, and public policies and commenting extensively on the same.
In the hope of getting a more favorable ruling from the commission, the following players have opted to try their luck in 2021:
- VanEck filed the VanEck Bitcoin Trust application on March 15th.
- Valkyrie Bitcoin Fund filed by Valkyrie Investments to list shares on the NYSE Arca. This application was made on April 23rd.
- Stone Ridge & NYDIG are seeking to list the NYDIG Bitcoin ETF shares on the NYSE Arca exchange. The application was made on February 16th.
- WisdomTree Bitcoin Trust from WisdomTree is seeking to list shares on Cboe BZX Exchange. Application filed on March 11th.
- Wise Origin Bitcoin Trust application by FD Funds Management LLC seeking to list ETF shares on the Cboe BZX Exchange. The application prospectus was filed with the SEC on March 24th.
- Galaxy Bitcoin ETF shares are to be issued by Galaxy Digital Funds LLC and listed on the NYSE Arca exchange. The fund would track the performance of the Bloomberg Galaxy Bitcoin Index maintained by Bloomberg Index Services Limited. Its preliminary prospectus was filed with the SEC on April 12th.
These are just some of the attempts made towards bringing US investors a cryptocurrency ETF.
Why the SEC keeps rejecting Bitcoin ETF applications
There have been several applications made to the SEC since 2013 requesting a rule change that would allow the launch of a Bitcoin ETF in the US. Many of which have been filed by reputable Wall Street firms. Most of what the SEC objects to is not the companies making the applications but rather the market in general.
The Bitcoin market is growing with barely a decade to its age. So far, it is valued at a poultry US$1 trillion compared to other more established markets such as gold, oil, treasury bonds, or company equity. These traditional financial instruments also have a history to them from which the SEC has drawn very effective policies to protect investors.
Bitcoin, on the other hand, is a new kind of asset utilizing an unproven technology. Most investors in the blockchain space are struggling to understand it, and so are the regulators.
The Bitcoin ETF applicants’ biggest challenge in getting the green light from the SEC is providing enough proof to show that the Bitcoin market has matured enough to be considered immune from market manipulations.
Given that a majority of the trading volume is reported from exchanges outside the jurisdiction of the SEC, this has become the most significant hindrance. If you cannot oversee the institutions reporting on the trading activity, you cannot effectively monitor open price discovery of the asset.
Additionally, there have been several incidents of scams and fraud cases within the cryptocurrency industry, confirming the fears that the SEC has highlighted.
Other concerns that the SEC has pointed out include the cryptocurrency market’s lack of liquidity and transparency.
Depending on how you look at it, you may find it encouraging to know that the SEC’s concerns are not on the particular companies making the requests but instead on the crypto market. Once the market achieves maturity, according to the SEC standards, the commission is bound to give a node to not one but most probably several of these applications.
Bitcoin ETFs outside the US
While the US cryptocurrency investors are impatiently waiting for the SEC to stop dragging their feet, investors in other countries are enjoying the fruits of more open-minded regulatory bodies. Several Bitcoin ETFs have been launched in Canada, Brazil, the Middle East, and Europe just this year alone. We expect more regulators to take the cue from Canada’s Ontario Securities Commission (OSC) and the other trailblazers.
Crypto ETFs in Canada
The OSC approved the launch of the first Bitcoin ETF in Canada on February 12th, 2021. This saw Purpose Bitcoin ETF (BTCC) launch a week later on the 18th, managed by Purpose Investments. Technically, this was the world’s first Bitcoin ETF, considering that several similar products offered in Europe are referred to as ETPs and ETNs standing for exchange-traded products and notes, respectively.
Since the launch of the Purpose Bitcoin ETF in Canada, several other cryptocurrency-related ETFs have been launched, including one by Purpose Investments that tracks the performance of Ethereum, the second-largest digital asset by market value.
The crypto ETFs you can invest in if you are in Canada include the following:
- Purpose Bitcoin ETF was launched by Purpose Investments in February 2021. Shares of this ETF are listed on the Toronto Stock Exchange (TSX). The fund currently manages more than CAD$1.4B (an equivalent of about 22062.5 BTC). This fund is listed on the TSX under three symbols representing three variants of the same fund. They are BTCC (FX HEDGED and quoted in local currency), BTCC.B (NON-FX HEDGED, also quoted in CAD), and BTCC.U (quoted in USD). You can also invest in the Purpose Ether ETF, another first ETF tracking the performance of Ether. This fund was launched on April 20th and holds more than CAD 312M or 65636 ETH under management.
- Evolve Bitcoin ETF (EBIT), managed by Evolve Funds Group Inc., was cleared for launch by the OSC on February 16th. The fund was listed on the 19th, just a day after the Purpose Bitcoin ETF started trading on the TSX exchange. So far, the fund has attracted investments to the tune of CAD 115M with an expense ratio of 0.75%. Evolve Funds Group has also listed shares of an Ether ETF as of April 20th. The Ether fund is listed under two variants: ETHR (unhedged) and ETHR.U (hedged against the US dollar.)
- 3iQ CoinShares Bitcoin ETF (BTCQ) shares are listed on the TSX exchange under the ticker symbols BTCQ (unhedged) and BTCQ.U (hedged against the US Dollar). The fund was listed on April 19th by 3iQ Corp in partnership with London-based CoinShares. So far, the fund has over $1 billion of AUM, with both variants of the fund charging an expense ratio of 1%. The two companies also launched an Ether ETF soon after the Bitcoin ETF called 3iQ CoinShares Ether ETF. It is also listed under two variants on the TSX: ETHQ (unhedged) and ETHQ.U (US Dollar hedged.)
- Other crypto ETFs already launched and listed for trading within Canada are Ninepoint Bitcoin ETF (BITC) and CI Galaxy Bitcoin ETF (BTCX). Both of these ETFs are listed on the TSX exchange.
Bitcoin ETF in Brazil and Dubai
Brazil got its first Bitcoin ETF in June 2021, launched by Rio asset manager QR Asset Management. Shares of the fund are listed on Sao Paulo-based B3 exchange under the ticker symbol QBTC11. The fund tracks the performance of the CME Group index of Bitcoin futures contracts.
QR Capital received the approval to launch the fund in March from the Brazil Securities and Exchange Commission (CVM).
In July, QR Capital received another approval from the CVM to launch an Ether ETF that tracks the performance of Ether cryptocurrency. The fund would launch similar to the Bitcoin ETF, listing the shares on the B3 exchange under the ticker symbol QETH11.
Another Bitcoin ETF available to Brazilian investors is the Hashdex Nasdaq Bitcoin Reference Price Index Fund trading on the B3 exchange under the ticker symbol BITH11. The fund was launched in July by Brazilian asset manager Hashdex.
For investors in the Middle East and North Africa (MENA), 3iQ Corp has dual-listed its Bitcoin fund on the Nasdaq Dubai international exchange. The shares of this fund are listed under the ticker symbol QBTC and function just like its Canadian counterpart.
Pros and Cons of Crypto ETFs
The benefits of investing in a Bitcoin or Ether ETF over a direct investment in the underlying asset are numerous. On the flip side, however, there are some drawbacks.
- Convenience – perhaps the greatest pro of a crypto ETF over direct investments is that average investors don’t have to handle the underlying asset. Crypto is quite hard to understand, and most of the platforms that allow you to buy and store your assets have less than stellar track records. Additionally, most cryptocurrency exchanges also have dubious regulatory policies, which raises the risk for its investors. As a result of crypto ETFs, investors may gain exposure to the new market using their existing brokerage accounts. This way, they do not have to worry about the safety and security of the assets they hold
- Flexibility – speculators need to be able to take advantage of both market rallies and corrections. As a result of investing through the spot market, you will not be able to profit from a falling asset’s value. In this case, it’s known as short selling or “going short.” However, with a Bitcoin ETF, you have the option of going long or short.
- Regulations – ETFs are highly regulated financial assets, and crypto ETFs are no exception. Not only can regulators monitor and analyze the performance of a Bitcoin ETF on public platforms, they can also provide protection against price manipulation within the ETF markets. However, the underlying asset’s price, in this case, Bitcoin or Ether, can still be manipulated through unregulated crypto exchanges.
- Management fees – ETF fund issuers charge a management fee usually between 0.4% and 1.5% annually. There is no fee involved in storing Bitcoin on a cryptocurrency exchange or a private wallet.
- Exchange limitation – it is easy to exchange your ‘physical’ digital assets that you directly hold. If you have some Bitcoin in your wallet, you can easily swap it for some Ether or Litecoin or any other asset supported on your platform of choice. This is not the case with a crypto ETF. Arbitrage speculators can thus take advantage of price differences between trading pairs across various platforms. This is not possible when dealing with crypto ETFs.
- Price discovery errors – ETFs track the performance of underlying assets. This could be indices or actual assets held in reserves. Sometimes, the net asset value (NAV) of the fund lags behind the actual value of the assets they track. Other times, the price difference could be caused by market volatility.
Depending on how you look at it, a Bitcoin or Ether ETF may just be the right kind of asset to include in your portfolio. Any prudent investor will have to consider the asset’s merits and disadvantages to ensure that they are familiar with the risk factors that go along with this asset class.
There are several ways to invest in Bitcoin and other cryptocurrencies. But few of them are any good to a regular investor. A Bitcoin ETF is one of those. If or when the SEC ever approves the first Bitcoin ETF in the United States, this would mark the transition of the crypto market to the next maturity stage.
It is a highly anticipated product, and for a good reason, it brings convenience and flexibility and allows investors to get in on the current market buzz without taking too much risk.
This may not be a reality in the US, but as we have highlighted, the products are already available in other markets, including Canada, Brazil, Dubai, and other places. It will be interesting to watch how the products perform in the market. Their success can be used as the basis for the SEC to approve such a product in the States.
Frequently Asked Questions about Bitcoin ETFs
What is a Bitcoin ETF?
A Bitcoin ETF is an exchange-traded fund created to track the price of Bitcoin. Shares of a BTC fund are listed on traditional exchanges allowing regular traders to buy and sell them through their brokerage accounts.
What is the difference between Bitcoin and a Bitcoin ETF?
Bitcoin is a digital currency that employs blockchain technology to facilitate value transfer whereas a Bitcoin ETF is a tradable financial instrument whose value is pegged to the value of the Bitcoin cryptocurrency. Additionally, while Bitcoin can be bought, sold, or traded on cryptocurrency exchanges, Bitcoin ETFs, currently, can only be accessed through the traditional bourses. Also, crypto ETFs are regulated products as opposed to Bitcoin, which is a decentralized and pseudonymous digital currency.
Is there a Bitcoin ETF in the US?
So far, there is not a single Bitcoin ETF in the United States. The SEC has been reluctant to approve any of the applications that have been made so far. The biggest concern the commission has is the potential for crypto market manipulation, given that a big chunk of the trading volume happens on exchanges with little to no surveillance from reputable regulators.
Are Crypto ETFs safe?
Bitcoin and Ether ETFs are, ideally, safe products since they are approved for listing on traditional exchanges. They are constantly monitored and audited with reports available to the public. However, crypto ETFs are still risky assets, given that their value is pegged to the value of cryptocurrency, which is a highly volatile asset.