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What Is a Bitcoin ETF & How Do You Start Investing in 2024?
Cryptocurrency has become more prevalent in recent years. Digital assets like Bitcoin and Ether have existed for a while, and most people know they exist. However, there are still some investors who are wary of the risks that come with volatile cryptocurrency markets.
There is a way investors can get involved with investing in cryptocurrency without worrying about the cryptocurrency markets as much, especially if they’re interested in Bitcoin: Bitcoin futures contracts exchange-traded funds.
In one package, Bitcoin exchange-traded funds combine two investment forms: cryptocurrency and ETFs. Bitcoin ETF aims to track the price of Bitcoin, exposing investors to the digital asset without themselves having to hold the physical asset.
In this article, you’ll learn about Bitcoin ETFs, how future contracts work, and the benefits and drawbacks of Bitcoin ETFs.
Table of Contents:
- What Is a Bitcoin ETF
- How Does Bitcoin ETF Work
- The History of Bitcoin Futures ETF in Australia
- The Benefits and Drawbacks of a Bitcoin ETF
- How to Invest in Australian Bitcoin ETFs
- How to Invest in International Bitcoin ETFs
- Final Thoughts
What Is a Bitcoin ETF? ➡️
Exchange-traded funds (ETFs) are a collection of securities that track an underlying index. ETFs can hold various investments, such as stocks, bonds, and cryptocurrency. ETFs will track a particular index, sector, commodity or other assets. Investors can buy and sell ETFs on the stock exchange. ETFs are used to track specific investment strategies.
Bitcoin ETF refers to spot Bitcoin ETF or a Bitcoin Futures ETF. A Bitcoin ETF acts as an investment vehicle that tracks Bitcoin, traded on traditional exchanges and unavailable on cryptocurrency exchanges. Bitcoin ETF allows investors to gain exposure to Bitcoin without signing up or physically holding the asset in a crypto wallet or using a cryptocurrency exchange.
The Australian Securities and Investment Commission (ASIC) regulates all Bitcoin ETFs in Australia.
How Does Bitcoin ETF Work? 🔎️
There are two methods for investors to gain access to the cryptocurrency Bitcoin through ETFs: spot Bitcoin ETFs and Bitcoin futures ETFs.
- Spot Bitcoin ETF: Backed by physical Bitcoins that underpin the value of the ETF. If the value of the coin backing the ETF increases, the value of your investment is likely to increase, too. Physically backed Bitcoin ETF is the most direct way of investing in Bitcoin without holding or using a cryptocurrency exchange. ETFs have limited trading hours as they’re only available through regulated securities exchanges and not a 24/7 active crypto market.
- Bitcoin futures ETFs: Bitcoin futures contracts don’t have the coin as an underlying asset. Instead, the fund holds future contracts over Bitcoin instead of the actual coin. Bitcoin futures allow investors to profit from rising prices through an agreement (contract) that sets a fixed price for Bitcoin and a future date for receiving it. There are no exposure risks as Bitcoin futures contracts don’t hold Bitcoin.
The History of Bitcoin Futures ETF in Australia 📝️
After the launch and early trading of the ProShares Bitcoin Strategy ETF (BITO) in the United States in October 2021, ASIC issued guidelines to launch ETFs that track the price of Bitcoin, Ethereum and other digital assets in Australia. The guidelines addressed market security, pricing, and transparency for Australian investors.
In May 2022, Australia’s first Bitcoin spot ETFs launched, a huge milestone for Australian cryptocurrency investors. Australia’s regulators approved spot ETFs in the world’s two largest cryptocurrencies: Ether and Bitcoin.
In 2023/24, the market for Bitcoin ETFs is still in its early stages of growth. As these are new assets to the Australian market, we are still in the early days of investing in cryptocurrency ETFs.
The Benefits and Drawbacks of a Bitcoin ETF
This section will explore the benefits and drawbacks of cryptocurrency ETFs and, more specifically, Bitcoin ETFs.
- Diversification: An exchange fund can hold more than one asset, so with the Bitcoin ETF, it can hold digital assets, stocks and more. Having multiple holdings allows investors to expand their portfolios and manage risk. Bitcoin ETF will enable investors to diversify their existing equity portfolios.
- Convenience: You don’t have to learn how to use cryptocurrency exchanges or how Bitcoin works. Some risks come with owning digital money directly; having a Bitcoin ETF protects you from those risks. Bitcoin ETF also simplifies investing in virtual assets, which may be ideal for a beginner trader.
- Tax efficiency: Digital assets are decentralised and lack a regulatory body. Most pension funds don’t allow the purchase of cryptocurrency. However, a Bitcoin ETF traded on a traditional exchange is likely subject to tax regulators, making it eligible for tax efficiency.
- Security: When you directly own cryptocurrency, it’s stored in a wallet with a security key that only you know. If that key is lost, there is no way to access the cryptocurrency in the wallet. When you buy shares with Crypto ETFs, you remove the need to store keys, giving you easier access to your shares.
- Inaccuracy: When an ETF has multiple holdings, the value of exchange-traded funds may accurately reflect a 0% rise in Bitcoin’s price due to other holdings. Although ETF provides leverage to the value of digital money, it may not accurately track its price.
- Lack of ownership: Digital money through exchange-traded funds is regulated by the government, so you wouldn’t benefit from the unregulated perks that come with Bitcoin, such as investor privacy, as digital assets run on blockchain technology.
- No 24/7 trading: You can access Bitcoin ETFs on regular asset exchanges instead of in crypto markets, so they’re limited to trading times and days. In contrast, the crypto market is accessible 24/7.
How to Invest in Australian Bitcoin ETFs 💰️
Choosing to buy or sell in Bitcoin ETFs in Australia is the same process as buying stocks and shares. It’s as simple as opening a brokerage account with your preferred Australian broker, funding it, and purchasing the ETFs you want.
You can find various ETFs on the Australian Securities Exchange (ASX) and Cboe Australia (CXA). However, your options for cryptocurrency ETFs are limited. Your options are limited even more so if it’s Bitcoin ETFs you want to invest in.
The Bitcoin ETFs that are available on ASX or CXA are:
- Global X 21 Shares Bitcoin ETF (EBTC): Provides investors a return of performance that tracks bitcoin price in Australian dollars. EBTC provides shareholders with interest in Coinbase’s cold storage of Bitcoin. You can find EBTC on ASX.
- 3iQ CoinShares Bitcoin Feeder ETF (BT3Q): An Australian feeder fund that gives investors access to a larger fund: 3iQ CoinShares Bitcoin ETF (BTCQ). BT3Q tracks daily Bitcoin price movements in US dollars. You can find BTCQ on Cboe Australia.
If you’re interested in looking at other cryptocurrencies ETFs, there are a few more options to consider:
- BetaShares Crypto Innovators ETF (CRYP): CRYP tracks the performance of an index that provides exposure to stocks of companies involved in the cryptocurrency economy. You can find it on the ASX.
- Global Ex 21 Shares Ethereum ETF (EETH): Provides investors with a return of performance that tracks Ether price in Australian dollars. EETH provides shareholders with interest in Coinbase’s cold storage of Ether. You can find EETH on ASX.
- 3iQ CoinShares Ether Feeder ETF (ET3Q): An Australian feeder fund that gives investors access to a larger fund: 3iQ CoinShares Ether ETF (ETHQ). BT3Q tracks daily Ether price movements in US dollars. You can find ETHQ on Cboe Australia.
How to Invest in International Bitcoin ETFs 🌐️
Due to limited options for Australian Bitcoin ETFs, some investors look at international ETFs instead to access a much more comprehensive range of assets to invest in. There are two methods of gaining international exposure through ETF investing.
- ASX ETFs: Investors can buy ETF units already investing in international shares on ASX. So, you don’t need to use any other stock exchange except the Australian ones. The choices are limited in comparison to the second option.
- Overseas stock exchange: Investors can directly seek out ETFs on overseas stock exchanges. For example, NASDAQ and the New York Stock Exchange offer thousands of ETFs, such as VanEck Bitcoin Strategy ETF and Valkyrie Bitcoin Strategy ETF (NASDAQ: BTF). Most brokers allow you to invest in overseas stock markets. You’ll need to look around for a broker that offers this service.
Both methods will give you access to international markets. The first one is limited but is a simple way to still benefit from global markets without seeking out other stock exchanges worldwide. If you want more variety in the ETFs you want to invest in, the second option allows you more freedom.
You may be unsure of what’s on the overseas market, so we’ve compiled a short list of options for you to consider.
International Bitcoin ETFs that are available:
- ProShares Bitcoin Strategy ETF (BITO): BITO is the world’s biggest crypto ETF and was the first Bitcoin ETF approved to trade in US markets. BITO is an actively managed fund that seeks capital appreciation through transparent exposure to Bitcoin futures contracts.
- VanEck Bitcoin Strategy ETF (XBTF): An actively managed fund that appreciates capital by investing in Bitcoin futures and assets like treasures and cash. XBTF is structured as a C-corp, so it has a tax-efficient structure.
- Valkyrie Bitcoin Strategy ETF (BTF): An actively managed ETF that spends almost 100% of its net assets in Bitcoin futures contracts. Other assets are held in US government securities, money market funds and corporate bonds.
Final Thoughts 💡️
Bitcoin ETFs are ideal for investors who want to invest in cryptocurrency without direct contact with cryptocurrency markets and without the need to hold the digital asset in a crypto wallet. So, if you’re already an investor who buys shares and stocks in Australia, you won’t have to change your investment approach much.
Cryptocurrency ETFs are tax-efficient, time-saving, and more accessible than directly purchasing a coin. So, if you’re on the fence about investing in Bitcoin, an exchange-traded fund may be the best option for a smooth introduction.
Frequently Asked Questions 📢️
Is Bitcoin ETF Worth It?
A Bitcoin ETF acts as an investment vehicle that tracks Bitcoin, traded on traditional exchanges and unavailable on cryptocurrency exchanges. Bitcoin ETF allows investors to gain exposure to Bitcoin without signing up or physically holding the asset in a crypto wallet or using a cryptocurrency exchange.
Is Owning a Bitcoin ETF the Same as Owning Bitcoin?
Owning a spot Bitcoin ETF is similar to owning Bitcoin, as it’s backed by physical Bitcoins that underpin the value of the ETF. Physically backed Bitcoin ETF is the most direct way of investing in Bitcoin without holding or using a cryptocurrency exchange.
What Are the Drawbacks of Bitcoin ETFs?
Like any investment, there are benefits and drawbacks. So, it’s only natural that you want to know what you’re getting into before investing. The disadvantages of Bitcoin ETFs include:
- Bitcoin ETFs are available on stocks and share exchanges instead of in crypto markets, so they’re limited to trading times and days. At the same time, the crypto market is accessible 24/7.
- When an ETF has multiple holdings, the value of exchange-traded funds may accurately reflect a 0% rise in Bitcoin’s price due to other holdings.
How Do You Invest in Bitcoin ETFs?
Investing in Bitcoin ETFs in Australia is the same as buying stocks and shares. It’s as simple as opening a brokerage account with your preferred Australian broker, funding it, and purchasing the ETFs you want. You can find various ETFs on the Australian Securities Exchange and Cboe Australia.
What Are the Benefits of Using Bitcoin ETFs?
There are several benefits of using Bitcoin ETFs, such as:
- An exchange fund can hold more than one asset, so with the Bitcoin ETF, it can hold digital assets, stocks and more. Bitcoin ETF allows investors to diversify their existing equity portfolios.
- You don’t have to learn how to use cryptocurrency exchanges or how Bitcoin works. Bitcoin ETF also simplifies investing in virtual assets, which may be ideal for a beginner trader.
- Bitcoin ETF traded on a traditional exchange is likely subject to tax regulators, making it eligible for tax efficiency.
- When you directly own cryptocurrency, it is stored in a wallet with a security key that only you know and can’t be replaced if lost. When you buy shares with Crypto ETFs, you remove the need to store keys, giving you easier access to your shares.
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