Michelle Legge
By Michelle LeggeHead of Crypto Tax Education
Updated Jun 27, 2024
This article has been fact checked and reviewed as per our editorial policy.

Bitcoin ETFs: What Are They and How Do They Work

Bitcoin ETFs (exchange-traded funds) are the hot topic of the financial world given the SEC's recent approval, but what is a Bitcoin ETF, how do they work and where can you invest in them?

What is a Bitcoin ETF?

  • Exchange-traded funds (ETFs) are investment funds that are traded on stock exchanges, much like individual stocks.

  • They are designed to track the performance of a specific index, commodity, or basket of assets.

  • ETFs provide investors with the diversification of a mutual fund and the flexibility of a stock, making them a popular choice for various investment strategies.

  • A Bitcoin ETF allows investors to gain exposure to crypto without needing to consider a digital wallet, exchange, or self-custody. This allows investors to access crypto in a simple way that may be familiar to them.

What are the different types of Bitcoin ETFs?

There are several types of crypto ETFs, each catering to different investment objectives. Broadly, ETFs can be categorized into:

Spot Bitcoin ETFs

ETF directly holds the underlying asset which reflects the overall value of the ETF. The price of the underlying holdings (e.g. Bitcoin) will generally reflect in the value of the ETF.

Futures Bitcoin ETFs

Unlike spot ETFs, futures ETFs do not hold underlying assets directly. Instead, the fund engages in futures contracts to gain exposure to the asset's price movements. These contracts are commitments to buy or sell the asset at a predetermined price at a specified time in the future.

Whilst crypto-related ETFs currently exist as futures ETFs, they do not have any direct exposure to crypto markets and therefore the spot ETFs are highly anticipated within the crypto industry. 

Read next: Learn about Ethereum ETFs

Does the SEC regulate Bitcoin ETFs?

On January 10, 2024, the SEC released a statement, letting investors know a number of spot Bitcoin exchange-traded products (ETP) shares had been approved for listing.

Read next: Does the SEC regulate crypto?

What are the advantages of Bitcoin ETFs?

Bitcoin ETFs come with unique advantages, including:

  • Accessibility: Trade Bitcoin through standard brokerage accounts on stock exchanges.

  • Regulation: Benefit from oversight and regulation in traditional financial markets.

  • Diversification: Add a cryptocurrency asset class to diversify your investment portfolio.

  • Simplicity: Gain exposure to Bitcoin's value without the need to manage and secure the actual digital coins.

  • Liquidity: Bitcoin ETFs offer liquidity, making it easier to buy and sell shares on the stock market.

What are the risks of Bitcoin ETFs?

Like all financial investments, Bitcoin ETFs also come with risks including:

  • Market volatility: Bitcoin is known for its significant price fluctuations, which can lead to substantial losses.

  • Regulatory changes: Future regulatory changes could impact the legality and operations of Bitcoin ETFs.

  • Counterparty risk: Dependence on the ETF provider to manage and secure underlying assets effectively.

  • Tracking error: The ETF might not perfectly track the price of Bitcoin due to management fees and operational costs.

Where can I invest in Bitcoin ETFs?

There are a number of platforms both in the US and internationally offering both futures and spot Bitcoin ETFs. Some of the most popular include:

IssuerETF NameType
GrayscaleGrayscale Bitcoin TrustSpot
BlackRockiShares Bitcoin TrustSpot
FidelityWise Origin Bitcoin Trust by FidelitySpot
ProSharesProShares Bitcoin Strategy ETFFutures
VanEckVanEck Bitcoin Strategy ETFFutures
Ark/21 SharesARK 21Shares Active Bitcoin Futures Strategy ETFFutures

Don't forget the tax bill

Like other financial investments, Bitcoin ETFs are subject to taxation. Generally, you will pay Capital Gains Tax on any gain from spot ETFs.

Koinly is a Bitcoin ETF calculator. We've got a dedicated guide to crypto ETF taxes where you can learn more about how Bitcoin ETFs are taxed.

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FAQs

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