The gradual adoption of Bitcoin is driving a demand for new and different financial instruments, such as Bitcoin ETFs. The introduction of these ETFs brings its share of twists and turns to each cycle and raises a whole series of questions.

In this article, we explore everything you need to know about Bitcoin ETFs. We discuss their nature, the different types of ETFs available, their advantages and disadvantages for the investor, and the potential repercussions of introducing a Bitcoin Spot ETF into the market.

What is an ETF?

ETF is the acronym for” Exchange Traded Fund ”, which is generally translated into French as” Exchange-traded fund ”. An ETF is a type of financial instrument whose objective is to monitor the performance of a stock market index as closely as possible. It works like a traditional investment fund, except that it is listed on a stock exchange and trades like a stock.

Concretely, an ETF is created by combining one or more underlying assets, such as shares, bonds, stock market indices or even commodities. For example, a CAC 40 ETF aims to replicate the evolution of the value of the CAC 40 index, both up and down. This index itself reflects the performance of the 40 most important shares listed on Euronext Paris. The company managing an ETF manages to follow the index by investing in the same values and in the same proportions as the index.

For the investor, the main advantage of an ETF is to allow access to a diversified portfolio of securities, while providing the flexibility of an exchange on the stock market. In addition, this type of financial product often has high liquidity, that is, they can be bought and sold quickly on the market. In return, the company managing an ETF charges fees on the investments of its clients.

What is a Bitcoin ETF?

A Bitcoin ETF is a publicly traded fund, designed either to track the performance of Bitcoin or to allow exposure to its ecosystem. Like other ETFs, it offers investors the opportunity to gain exposure to the underlying asset, bitcoin, without requiring a direct purchase. However, there are many different types of Bitcoin ETFs and not all have the same performance.

What are the different types of Bitcoin ETFs?

The first is the Bitcoin Spot ETF. It is distinguished by its simplicity, as it provides direct exposure to the current BTC price (or “spot”). In this case, the company managing the ETF holds a quantity of real bitcoins, in return for the transactions carried out on the units of its fund. This method aims to reflect the market price as accurately as possible, while limiting counterparty risk to the company that manages the ETF.

To date, the SEC, which is the financial market authority in the United States (the equivalent of the AMF in France), has not yet approved a Spot ETF for bitcoin, mainly for fear of market manipulation. However, in 2023, we saw a surge in the number of these requests, with validation deadlines approaching for the SEC. The first expected decision concerns the application by 21Shares in partnership with ARK Invest, for which a verdict must be issued before January 10, 2024. As for the BlackRock Trust, which is in fact a Bitcoin Spot ETF, the decision is expected no later than March 15, 2024.

In the past, the SEC had already approved Trusts (with no possible arbitration, like GBTC) and Bitcoin Futures ETFs. This other type of ETF invests in bitcoin futures contracts, thus offering indirect exposure via financial derivatives. Bitcoin Futures ETFs have the advantage of greater flexibility and liquidity compared to Spot ETFs. However, their value may deviate from the real price of Bitcoin, and so they may have differences in performance. They also have additional counterparty risks.

A distinction is made between classic Bitcoin Futures ETFs, which aim to take advantage of rising prices, and Bitcoin Short ETFs, which allow you to speculate on falling prices. Some of these ETFs may include leverage, in order to amplify price changes.

In addition to these two main categories, there are a multitude of other ETFs that allow you to get exposure to bitcoin or its ecosystem. For example, Bitcoin Mining ETFs invest in mining companies that are listed on the stock exchange. There are also ETFs established on various cryptocurrencies. Finally, there are general ETFs that offer a diversified portfolio with shares from companies closely or indirectly linked to Bitcoin, such as MicroStrategy, Block (formerly Square), TSMC, or even Marathon Digital.

What are the pros and cons of investing in a Bitcoin ETF?

Investing in an ETF on a traditional market offers numerous advantages, but in the case of an asset as specific as bitcoin, these interests may be less obvious to the individual investor.

The advantages of ETFs compared to buying real bitcoin directly lie mainly in the regulatory and fiscal areas. Some companies, which cannot directly hold bitcoin, can use an ETF to gain exposure to this asset without breaking the law. For other companies, it can also make it easier to manage bitcoin exposure accounts. In addition, depending on the country, an ETF could offer tax advantages compared to directly holding bitcoin. For example, in France, losses on securities such as ETFs can be carried forward to the next fiscal year, unlike losses on cryptos.

However, these few small advantages are outweighed by numerous disadvantages. Compared to holding bitcoin directly on an exchange, using an ETF involves annual management fees, while these generally only charge for the buying and selling service. In addition, the counterpart to a Bitcoin Spot ETF is often based on an American company, which does not meet the same standards as a PSAN in France. For a Bitcoin Futures ETF, the counterparty risk is even higher since it is based on numerous financial derivatives.

Moreover, if we compare an ETF with bitcoins held in a wallet in autonomous security (self custody), then the two investments have absolutely nothing in common. By managing your Bitcoin keys yourself, you fully benefit from the advantages of Satoshi Nakamoto's invention: freedom of storage and management, absence of counterparty risk and fractional reserve, protection of your privacy, and, with a Bitcoin node, incensurability of transactions.

Yes, the Bitcoin ETF has the advantage of being simple and accessible and it allows you to get exposure to Bitcoin without the need to own it. But nowadays, it's getting easier and easier to acquire real bitcoin. In addition, autonomous security is gradually becoming simpler and less risky. Thanks to recent innovations such as Miniscript, it is now possible to use wallets with recovery keys and time locks, all integrated into user-friendly user interfaces. These improvements greatly decrease the risks of loss and theft for the individual user, while ensuring all the benefits of Satoshi Nakamoto's invention.

➤ Discover the advantages of the DCA method for saving bitcoin.

What are the challenges behind the arrival of Bitcoin ETFs?

Although the introduction of a Bitcoin Spot ETF is not necessarily advantageous for the individual investor in France, this event could have significant repercussions.

On the bright side, if the SEC approves a Bitcoin Spot ETF, it would lend greater legitimacy and credibility to bitcoin as an investment asset, beyond its role as a currency. The involvement of large fund management companies such as BlackRock, Invesco, Invesco, VanEck, or WisdomTree, could strengthen the confidence of investors, especially institutional investors.

Additionally, a Bitcoin Spot ETF would make bitcoin more accessible, thereby broadening the investor base by including those who are reluctant to invest directly in cryptocurrency. This could increase demand and, potentially, the price of Bitcoin. The entry of major players like BlackRock could also contribute to the stabilization of the market, ultimately promoting the wider adoption of Bitcoin as a currency in everyday life.

However, negative effects are also possible. In the short term, a sudden inflow of capital could lead to increased volatility. The entry of major financial players could also lead to a concentration of capital, increasing the risks of manipulation and influence on the development of the protocol.

Finally, significant market growth could worry regulators, leading to increased surveillance and potentially even more restrictive regulations, affecting freedom and innovation in the ecosystem. More broadly, the growing involvement of traditional financial institutions obviously represents a dilution of the original cypherpunk ideal and the values it embodies. That is why it is crucial to continue to learn about the technical functioning of Bitcoin and to learn how to use it freely and independently.

➤ Discover how to secure your Bitcoin keys yourself.

Conclusion

A Bitcoin ETF is a financial instrument designed to provide exposure, directly or indirectly, to BTC price. It can come in a multitude of forms, including Spot and Futures ETFs. Spot ETFs seek to replicate the price by directly holding bitcoin, while ETFs Futures do so via futures contracts. In addition, there are thematic ETFs linked to Bitcoin, which invest in shares of mining companies or other companies more or less linked to the protocol. To date, while there are a variety of Bitcoin ETFs already available, no Spot ETFs have yet received SEC approval.

The likely introduction of Bitcoin Spot ETFs raises various questions. On the one hand, they could improve the accessibility and legitimacy of Bitcoin, thus promoting its adoption by a wider audience. On the other hand, they could introduce complex market dynamics and regulatory issues that could affect the ecosystem.

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