What makes Bitcoin ETFs appealing to many is how investors can follow fluctuations in the cryptocurrency’s price without actually owning any Bitcoin through an exchange-traded fund (ETF). In simpler terms, Bitcoin exchange-traded funds (ETFs) track the performance of the underlying asset.
How Do Bitcoin ETFs Work?
An exchange-traded fund (ETF) is an investment fund that tracks the value of an index or underlying asset. Currently, exchange-traded funds (ETFs) are offered for a variety of assets and sectors, including currencies and commodities.
Similar to how Bitcoin is priced, the price of one share of an exchange-traded fund would also fluctuate in conjunction with the price of Bitcoin. The value of the ETF rises if Bitcoin does, and vice versa. Also, the ETF would trade on a market exchange such as the NYSE or TSX rather than a cryptocurrency exchange.
Types of Bitcoin Exchange-Traded Funds
The two types of Bitcoin exchange-traded funds include spot ETFs and futures ETFs.
Spot Bitcoin ETF
A Bitcoin Spot ETF is a type of ETF that gives investors access to the current market price of Bitcoin.
In this case, “spot” refers to the current price of bitcoin, which is the underlying asset. Most of the time, a bitcoin spot exchange-traded fund (ETF) tracks the price of real bitcoin as closely as possible in real-time.
Futures Bitcoin ETF
On the other hand, Futures ETFs don’t hold actual bitcoin. Rather, it involves using bitcoin futures contracts to gain exposure to the crypto. This way, investors can speculate and place bets on the asset’s future price through bitcoin futures contracts.
There are bitcoin ETFs that are designed to give investors inverse or leveraged exposure to the price of bitcoin. This means that investors can magnify gains as well as losses.
Advantages of Bitcoin Exchange-Traded Funds
- When you invest in a Bitcoin ETF, you enjoy the leverage over the price of Bitcoin without needing to understand how it works, register on a crypto exchange, or assume the risks associated with direct Bitcoin ownership.
- An ETF can hold multiple assets. A Bitcoin ETF, for example, could include Facebook stocks, Bitcoin, and Apple stocks, amongst other assets, which allows investors to minimize risk and diversify their portfolios.
Disadvantages of Bitcoin Exchange-Traded Funds
- One thing to note is that ETFs usually charge management fees in exchange for the services they offer. This means that, over time, holding a large number of shares in a Bitcoin ETF results in large management fees.
- On the one hand, it is possible to exchange Bitcoin for other crypto, including Ethereum, XRP, and more. However, since a Bitcoin ETF is merely an investment fund that tracks Bitcoin’s price and not a cryptocurrency, it cannot be traded for other crypto.
Takeaways
Bitcoin ETFs allow people to gain exposure to cryptocurrency market fluctuations without actually holding Bitcoin. However, note that it is important to remember that Bitcoin ETFs aren’t always available. It depends on the country and its laws. Before deciding to invest, investors should carefully think about all the factors, such as fees, how accurate the tracking is, and the ETF’s custodian arrangements.
