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If you’ve been paying attention to news in the Bitcoin space you will have noticed the term Exchange-traded Fund (ETF) popping up quite a lot recently. At a basic level the growing demand for ETF-like products in the crypto space boils down to two things: regulation and custody.
There’s a lot of institutional capital sitting on the sidelines waiting to enter the crypto space. Most retail investors and crypto enthusiasts invest via online crypto exchanges or Bitcoin ATMs. The thought of being your own bank by managing your private keys is actually appealing and what attracts some people to buy. However, there’s also a sizable investor class that doesn’t want to worry about custody and security. These investors want to invest in a familiar asset that can give exposure to crypto, without the need to manage the keys, storage and security.
Enter the Bitcoin ETF. An ETF is an investment vehicle that tracks the performance of a particular asset or group of assets; in this case Bitcoin is the asset. An ETF also comes with the blessing of the SEC and so from a regulatory perspective it ticks the boxes for the institutional clients.
Below we’ll look at ETFs in more detail and also discuss Exchange Traded Notes (ETNs) and trackers.
What is the difference between Bitcoin ETFs, ETNs and trackers?
Both ETFs and trackers will track a particular asset or index, rising and falling based on the movement of the underlying instrument. ETF and ETN are open-ended funds ( can issue an unlimited number of shares). The ETFs market, in general, is much larger than ETNs.
One obvious difference is that ETFs are traded on stock exchanges, meaning that pricing is live and changes throughout the day. ETNs, on the other hand, are priced once a day.
ETFs also give an investor an equity stake in the underlying asset whereas an ETN is an unsecured debt note. Similar to a Bond, the ETN can be held to maturity or sold early. From a risk perspective, the ETN is unsecured meaning there is a risk of default on the loan ao the creditworthiness of the issuing entity is important. From a tax perspective ETNs may be preferential with longer-term capital gains.
Active vs passive
Passive investments aim to replicate the performance of a benchmark, for example the Bitcoin Price Actively managed funds, try to outperform a benchmark and typically come with higher management and performance fees to do this.
Bitcoin ETFs explained
AN ETF is a type of fund. It owns assets and divides ownership into shares that are held by investors. Michael Venuto puts it quite simply when he says that an ETF is a mutual fund with benefits. The fund prices every second and trades on an exchange, which is different to mutual funds.
Unlike traditional mutual funds, ETFs do not sell or redeem their individual shares at net asset value (NAV). Instead, financial institutions purchase and redeem ETF shares directly from the ETF
The ETF market has been growing considerably in recent years and according to Bank Of America, the ETF market will reach 50 trillion by 2030. The ETF share of the global stock markets is growing and with 21 mission Bitcoin cap, you can expect the Bitcoin ETF market share to grow also in the years ahead.
Why Bitcoin ETFs are popular with investors
We’ve already mentioned that these instruments give investors exposure to the crypto asset class without the overhead of managing the security and custody of private keys. The transparency of the ETF structure is another appealing aspect.
For seasoned investors, it also boils down to familiarity, simplicity and costs.
- From a cost perspective, passive ETFs are generally cheaper than active. A Bitcoin ETF that tracks the price of Bitcoin could be a low cost way for investors to get exposure. They also don’t need to worry about the custodial costs.
- The simplicity of ETFs and similar products also make them appealing to investors. They do exactly what they say on the tin.
- Finally, familiarity is something a lot of traditional investors look for an the structure of thee products is reassuring to investors
Crypto ETFs and ETPs available to invest in
There are no Bitcoin ETFs currently trading publicly in the U.S, but there are a couple of options that come close.
Grayscale Bitcoin Trust (GBTC)
Although this trust is not technically an ETF, Grayscale says it’s modeled on physically backed ETFs products like the SPDR Gold Trust.
This trust owns Bitcoins on behalf of investors and allows them to trade in shares of the trust. The Trust has been around since 2013 for accredited investors and subsequently was approved by FINRA to trade publicly. This means that any investors now have access to buy and sell public shares of the Trust under the symbol GBTC. The trust uses offline or “cold” storage with Coinbase Custody Trust Company, LLC, as Custodian for the Bitcoin.
According to their website: “Grayscale Bitcoin Trust’s shares are the first publicly quoted* securities solely invested in and deriving value from the price of Bitcoin.”
The annual fee for the trust is 2%.
3iQ Corp Bitcoin Fund
Again, this is not an actual ETF, but close in structure. Toronto-based investment manager 3iQ Corp offers a Bitcoin Fund that trades on the Toronto Stock Exchange with the ticker QBTC.U.
This canadian based fund is not yet registered to serve U.S. investors.
The management fee is 1.95%
BLOK is an actively managed blockchain ETF by Amplify that invests at least 80% of its net assets in equity shares of companies in the blockchain technologies. For example, the fund has invested in the likes of Galaxy Digital and the crypto friendly bank Silvergate.
Toroso serves as active sub-advisor and ETF sponsor to an ETF. The fund has a Gross Expense Ratioof 0.90%, or 90 BPS and trades on the NYSE Arca witht he ticker BLOK.
ARKW is an Active Equity ETF that also trades on the NYSE ARCA. It is not a pure play blockchain fund and instead has a diversified portfolio across a number of areas such as e-commerce, big data, machine learning, IOT, digital media and Blockchain. The funds top holding is in Tesla stock and the fund has an expense ratio of 76 BPS.
Bitcoin Tracker One
You can buy shares in a Bitcoin tracker from a stockbroker such as Degiro and XBT provider. There are ETNs that track Bitcoin, Ether and Litecoin.
- BITCOIN TRACKER ONE EUR (BITCOIN XBTE)
- BITCOIN TRACKER ONE (COINXBT)
- ETHER TRACKER ONE (ETHEREUM XBT)
- ETHER TRACKER ONE EUR (ETHEREUM XBTE)
- LITECOIN TRACKER ONE(COINLTC)
- LITECOIN TRACKER ONE EUR(COINLTCE)
Crypto ETPs are also available from 21Shares and they trade on the Swiss Stock Exchange (SIX). They have Index, single tracker and short products available. The Short Bitcoin ETP (Ticker: SBTC) gives investors a -1x return to the performance of Bitcoin for a single day – essentially shoring the price of Bitcoin.
Are there any Bitcoin ETFs approved in the U.S?
There are currently no Bitcoin ETFs approved in the U.S. There’s been a long list of Bitcoin ETF proposals, but until this point, the SEC has rejected all. The main reasons cited for the rejections are the unregulated nature of the exchanges, investor protections and market manipulations.
As far back as March 2017, the SEC rejected the Winklevoss twins application for a Bitcoin ETF, highlighting concerns with the underlying Bitcoin market.
More recently in february of 2020, SEC denied a Bitcoin fund by Wilshire Phoenix to list on the NYSE Arca exchange. From the SEC statement, they point to the unregulated nature of the exchange platforms in the space.
“In addition, as NYSE Arca states, the Sponsor recognizes that some of the Commission’s concerns are that a significant portion of Bitcoin trading occurs on unregulated platforms and that there is a concentration of a significant number of Bitcoin in the hands of a small number of holders”
A full history of Bitcoin ETFs is available from Cointelegraph. As the Bitcoin ETF bandwagon keeps knocking on the door, it’s probably only a question of when, and not if, we will see a Bitcoin ETF.
Products like Bitcoin ETFs reduce the barriers for mainstream institutional investors entering the crypto space. Some may argue that it goes against the fundamental philosophy of Bitcoin to use third parties to manage custody, but others look at it more pragmatically as a necessary step in the adoption life-cycle. From a pure pricing perspective an ETF would bring increasing demand for the underlying fixed asset ( 21 million Bitcoin) which could result in an uptick in price.
If you want to buy Bitcoin online directly then check out our review of the best places to buy online