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What Are Bitcoin ETFs and Why Are They Significant?

March 26, 2021 • April Miller

Cryptocurrencies like Bitcoin present an interesting opportunity for investors but come with some risks. To newcomers, crypto can seem unsecure or overly complicated, pushing them away from investing in it. Bitcoin ETFs give investors a middle ground, but what exactly are they?

An ETF, or exchange-traded fund, is an investment option that involves a collection of securities instead of a specific security itself. For example, the SDPR S&P 500 ETF lets you invest in the S&P 500 index instead of the specific companies. Bitcoin ETFs are the same thing, but with Bitcoin.

With a Bitcoin ETF, you can invest in Bitcoin without owning any actual bitcoins. Here’s a closer look at how that works and why it matters.

How Do Bitcoin ETFs Work?

Normally, if you wanted to invest in Bitcoin, you’d buy some coins from an exchange. As supply and demand change, the value of the bitcoins you hold will also shift. If you didn’t want to buy and sell actual bitcoins, you could buy into an ETF.

Your ETF share’s value will mimic the fluctuations in Bitcoin itself. When the price of Bitcoin goes up or down, so will the value of your share. Essentially, you’re investing in the value of Bitcoin as a concept instead of the tokens themselves.

These ETFs give investors a relatively safe, easy way to diversify their portfolio. Since crypto like Bitcoin is relatively independent of traditional stock markets, it can be a valuable investment.

Investing in Bitcoin ETFs vs. Bitcoin Itself

At this point, you may wonder why someone would choose an ETF over buying actual bitcoins. After all, you can spend bitcoins on goods or services, but you can’t do that with an ETF share. ETFs are preferable if you’re less interested in Bitcoin as a currency and more interested in it as an investment.

You can’t spend an ETF share, but you also don’t have to worry about crypto management. Owning bitcoins means having to deal with some security issues. People have lost more than 3 million bitcoins overall from problems like getting locked out of their wallets.

Wallet security aside, many people distrust the exchanges where you buy and sell bitcoins. These could have security issues, unfair exchange rates or hidden fees that turn away investors. Bitcoin ETFs enable investors to profit off of Bitcoin without dealing with these sites.

If nothing else, more investors understand ETFs than they understand cryptocurrency. ETFs are a much older, more established concept than crypto, so people may be more comfortable with them.

Lingering Regulatory Issues

These ETFs could help push Bitcoin into the mainstream by attracting investors. There’s still one considerable hurdle in their way, though. For American investors to buy ETF shares, these SEC has to approve the ETF, which creates a problem.

As of right now, there are no SEC-approved cryptocurrency ETFs, stopping American investors from capitalizing on these opportunities. Other countries’ stock markets have approved crypto ETFs, but not the U.S. Until the SEC approves one, Bitcoin may lack support from investors in the world’s largest economy.

As more people have embraced Bitcoin, it’s become more legitimate. If this trend continues, it may not be long before the SEC approves a Bitcoin ETF. Given crypto’s recent performance, this shift could come sooner rather than later.

The Crypto Market Is Still Young

Cryptocurrency is still in its earliest stages. Bitcoin was the very first cryptocurrency, and it didn’t emerge until 2009. Since crypto is so young, it may take a while before it catches the eyes of many investors.

Regulatory agencies like the SEC need to settle their stance on cryptocurrency before it becomes a more viable investment. Until then, Bitcoin ETFs are a promising idea, just not accessible for U.S. investors.

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