What Is a Bitcoin ETF, and Why Does Everyone from BlackRock to Grayscale Want One?

A spot Bitcoin ETF creates a simple, legally compliant way to trade the price of Bitcoin, accessible on markets that investors are already familiar with.

Many of the crypto-curious still view buying Bitcoin from a crypto exchange as an intimidating and opaque process. The technical aspects of holding Bitcoin—such as crypto wallets, Bitcoin addresses and private keys—are confusing to newcomers, and scare some investors away.

All of this has intensified the appeal of a Bitcoin ETF, or exchange-traded fund. In the U.S., major financial institutions like BlackRock, Fidelity, and Invesco have applied with the U.S. Securities and Exchange Commission (SEC) to launch ETFs. As of January 2024, the Securities and Exchange Commission (SEC) has yet to approve a spot Bitcoin ETF.

On the other hand, Grayscale’s two-year battle to launch a Bitcoin ETF may finally be turning a corner. In August 2023, the United States Court of Appeals for the DC Circuit sided with Grayscale over the U.S. Securities and Exchange Commission (SEC) in the crypto firm’s quest to launch a Bitcoin ETF; in October 2023, the regulator was ordered to review Grayscale’s application.

In late 2023, SEC chair Gary Gensler said that the regulator was “taking a new look” at Bitcoin ETF applications, amid a flurry of meetings between the SEC and more than a dozen hopefuls. Analysts from JP Morgan and Bloomberg have pointed to a strong chance that one or more Bitcoin ETFs will be approved in January 2024.

Other countries have been quicker off the mark, with Bitcoin ETFs launching in Canada, Brazil and Europe.

What is an ETF?

• 💸 An ETF is an investment vehicle that is publicly traded, like a stock, but tracks the performance of an underlying asset or index, rather than one company.
• 🛢️ An ETF is a way for investors to get exposure to the value of its underlying asset, like gold or oil.
• 📈 ETFs trade on a traditional stock exchange, and their value should rise when the asset increases in price, and fall when it decreases.

Did you know?

The first ETF launched in 1993, and they became popular as a way for retail investors to invest in a basket of assets at once. If you wanted to invest in 500 of the largest companies in America at once, you could buy shares in a S&P 500 ETF.

A Bitcoin ETF works in much the same way as any other ETF. Investors buy shares in the ETF through whatever brokerage they buy stocks, and can trade them the same way they’d trade shares in Apple or Tesla.

Bitcoin ETFs track the current price of Bitcoin, and should act in lockstep with Bitcoin’s price swings.

Why the need for a Bitcoin ETF?

So, why wouldn’t investors just buy Bitcoin?

For most regular retail investors, Bitcoin and cryptocurrencies in general still look risky.

Besides having unclear regulations around them, owning Bitcoin requires keeping a Bitcoin wallet and trusting crypto exchanges, which are still uncharted territory for people unfamiliar with the space and require a certain level of self-education.

Holding Bitcoin places the burden of security squarely on you, making you responsible for keeping your own private keys safe (unless you want to entrust them to the exchange). This may mean buying a hardware wallet to protect purchased Bitcoin, or storing private keys in a secure manner. You’d also have to work out how to file taxes for sales of Bitcoin that resulted in capital gains.

With a Bitcoin ETF, investors need not worry about private keys, storage, or security. They own shares in the ETF just like their shares of stock, and can gain exposure to the cryptocurrency market without having to go through the hoops of purchasing and holding crypto.

And to put it plainly, that is an extremely appealing proposition for many regular folks—as well as sophisticated institutional investors.

That’s why so many hedge funds and other investment firms have filed applications with the U.S. Securities and Exchange Commission (SEC) for Bitcoin ETFs. Gemini founders Cameron and Tyler Winklevoss were first out of the gate with an application for the Winklevoss Bitcoin Trust in 2013. In 2018, the U.S. Patent and Trademark Office awarded the Winklevoss brothers a patent for “exchange-traded products.” Others soon followed, but in the ten years since the Winklevoss twins’ attempt, the SEC has yet to approve any application for a spot Bitcoin ETF.

How does a Bitcoin ETF work?

A Bitcoin ETF is managed by a firm that buys and holds the actual Bitcoin; the price is pegged to the Bitcoin held in the fund. The firm lists the ETF on a traditional stock exchange, and you, the investor, trade the ETF just as you would any other stock. Bitcoin ETFs also offer new types of trading opportunities, including short-selling, where investors can bet against Bitcoin.

But there are also some key differences between a Bitcoin ETF and other ETFs.

First, some ETFs, like those that track the S&P 500, represent equity shares, so you get a cut of the dividends that any company in the ETF pay to their shareholders. When Tesla pays a dividend and you have shares in an ETF that includes Tesla, you get a (smaller) dividend. Bitcoin is decentralized, so that won’t happen with a Bitcoin ETF.

Second, just like with other ETFs, you have to pay fees to the company offering the ETF. But with a Bitcoin ETF, some portion of your fees would go to paying the custody and management fees for the purchase and storage of the Bitcoin that underlies the ETF.

A brief history of Bitcoin ETF progress

• July 2013: The Winklevoss Bitcoin Trust files the first Bitcoin ETF proposal.
• June 2018: The SEC rejects the Winklevoss’ second Bitcoin ETF proposal.
• October 2019: The SEC rejects Bitwise’s Bitcoin ETF proposal.
• February 2020: Wilshire Phoenix becomes the latest project to have its Bitcoin ETF project rejected by the SEC.
• September 2020: The world’s first Bitcoin ETF is listed on the Bermuda Stock Exchange.
• December 2020: VanEck files a proposal for a Bitcoin ETF, after pulling its previous proposals before formal rejection multiple times.
• February 2021: Canada’s first Bitcoin ETF launches, the Purpose Bitcoin ETF (BTCC). Two more would be approved in the same month: the Evolve Bitcoin ETF (EBIT) and the CI Galaxy Bitcoin ETF (BTCX).
• October 2021: Launch of the first U.S.-listed Bitcoin-linked ETF, the roShares Bitcoin Strategy ETF (BITO). It does not hold Bitcoin itself on its balance sheet, but tracks the price of Bitcoin through related assets.
• June 2023: The SEC approves the 2x Bitcoin Strategy ETF (BITX) from Volatility Shares and the first leveraged Bitcoin futures ETF.
• August 2023: London-based Jacobi Asset Management launches Europe’s first Bitcoin ETF.
• August 2023: A U.S. judge orders that the SEC’s denial of Grayscale’s application to convert its Grayscale Bitcoin Trust (GBTC) into a spot Bitcoin ETF be reviewed.
• October 2023: Following the SEC’s failure to appeal, the U.S. Court of Appeals formally orders the SEC to review Grayscale’s application.
• December 2023: SEC chair Gary Gensler stated that the regulator was “taking a new look” at applications for a spot Bitcoin ETF, and reviewing “between eight and a dozen filings.”

What’s so special about a Bitcoin ETF?

A Bitcoin ETF in the U.S. is expected to bring a new level of mainstream trustworthiness and acceptance to Bitcoin investing. In 2020 and 2021, big publicly traded companies including Square and Tesla bought Bitcoin as an investment for their balance sheets, which spurred new adoption—but the cryptocurrency is still seen by many conservative investors as a risky bet or even a gimmick.

The approval of a spot Bitcoin ETF by the SEC would mean that institutional investors can more easily speculate on the price of Bitcoin. It would functionally bring Bitcoin to Wall Street, with the Bitcoin ETF traded through the same places as Tesla stock, bonds, gold, oil, or any other traditional assets.

And it would likely be a huge boost to the price of Bitcoin.

Did you know?

Cannabis ETFs have become popular for many of the same reasons that Bitcoin ETFs have. Just like crypto, the marijuana industry is viewed as risky and uncertain by traditional investors who still want the opportunity to profit from it.

Disclaimer：

1. This article is reprinted from [decrypt]. All copyrights belong to the original author [Ki Chong Tran, Robert Stevens, Daniel Roberts and Stephen Graves]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.