What is a Bitcoin ETF? Complete Beginner's Guide
Learn what Bitcoin ETFs are, how they work, and why they matter for cryptocurrency investors. Understand the difference between spot and futures ETFs.
What is a Bitcoin ETF?
A Bitcoin ETF (Exchange-Traded Fund) is an investment fund that tracks the price of Bitcoin and trades on traditional stock exchanges like the TSX or NYSE. Instead of buying Bitcoin directly through a cryptocurrency exchange, investors can buy shares of a Bitcoin ETF through their regular brokerage account.
Bitcoin ETFs provide a regulated, familiar way to gain exposure to Bitcoin’s price movements without the complexities of owning cryptocurrency directly.
How Bitcoin ETFs Work
Bitcoin ETFs operate similarly to other ETFs you might already own, such as those tracking the S&P 500 or gold. The fund manager holds the underlying asset (or derivatives representing it) and issues shares that trade on stock exchanges.
Spot Bitcoin ETFs
Spot Bitcoin ETFs hold actual Bitcoin in custody. When you buy shares of a spot Bitcoin ETF:
- The fund manager purchases and stores real Bitcoin
- Your shares represent ownership in the fund’s Bitcoin holdings
- The share price tracks the actual spot price of Bitcoin
Example: Canada’s Purpose Bitcoin ETF (BTCC) holds real Bitcoin in cold storage with Gemini as the custodian.
Futures Bitcoin ETFs
Futures-based ETFs don’t hold actual Bitcoin. Instead, they hold Bitcoin futures contracts:
- The fund buys futures contracts that bet on Bitcoin’s future price
- As contracts expire, the fund “rolls” into new contracts
- This rolling process can create tracking differences vs. spot price
Example: ProShares Bitcoin Strategy ETF (BITO) in the US holds Bitcoin futures contracts.
Benefits of Bitcoin ETFs
1. Regulated Investment
Bitcoin ETFs trade on regulated stock exchanges and are offered by established financial institutions. This provides investor protections not available on cryptocurrency exchanges.
2. Tax-Advantaged Accounts
In Canada, Bitcoin ETFs can be held in:
- TFSA - Tax-free gains on your Bitcoin exposure
- RRSP - Tax-deferred growth
- RESP - For education savings
- RRIF - For retirement income
This is a major advantage over holding Bitcoin directly, which cannot be placed in registered accounts.
3. No Custody Concerns
With a Bitcoin ETF, you don’t need to:
- Set up a cryptocurrency wallet
- Manage private keys
- Worry about exchange hacks or lost passwords
The ETF provider handles all custody and security.
4. Familiar Trading Experience
Buy and sell Bitcoin ETFs just like any stock through your existing brokerage. No need to open accounts with cryptocurrency exchanges.
Considerations
Management Fees (MER)
Bitcoin ETFs charge annual management fees (MER), typically ranging from 0.25% to 1.5%. While this is a cost, it’s often comparable to what you’d pay in trading fees, spreads, and withdrawal costs on crypto exchanges.
Tracking Error
ETF prices may not perfectly track Bitcoin’s price due to:
- Management fees eating into returns
- Premium/discount to NAV
- Futures roll costs (for futures-based ETFs)
No Direct Ownership
When you own a Bitcoin ETF, you own shares in a fund—not actual Bitcoin. You can’t:
- Transfer your Bitcoin to another wallet
- Use it for transactions
- Participate in blockchain governance
Spot vs. Futures ETFs: Which is Better?
| Feature | Spot ETF | Futures ETF |
|---|---|---|
| Holds actual Bitcoin | Yes | No |
| Tracking accuracy | Better | May diverge |
| Contango costs | None | Yes |
| Available in Canada | Yes | Yes |
| Available in US | Yes (since Jan 2024) | Yes |
For most long-term investors, spot Bitcoin ETFs are generally preferred due to better tracking and no futures roll costs.
Canadian Bitcoin ETF History
Canada was a pioneer in Bitcoin ETFs:
- February 2021: Purpose Bitcoin ETF (BTCC) launched as the world’s first spot Bitcoin ETF
- February 2021: Evolve Bitcoin ETF (EBIT) and CI Galaxy Bitcoin ETF (BTCX) followed
- 2021-2022: Multiple Ethereum ETFs also launched
- 2024: Solana and XRP ETFs launched in Canada
Canadian investors have had access to spot crypto ETFs years before they became available in the United States.
Getting Started
If you’re considering a Bitcoin ETF investment:
- Compare fees - Look at the MER across different options
- Check your broker - Ensure your brokerage offers the ETF you want
- Consider your account type - TFSA offers tax-free gains, RRSP offers tax-deferred growth
- Understand the risks - Bitcoin is volatile; only invest what you can afford to lose
Summary
Bitcoin ETFs provide a convenient, regulated way to gain exposure to Bitcoin through your existing investment accounts. While you pay management fees and don’t own Bitcoin directly, the benefits of tax-advantaged investing and simplified custody make ETFs attractive for many investors.
For Canadian investors, the availability of spot Bitcoin ETFs since 2021 has made crypto investing more accessible than ever.
Disclaimer: This article is for educational purposes only and should not be considered financial or investment advice. Always do your own research and consult with a qualified financial advisor before making investment decisions.