A Bitcoin ETF combines two prevalent forms of investment, ETFs and cryptocurrencies, into one package. A Bitcoin ETF aims to track the Bitcoin price, exposing investors to the digital asset without themselves directly holding the physical asset. There are two main different types of Bitcoin ETFs: “spot” Bitcoin ETFs and futures-based Bitcoin ETFs.
On May 12, 2022, Australia’s first spot Bitcoin ETFs were launched.
What is a Bitcoin ETF?
When investors refer to a ‘Bitcoin ETF,’ they are usually referring to a ‘spot Bitcoin ETF’.
A Bitcoin exchange-traded fund is an investment vehicle that seeks to track the price of Bitcoin. Bitcoin ETFs are traded on traditional regulated securities exchanges and are not available on cryptocurrency exchanges.
Any Bitcoin ETF offered in Australia is regulated by the Australian Securities and Investment Commission (ASIC). Investors can gain exposure to the digital asset without the hassle of having to sign up to a cryptocurrency exchange and creating a crypto wallet.
How Does a Bitcoin ETF work?
Investors can gain access to Bitcoin directly or indirectly through two different methods: spot Bitcoin ETFs and Bitcoin futures ETFs. Here is how each product works.
1. Spot Bitcoin ETFs
A spot Bitcoin ETF is backed by physical Bitcoins that underpin the value of the ETF. If the value of the digital coins backing the ETF rises, the value of your investment can generally be expected to increase. In simple terms, if the price of Bitcoin increases, the investment should too.
A physically-backed Bitcoin ETF is the most direct way of investing in Bitcoin without buying Bitcoin on a crypto exchange and holding the coins. In this case, the fund holds them.
There are some negatives though. For example, investors are limited to trading an ETF within traditional market hours for regulated securities exchanges, unlike crypto markets which trade 24/7.
2. Bitcoin futures ETFs
A Bitcoin futures ETF does not hold any bitcoin as the underlying assets; instead, the fund holds futures contracts over Bitcoin instead of the actual coin.
A futures contract potentially allows investors to profit from rising prices through an agreement that sets a fixed price and a future date for delivery of an asset, or the cash equivalent value.
As a futures-based Bitcoin ETF does not hold Bitcoin, it is not directly exposed to the risks associated with storing the cryptocurrency.
Investing in Bitcoin futures can result in Bitcoin futures trading at a premium or discount compared to the spot price, largely due to the process of “rolling” futures contracts at regular intervals in order to maintain investment exposure, which can result in gains or losses to the investor.
Bitcoin ETF Approvals in the U.S. and Australia
Approvals in the U.S.
In 2017, the Securities and Exchange Commission (SEC) turned down the first petition to launch a Bitcoin spot ETF. Later attempts with a futures-based fund had more success. The ProShares Bitcoin Strategy ETF, known as BITO, began trading in October 2021.
BITO aims to track the price of Bitcoin futures contracts traded at the Chicago Mercantile Exchange (CME). According to news reports, BITO grew at ‘record speed’ following the launch, quickly reaching US$1 billion in assets.
To date, the SEC has not approved a Bitcoin spot ETF.
Approvals in Australia
Shortly after the launch of BITO, ASIC issued guidelines for the launch of ETFs that seek to track the price of digital assets such as Bitcoin and Ethereum. These guidelines addressed issues around market security, transparency, and pricing to better protect Australian investors.
On May 12, 2022, Australia’s first Bitcoin spot ETFs were launched, representing a significant milestone for Australian crypto investors.
It is noted that an Australian ETF providing exposure to companies supporting the crypto economy has been available to investors since November 2021. BetaShares’ crypto equities ETF, ASX: CRYP, broke records for flows on launch day, reaching net inflows of A$39.7 million.
The Advantages and Disadvantages of a Bitcoin ETF
|Spot Bitcoin ETF||
|Futures Bitcoin ETF||
BetaShares Crypto Equities ETF
The BetaShares Crypto Innovators ETF (CRYP) was launched in November 2021 and aims to track the performance of the Bitwise Crypto Innovators Index. CRYP was the first Australian crypto equities ETF and provides investors with focused exposure to the crypto economy, including companies building crypto mining equipment, crypto trading venues, and other key services that allow the crypto economy to thrive.
The Bitwise Index consists of a range of publicly-traded companies substantially involved in crypto-specific activities. CRYP captures key crypto companies that are involved in the following:
- Trading and custody: Crypto brokerages and exchanges like Coinbase.
- Mining: Bitcoin mining companies like RIOT Blockchain that help to secure the blockchain and process transactions.
- Hardware and infrastructure: Semiconductor companies that supply bitcoin miners with semiconductor chips.
- Asset management: Asset managers, like Galaxy Digital, that help institutional investors access the space.
- Treasury holdings: Companies like MicroStrategy that hold Bitcoin as an asset on their balance sheet as part of their core allocation strategy.
How to Invest?
The BetaShares Crypto Innovators ETF (CRYP) is traded on the ASX and is available through online brokerage accounts. Investors can find more information, such as the fund objective, key facts, holdings, performance, distributions, announcements, and resources, by visiting the fund page.
A spot Bitcoin ETF provides institutional and retail investors with a mechanism to invest in Bitcoin without storing the keys for a Bitcoin wallet, signing up to a crypto exchange or worrying about the security of a crypto exchange.
The launch of Australia’s first spot Bitcoin ETFs is a milestone for Australian investors and the Bitcoin community. It provides investors with regulatory clarity, but it also opens the door for superannuation funds wanting to invest in the sector.
Bitcoin remains a very volatile asset to invest in. To learn more about ETFs and how they could help you achieve your investment goals, visit our BetaShares Education Centre. Check out the BetaShares crypto glossary, and subscribe to our new weekly crypto newsletter, Off the Chain.
Decay – this results in losses attributed to the underlying asset such as futures roll which may not be apparent in an underlying spot exposure.
Divergence – when the price of an asset is moving contrary to the underlying asset.
Investing in crypto assets or companies servicing crypto asset markets should be considered very high risk. Exposure to crypto assets involves substantially higher risk when compared to traditional investments due to their speculative nature and the very high volatility of crypto asset markets.
Investing in crypto assets or crypto-focused companies is not suitable for all investors and should only be considered by investors who (i) fully understand their features and risks or after consulting a professional financial adviser, and (ii) who have a very high tolerance for risk and the capacity to absorb a rapid loss of some or all of their investment.
Any investment in crypto assets or crypto-focused companies should only be considered as a very small component of an investor’s overall portfolio.
For more information on risks and other features of CRYP, please see the Target Market Determination (TMD) and Product Disclosure Statement, available at www.betashares.com.au. CRYP will not invest in crypto assets directly, and will not track price movements of any crypto assets.
BetaShares Capital Limited (ABN 78 139 566 868, AFSL 341181) (“BetaShares”) is the issuer of this information. This information is general only, is not personal financial advice, and is not a recommendation to buy, hold or sell any investment or adopt any particular investment strategy. It does not take into account any person’s financial objectives, situation or needs. Before making a decision to invest in any BetaShares Fund you should obtain and read a copy of the relevant PDS available from www.betashares.com.au or by calling 1300 487 577 and obtain financial advice in light of your individual circumstances. You may also wish to consider the relevant Target Market Determination (TMD) which sets out the class of consumers that comprise the target market for the BetaShares Fund and is available at www.betashares.com.au/target-market-determinations. To the extent permitted by law BetaShares accepts no liability for any loss from reliance on this information.
Future results are impossible to predict and involve risks and uncertainties outside the control of BetaShares. This information may include views, opinions, estimates and projections (“forward looking statements”) which are, by their very nature, subject to various risks and uncertainties. Actual events or results may differ materially, positively or negatively, from those reflected or contemplated in such statements. Readers must not place undue reliance on such statements. BetaShares does not undertake any obligation to update forward looking statements to reflect events or circumstances after the date such statements are made or to reflect the occurrence of unanticipated events.