Bitcoin ETFs are exchange-traded funds that track the value of Bitcoin and trade on traditional market exchanges rather than cryptocurrency exchanges. They allow investors to invest in Bitcoin without using a crypto exchange while providing leverage to its price. ^[1][7]

Overview

In an exchange-traded fund (ETF) that tracks stocks, the stocks are purchased by the fund. These are the fund's holdings, and the company that bought them offers fractionalized shares on exchanges. ^[2]

A Bitcoin ETF would buy and hold Bitcoin, then offer fractional shares on an exchange for trading like a traditional ETF. ^[2]

As Bitcoin's price rose above several thousand dollars, retail and average investors lost the opportunity to invest in Bitcoin directly. Brokerages, responding to demand for investor access to Bitcoin, started to design Bitcoin exchange-traded funds. ^[2]

Applications with the Securities and Exchange Commission (SEC) for approval started in 2013 with the Winklevoss brothers. ^[4]

Bitcoin Futures ETF

A Bitcoin futures ETF is an Exchange-Traded Fund that doesn't necessarily rely on actual BTC held in wallets. Instead, it employs Bitcoin futures contracts as its foundational assets. The SEC has shown a preference for futures ETFs linked to the Chicago Mercantile Exchange’s (CME) Bitcoin futures, which are regulated financial instruments. ^[7]

In this setup, a Bitcoin futures ETF utilizes the CME’s Bitcoin Reference Rate (BRR) for pricing, in contrast to the spot price. The primary distinction between a Bitcoin physical ETF and a Bitcoin futures ETF lies in the source from which their respective prices are determined. ^[7]

Bitcoin Futures Contract

A futures contract is a standardized contract where two parties agree to exchange a specific quantity of assets on a specific day for a particular price. A Bitcoin futures contract is an agreement between two parties to exchange a contract unit of Bitcoin. ^[2]

Many Bitcoin ETFs hold futures contracts, which are derivative contracts to buy or sell an asset — in this case, Bitcoin — at some future date and at some agreed price. One example is ProShares Bitcoin Strategy ETF (BITO), which was the first of its kind when it launched in October 2021. ^[3]

Bitcoin ETF Approval

In 2013, the US SEC rejected the initial proposal of Bitcoin ETF by the Winklevoss twins, Cameron & Tyler Winklevoss. SEC is yet to approve a bitcoin ETF despite the many proposals from multiple companies including a second Winklevoss Twin ETF in 2018, one from Bitwise, five from Direxion, two from GraniteShares, etc. ^[5]

The main arguments given by the SEC for the repeat rejections have been that the Bitcoin market is too volatile, lacks sufficient surveillance, and is too easily manipulated.

In 2022, Canada’s financial regulator, the Ontario Securities Commission (OSC) approved the world’s first two bitcoin ETFs in quick succession. The Purpose Bitcoin ETF (BTCC) and the Evolve Bitcoin ETF (EBIT) are both physically settled ETFs. ^[5]

In June 2023, BlackRock, an asset management firm, added its application to the bundle of Bitcoin ETF filings being reviewed by the SEC, creating renewed interest among investors in and out of the crypto space. The company later added a “surveillance-sharing agreement” with cryptocurrency exchange Coinbase following reports the SEC could be more open to accepting an ETF application under such conditions. ^[6]

Under SEC guidelines, the federal regulator has the authority to delay ETF applications for up to 240 days — by opening them to public comment or otherwise — from the first filing in the Federal Register. This sets deadlines for Bitcoin ETF approval to early 2024. ^[6]

On August 31, 2023, the SEC announced delays until October on making a decision on all of the spot bitcoin exchange-traded fund (ETF) applications filed by applicants including BlackRock, WisdomTree, Invesco Galaxy, Wise Origin, VanEck, Bitwise, and Valkyrie Digital Assets. ^[8]

On August 31, 2023, Ark Invest- an investment firm, in its report highlighted positive market trends in Grayscale Bitcoin Trust (GBTC), indicating increasing confidence in spot Bitcoin ETF approval. Ark Invest’s report attributed the rising price of GBTC to positive market sentiment following Grayscale’s recent court victory. ^[9][10]

On August 29, the US Court of Appeals ruled that the SEC must review and reconsider the terms of its rejection of Grayscale Bitcoin Trust’s (GBTC’s) application to convert into a spot Bitcoin ETF. On that same day, Ark Invest noticed a favorable change in market activity.

“That day, GBTC’s discount- to-NAV increased from -24% to -18%, suggesting market optimism that the odds of a Bitcoin spot ETF in the short term have increased.”^[10]

On September 5, 2023, Grayscale Investments urged the U.S. SEC to quickly approve its proposed exchange-traded fund (ETF) that would track bitcoin, following the crypto asset manager's court victory against the agency. ^[11]

"We hope you will agree that the best use of resources now is for the (SEC) to issue an order approving" the product, Grayscale's law firm DavisPolk wrote in a letter which was filed with the SEC on September 5.^[11]