Bitcoin ETF: An Investment Tool for the New Era of Cryptocurrency

From History to Modernity: How Bitcoin ETF Was Created

The concept of an exchange-traded fund (ETF) has long been established. The first such instrument appeared in Canada in 1990, and then spread to the United States with the launch of the SPDR S&P 500 ETF in 1993. When the (SPDR Gold Shares) gold ETF was launched in 2004, the market received a clear example of how regulated funds can increase the accessibility of traditional assets for retail investors.

The logic was simple: why hold a physical asset yourself when you can buy a fund share through a brokerage account? This idea is also applicable to cryptocurrencies.

Bitcoin, as a digital asset, has entered the queue for integration into the traditional financial system. The result was the Bitcoin ETF — an investment instrument that provides institutional and retail investors with simplified access to Bitcoin’s price without the need to buy and store cryptocurrencies in digital wallets themselves.

What is a Bitcoin ETF and why is it important

Bitcoin ETF — is an exchange-traded fund that primarily invests in Bitcoin or derivative financial instruments based on it. It trades on stock exchanges like regular shares but gives investors access to the cryptocurrency’s price movement.

The significance of Bitcoin ETF lies in several aspects:

Democratization of crypto investments. Previously, entering the cryptocurrency market required technical knowledge: registering on an exchange, understanding how wallets work, managing private keys. Bitcoin ETFs eliminate this learning curve. Investors simply open a traditional brokerage account and buy an ETF like a regular security.

Enhanced security. When purchasing Bitcoin directly, the investor is responsible for safeguarding their crypto assets. In the case of a Bitcoin ETF, this responsibility shifts to the fund provider, which operates under regulatory oversight. In some jurisdictions, funds are protected by insurance (for example, in the US up to a certain limit).

Attracting institutional investors. Funds, pension funds, and other large players have long avoided cryptocurrencies due to regulatory uncertainty. Bitcoin ETFs provide them with a regulated and transparent way to include digital assets in their portfolios.

History of Bitcoin ETF in North America

The first Bitcoin ETF did not appear in the US but in Canada. On February 18, 2021, the Toronto Stock Exchange (TSX) began trading the Purpose Bitcoin ETF with tickers BTCC.B and BTCC.U. This was a historic milestone: the first officially approved Bitcoin ETF in North America, allowing investors to access actual Bitcoin holdings through a familiar brokerage account.

The launch of the Purpose Bitcoin ETF opened the gateway for other providers. By 2024, dozens of Bitcoin ETFs have appeared worldwide, differing by types, assets under management, and geography.

Two types of Bitcoin ETFs: spot and futures

To choose the right Bitcoin ETF, it’s important to understand its structure.

Spot Bitcoin ETF: direct ownership of the asset

Spot Bitcoin ETFs invest directly in real Bitcoin. The fund stores the cryptocurrency with a licensed custodian, and ETF shares reflect the current market price of the assets.

Advantages:

• Price tracks the actual Bitcoin price in real time
• No intermediate instruments or speculative layer
• Investors gain direct exposure to the cryptocurrency

Where available: Spot Bitcoin ETFs are widespread in Canada, Switzerland, Germany, Brazil, and other countries. In the US, regulators (SEC) have long not approved spot ETFs, citing market manipulation risks.

Futures Bitcoin ETF: speculative approach

Futures Bitcoin ETFs invest not in Bitcoin itself but in futures contracts on its price. This means the fund holds positions in futures markets that represent the future price of the cryptocurrency.

Characteristics:

• Do not require holding actual Bitcoin
• Allow exposure through derivative instruments
• May be available in jurisdictions where spot ETFs are prohibited (for example, the US)
• May not fully reflect spot market dynamics due to contango and backwardation features

Bitcoin ETF vs. traditional ETF: what’s the difference

Functionally, Bitcoin ETFs operate similarly to any other ETF. The difference lies in the underlying asset:

• Traditional S&P 500 ETF tracks a basket of the 500 largest US companies
• Bitcoin ETF is tied to the price of a single asset — Bitcoin

Both offer investors diversification (— in the first case — through many companies, and in the second — through regulated access to the crypto market), liquidity, and ease of trading via brokerage accounts.

Global picture: Bitcoin ETFs around the world in 2024

North America: Canada leads, US waiting

In Canada, the spot Bitcoin ETF market has developed actively. Here are the leaders by assets under management (AUM):

In the United States, the situation is different. Until 2024, the SEC has not approved any spot Bitcoin ETF, despite numerous filings from BlackRock, Fidelity, and other giants. Instead, the US market is filled with futures ETFs:

Europe: more favorable environment

European regulators are more open to spot Bitcoin ETFs. Switzerland, Germany, and Sweden offer investors direct access to physical Bitcoin via ETFs:

Latin America: new opportunities

Brazil became the first country in the region to approve a spot Bitcoin ETF:

How to choose the right Bitcoin ETF

Investing in a Bitcoin ETF is a strategic decision that requires analyzing several factors.

Step 1: Determine the ETF type suitable for your jurisdiction

First, find out which types of Bitcoin ETFs are available in your country or region. If you are in the US, you will have to work with futures ETFs, as spot ETFs are not yet approved. In countries with a more lenient regulatory regime, you can choose between spot and futures options.

Step 2: Assess fees and expenses

Even a small difference in the (expense ratio) can significantly impact your returns over years of investing. Compare management fees of different ETFs and select the most cost-effective option.

Step 3: Check liquidity

A highly liquid ETF makes it easier to enter and exit positions without significant slippage. Pay attention to trading volumes and the bid-ask spread.

Step 4: Analyze the provider’s track record

The company managing the ETF should have a solid reputation, experience in fund management, and adequate security systems. BlackRock, Fidelity, Grayscale, VanEck, and other major providers have a long history in the market.

Step 5: Consider volatility

Bitcoin is known for its price volatility. Ensure that your investment horizon and risk tolerance align with this asset’s nature. For long-term investing, volatility is less critical; for short-term trading, it’s a key risk.

Step-by-step guide: how to invest in a Bitcoin ETF

Option 1: Investing in a Bitcoin ETF in the US

1. Open a brokerage account. Choose a broker that offers trading in futures Bitcoin ETFs. Popular options include Fidelity, Charles Schwab, E*TRADE, and others. Ensure that fees and platform features meet your needs.

2. Fund your account. Transfer the necessary amount from your bank account.

3. Find the desired ETF. Using your broker’s search function, locate the Bitcoin ETF you’re interested in (for example, BITO, XBTF, or BTF).

4. Place an order. Enter the number of shares you want to buy and select order type (market or limit). A market order executes immediately at the current price; a limit order only executes when the specified price is reached.

5. Monitor your position. After purchase, track your investment’s value through your broker’s dashboard.

Option 2: Investing in international spot Bitcoin ETFs

1. Identify available options. Depending on your country (Canada, Europe, Brazil, etc.), find out which spot Bitcoin ETFs are accessible locally.

2. Open an account. It’s recommended to work with a local broker or an international company servicing your jurisdiction.

3. Research the assets. Study the assets under management, fees, and provider reliability (Purpose Bitcoin ETF, 21Shares, CoinShares, etc.).

4. Buy shares. The process is similar to the US option: place an order via your broker’s interface.

5. Evaluate tax implications. Tax treatment of Bitcoin ETFs varies by country. Consult a tax advisor before investing.

Key advantages and risks of Bitcoin ETFs

Advantages

Ease for beginners. No need to understand blockchain technology, manage private keys, or work with decentralized exchanges. All processing and security functions are handled by the ETF provider.

Regulation and transparency. Bitcoin ETFs are traded on official exchanges and are subject to regulatory oversight, reducing fraud risk.

Portfolio diversification. Bitcoin ETFs allow adding crypto exposure without investing the majority of capital directly into crypto.

Trading convenience. You can buy or sell Bitcoin ETFs during stock exchange trading hours, unlike 24/7 crypto exchanges.

Risks

Bitcoin’s volatility. Cryptocurrency prices can fluctuate sharply, affecting ETF value and potentially leading to losses.

Regulatory changes. If regulators tighten rules, it could impact operations and ownership rights of Bitcoin ETFs.

Futures ETF specifics. Futures Bitcoin ETFs may show different dynamics from spot markets due to technical features of futures contracts.

Provider credit risk. If the ETF provider faces financial difficulties, it could theoretically affect the fund’s value, though such cases are rare due to regulation.

Conclusion: Bitcoin ETF as a bridge between traditional finance and crypto

Bitcoin ETFs represent a significant step in integrating cryptocurrencies into the global financial system. They offer investors a regulated, convenient, and relatively safe way to access Bitcoin’s price without dealing directly with digital wallets and crypto exchanges.

When choosing a Bitcoin ETF, carefully analyze fees, liquidity, provider reputation, and suitability to your investment profile. Remember the inherent volatility of cryptocurrencies and ensure you are prepared for short-term price fluctuations for potential long-term growth.

If you are in the US, futures Bitcoin ETFs provide exposure within the regulatory framework. If you have access to international or spot Bitcoin ETFs, you get a more direct link to Bitcoin’s price movement.

In any case, it is recommended to consult with a financial advisor before investing to ensure that Bitcoin ETFs align with your financial goals and risk tolerance.