Bitcoin ETFs work similarly to traditional ETFs, which have been popular with investors for years due to their effectiveness in diversifying risk, the ability to trade outside of core trading hours and the ability to buy or sell shares. This type of flexibility was difficult to achieve when trading traditional assets before the advent of ETFs. Now, thanks to cryptocurrency ETFs, this kind of flexibility is available in the cryptocurrency market.

In our SwapGate blog, we will take a look at what Bitcoin ETFs are, how they work, their types, historical context, advantages and disadvantages, and how you can invest in Bitcoin ETFs.

What is a Bitcoin ETF?

Bitcoin ETF (Exchange-Traded Fund) is a type of investment fund that trades on exchanges, similar to stocks, and offers investors exposure to the current value of bitcoin without having to directly buy and hold the cryptocurrency. It is a financially regulated investment vehicle, making it attractive to a wide range of investors, including those who prefer traditional financial instruments but also wish to access the dynamic cryptocurrency market.

How do Bitcoin ETFs work?

Bitcoin ETFs function similarly to traditional ETFs, which typically include a basket of assets such as stocks, bonds or commodities. The company managing the ETF issues shares of the fund, which represent an equity stake in the assets the ETF manages. In the case of Bitcoin ETFs, the fund either directly owns bitcoins or follows the price of bitcoin using derivatives such as futures contracts.

There are several types of Bitcoin ETFs available in the global market:

• Bitcoin Spot ETF: This type of ETF directly buys bitcoins, ensuring that the ETF shares match the current market price of bitcoin. When an investor buys shares of such an ETF, the management company purchases an equivalent amount of bitcoins, holding them in reserve.
• Bitcoin Futures ETF: Unlike a spot ETF, a Bitcoin futures ETF follows the price of a basket of bitcoin futures contracts rather than the direct market price of the cryptocurrency itself. This allows the ETF to avoid having to physically store bitcoins.
• Leveraged Bitcoin Futures ETF: This type of ETF works similarly to the Bitcoin Futures ETF, but offers investors the ability to leverage, increasing their exposure to bitcoin without having to invest more capital. For example, with a double leveraged ETF, an investor can get double exposure to bitcoin price movements.

Bitcoin ETF providers

There are various Bitcoin ETF providers in the market, each offering unique terms and strategies for investing in bitcoin through ETFs. In the United States, these providers include iShares Bitcoin ETF Trust, Bitwise Bitcoin ETF Trust, ARK 21Shares Bitcoin ETF, Franklin Templeton Bitcoin ETF, Valkyrie Bitcoin Fund, and WisdomTree Bitcoin Fund. These funds use a variety of methods to track the price of Bitcoin and provide investors with appropriate exposure.

Historical context of Bitcoin ETFs

The path to Bitcoin ETF approval in the U.S. began in 2013 when Gemini co-founders Cameron and Tyler Winklevoss first filed an order to create a spot Bitcoin ETF with the U.S. Securities and Exchange Commission (SEC). While initial attempts were unsuccessful, subsequent orders from companies such as Fidelity, Grayscale, VanEck and WisdomTree have confirmed the growing interest in the instrument.

Why invest in Bitcoin ETFs?

Investing in any type of Bitcoin ETF can offer several advantages over investing directly in cryptocurrencies for certain types of traders. However, there are also Bitcoin ETF disadvantages that all investors should consider when deciding which financial instrument is best for them.

Advantages of investing in Bitcoin ETFs:

• Convenience and regulation: ETFs provide a convenient and regulated way to access bitcoin price changes without the complexities associated with buying, storing and securing cryptocurrency.
• Liquidity and ease of trading: Bitcoin ETF shares trade on established stock exchanges, capitalizing on the existing infrastructure and liquidity of these markets.

Disadvantages of investing in Bitcoin ETFs:

• Indirect Exposure: Investing in Bitcoin ETFs means taking indirect exposure to bitcoin rather than directly owning the cryptocurrency.
• Fees Charged: Like traditional ETFs, Bitcoin ETFs typically charge management fees for providing the product, which can reduce overall investment returns.
• Geographic restrictions and limited trading hours: Some jurisdictions prohibit retail traders from purchasing any type of cryptocurrency derivatives, including ETFs.

How to invest in Bitcoin ETFs?

Investing in Bitcoin ETFs can be an easy and affordable way for those who want to gain exposure to bitcoin through a regulated financial instrument. Here’s a step-by-step guide on how to get started:

1. Choosing a brokerage platform: The first step is to choose a brokerage platform that offers access to Bitcoin ETFs. Many traditional brokerages, such as Fidelity and Charles Schwab, now offer access to Bitcoin ETFs. It is important to choose a reliable and regulated platform.
2. Opening an account with a broker: After choosing a platform, the next step is to open an account. This usually involves providing personal information and identification documents. Some platforms may also require you to fill out a questionnaire to confirm that Bitcoin ETFs fit your investment profile.
3. Funding your account: Before you can invest in Bitcoin ETFs, you need to fund your account with a brokerage platform. Most reputable platforms support wire transfers, credit cards, and other payment methods. It is important to note that some platforms may charge a deposit fee, so read the terms and conditions carefully.
4. Selecting Bitcoin ETFs: After funding your account, you can choose a Bitcoin ETF to invest in. It is important to research the various ETFs available and consider factors such as commissions, liquidity and past performance before making a decision.
5. Placing an order: Once you have selected a Bitcoin ETF, you can place an order. In this step, you specify the number of shares you want to buy and the purchase price. It is important to consider that Bitcoin ETF prices can be volatile, so it is important to monitor your investments and adjust your strategy if necessary.
6. Investment Monitoring: Investing in Bitcoin ETFs requires constant monitoring to stay abreast of market trends and news.

The significance of Bitcoin ETFs

The approval and introduction of both spot and futures Bitcoin ETFs is a significant development in the cryptocurrency market. These regulated financial products offer investors a regulated and affordable way to gain indirect exposure to Bitcoin’s growth potential, fostering greater acceptance and adoption of digital assets.

As the regulatory environment evolves, Bitcoin ETFs may further cement the legitimacy of the cryptocurrency industry and offer investors new opportunities to diversify their portfolios. However, as with any investment, it is important to conduct a thorough analysis and consider all risks and rewards before investing.

Conclusion

Bitcoin ETFs break new ground for investors looking to explore the cryptocurrency market through a familiar and regulated investment vehicle. They offer a convenient way to gain exposure to bitcoin while minimizing some of the complexities and risks associated with direct ownership of cryptocurrency.

SwapGate provides investors with access to a wide range of cryptocurrency assets, making it easy to invest and use for a variety of purposes.