An Exchange-Traded Fund (ETF) is like a basket of assets like stocks, bonds, or cryptocurrencies, that investors buy shares of, similar to buying stocks. Instead of owning the actual assets yourself, you own a portion of the fund which holds those assets.
🤷How Does a Bitcoin ETF Work?
Spot Bitcoin ETF (Example: IBIT by BlackRock)
Imagine a fund manager buys 1,000 Bitcoins and stores them securely. This fund is then divided into shares, and each share represents a small fraction of those Bitcoins. If the price of Bitcoin rises, so does the value of each share.
👉You buy shares of this ETF on a regular stock exchange via your broker.
👉You don’t need to worry about wallets, private keys, or security risks of holding Bitcoin directly.
👉The ETF price moves almost in real-time with Bitcoin’s market price.
👉Market makers help maintain the link between ETF shares' price and the actual
Bitcoin price by creating or redeeming shares as demand changes.
👉Example: If Bitcoin is $30,000 and the ETF breaks the fund into 1 million shares, each share might be worth roughly $30 (minus fees).
Bitcoin Futures ETF (Example: BITO by ProShares)
Instead of holding Bitcoins directly, this ETF invests in futures contracts, which are agreements to buy or sell Bitcoin at a set price in the future.
👉The ETF’s price tracks Bitcoin’s expected future price, not the current price.
👉This involves less risk of theft or loss since no actual Bitcoin is held.
👉However, the ETF price can deviate from actual Bitcoin prices due to how futures expire and roll over.
👉Useful for investors wanting exposure without holding Bitcoin but aware of potential price disconnects compared to spot price.
Key Components Inside a Bitcoin ETF
👉Underlying Asset: Actual Bitcoin (spot ETFs) or Bitcoin futures contracts (futures ETFs).
👉Shares: Represent fractional ownership in the fund’s total Bitcoin holdings or futures contracts.
👉Custodians: Specialized entities manage and secure the underlying Bitcoin assets, often using “cold storage” (offline hardware wallets) to prevent hacking.
👉Market Makers: Facilitate liquidity and arbitrage to keep ETF prices aligned with Bitcoin’s market value.
👉Management Fees: Cover the fund operation costs, typically a small annual percentage.
Why Use Bitcoin ETFs?
👉Simplifies investing in Bitcoin with traditional brokerage accounts.
👉Avoids managing digital wallets and private keys.
👉Provides regulatory oversight and investor protections.
👉Allows Bitcoin exposure in retirement accounts and other traditional financial vehicles.
👉Easier liquidity compared to directly buying and selling Bitcoin on crypto exchanges.
