💰 What is a Bitcoin ETF? - Complete Beginner's Guide on Bitcoin ETFs (2024 Updated)

Summary

In this informative episode of Crypto Whiteboard Tuesday, Nate Martin from 99Bitcoins.com explains the concept of a Bitcoin ETF, or Exchange Traded Fund, which allows investors to speculate on Bitcoin's price movements without the need to hold actual Bitcoins. He discusses the advantages of ETFs, including accessibility, ease of trade, and regulatory oversight, as well as the downsides such as tracking errors, limited trading hours, and management fees. Nate also provides guidance on selecting the best ETF by considering factors like management fees, issuer reputation, and assets under management. He concludes by touching on the potential impact of Bitcoin ETFs on the price of Bitcoin, noting the increased buying pressure and the upcoming 2024 halving event that could drive prices up. The video is a valuable resource for those interested in understanding Bitcoin ETFs and their role in the cryptocurrency market.

Takeaways

• 📈 **Bitcoin ETF Definition**: A Bitcoin ETF (Exchange Traded Fund) is a financial instrument that tracks the price of Bitcoin without requiring the holder to own the actual cryptocurrency.
• 💡 **Speculation without Ownership**: You can speculate on Bitcoin's price movements by investing in a Bitcoin ETF without the need to hold actual Bitcoins.
• 🔒 **Security and Convenience**: Investing in a Bitcoin ETF eliminates the need to manage the security of your Bitcoin holdings, simplifying the process for investors.
• 🇺🇸 **Regulation and Oversight**: In the United States, ETFs are regulated by the Securities and Exchange Commission, providing an additional layer of investor protection.
• 📉 **Spot vs. Futures ETFs**: A Bitcoin Spot ETF tracks the current price of Bitcoin, unlike a Futures ETF, which tracks contracts to buy or sell Bitcoin at a future date.
• 💻 **Accessible Platforms**: Bitcoin ETFs can be bought and sold through popular online brokerage platforms like Robinhood, eToro, Fidelity, WeBull, and Charles Schwab.
• 💰 **Management Fees**: ETFs come with management fees, which can affect the overall return and are not associated with holding actual Bitcoins.
• 🔍 **Tracking Error**: ETFs may not perfectly mirror Bitcoin's price due to tracking errors caused by market conditions, management strategy, and fees.
• ⏰ **Trading Limitations**: Unlike Bitcoin, which can be traded 24/7, ETFs are subject to market hours and may not be available for trading during extreme market volatility.
• 💵 **Payment Utility**: Bitcoin can be used as a means of payment, whereas ETFs can only be traded for cash.
• 📚 **Research and Personal Preference**: When choosing an ETF, consider factors like management fees, the issuer's reputation, assets under management, and personal investment goals.

Q & A

What is a Bitcoin ETF?

A Bitcoin ETF, or Exchange Traded Fund, is a financial instrument that tracks the price of a particular asset, in this case, Bitcoin. It allows investors to speculate on Bitcoin's price movements without actually buying or holding the cryptocurrency.

Why might someone prefer a Bitcoin ETF over buying actual Bitcoins?

A Bitcoin ETF offers a way to speculate on Bitcoin's price without the need to secure and manage the actual cryptocurrency. It is regulated, which adds a layer of investor protection, and is more accessible to the general public as it doesn't require technical knowledge about wallets and seed phrases.

How does the ETF abbreviation break down in terms of its components?

ETF stands for Exchange Traded Fund. The 'E' stands for Exchange, meaning ETFs are bought and sold like stocks on an exchange. The 'T' stands for Traded, indicating that ETFs are traded throughout the day with price changes. The 'F' stands for Fund, reflecting that ETFs hold a collection of assets to track the price of the asset they aim to follow.

What is a Bitcoin Spot ETF and how does it differ from a Futures ETF?

A Bitcoin Spot ETF tracks the current price of Bitcoin. It differs from a Futures ETF, which tracks contracts to buy or sell Bitcoin at a future date. The Spot ETF provides direct exposure to the current market price of Bitcoin, whereas a Futures ETF involves speculation on future price movements.

How can one buy a Bitcoin ETF?

Bitcoin ETFs can be purchased through online brokers such as Robinhood, eToro, Fidelity, WeBull, and Charles Schwab. Additionally, one can inquire about including a Bitcoin ETF in traditional retirement accounts like an IRA or 401(k).

What are tracking errors and why do they occur with ETFs?

Tracking errors are discrepancies between the ETF's price and the actual price of the asset it is designed to track, in this case, Bitcoin. These errors can occur due to market conditions, the ETF management's strategy, or the fees associated with the ETF.

What are some advantages of investing in a Bitcoin ETF compared to buying Bitcoin directly?

ETFs are more accessible, do not require technical knowledge about cryptocurrency wallets, are easier to trade through popular platforms, and are regulated, offering an additional layer of investor protection.

What are some disadvantages of investing in a Bitcoin ETF compared to buying Bitcoin directly?

ETFs are not available for trading 24/7, may not be available for buying or selling during periods of extreme volatility, require management fees, and do not provide full custody of actual Bitcoins, exposing investors to the risk of the ETF issuer's financial stability.

How can one choose the best Bitcoin ETF?

When choosing a Bitcoin ETF, one should consider the management fees (expense ratio), the reputation and track record of the ETF issuer, and the ETF's assets under management (AUM), which can reflect investor confidence and liquidity.

How might the approval of Bitcoin spot ETFs impact the price of Bitcoin?

The approval of Bitcoin spot ETFs can create buying pressure and potentially drive up the price of Bitcoin. This is because ETF issuers are required to hold actual bitcoins to back the notes they issue, and the availability of ETFs allows institutional investors to invest in Bitcoin, increasing demand.

What is the '2024 halving event' mentioned in the script and how could it affect Bitcoin's price?

The '2024 halving event' refers to a reduction in the rate at which new Bitcoins are created, effectively cutting it in half. This reduction in supply, combined with higher demand, can lead to an increase in the price of Bitcoin.

What is the final advice given by Nate Martin regarding investment in Bitcoin ETFs?

Nate Martin advises that while a Bitcoin ETF can be a good solution for those who want to speculate on Bitcoin's price without the technical hassles, one should always do their own research and not take the information as investment advice. He also reminds that in extreme market conditions, trading of the ETF might not be possible, and there is always a risk associated with the ETF issuer.

Outlines

00:00

🤔 Understanding Bitcoin ETFs and Their Impact

This paragraph introduces the concept of a Bitcoin ETF, which is a financial instrument designed to track the price of Bitcoin without the need to hold the actual cryptocurrency. It explains the benefits of ETFs, such as not having to manage the security of Bitcoin, and how they are regulated by the Securities and Exchange Commission for investor protection. The difference between a Bitcoin Spot ETF and a Futures ETF is also clarified, with the former tracking the current price of Bitcoin and the latter tracking contracts for future transactions. The paragraph also discusses how to purchase a Bitcoin ETF and the potential tracking errors that may occur due to market conditions or management strategies.

05:00

💼 Choosing the Best Bitcoin ETF and Its Market Influence

The second paragraph delves into how to select the most suitable Bitcoin ETF, considering factors like management fees, the reputation of the ETF issuer, and the assets under management (AUM). It emphasizes the importance of choosing a reputable issuer, especially one with experience in crypto assets, and the significance of higher AUM for investor confidence and liquidity. The paragraph also discusses the potential impact of Bitcoin spot ETFs on the price of Bitcoin, suggesting that the requirement for ETF issuers to hold actual bitcoins to back their notes can drive up the price. Additionally, it mentions the inclusion of institutional investors and the upcoming 2024 halving event as factors that could increase buying pressure and, consequently, the price of Bitcoin. The speaker advises viewers to conduct their own research and not to take the information as investment advice.

Keywords

💡Bitcoin ETF

A Bitcoin ETF, or Exchange Traded Fund, is a financial instrument that tracks the price of Bitcoin without requiring the holder to own the actual cryptocurrency. It allows investors to speculate on Bitcoin's price movements without the need to secure and manage the digital asset directly. In the video, Nate Martin discusses how a Bitcoin ETF operates and its advantages over buying and holding actual Bitcoins.

💡Exchange

An exchange is a marketplace where financial instruments, like stocks and ETFs, are bought and sold. In the context of the video, ETFs are traded on exchanges just like stocks, which means they can be bought and sold throughout the trading day. This is a key feature of ETFs, as it provides liquidity and accessibility to investors.

💡Spot ETF

A Spot ETF is a type of ETF that tracks the current or 'spot' price of an underlying asset, in this case, Bitcoin. As explained in the video, a Bitcoin Spot ETF is different from a Futures ETF, which tracks contracts to buy or sell Bitcoin at a future date. Spot ETFs aim to reflect the current market value of Bitcoin, providing investors with a way to participate in Bitcoin's price movements without directly owning the cryptocurrency.

💡Management Fee

The management fee, also known as the expense ratio, is the fee charged by the ETF issuer for managing the fund. As mentioned in the video, these fees can affect the overall return on investment and are an important consideration when choosing an ETF. Lower fees are generally preferred as they make the investment more cost-effective and closely aligned with the performance of the underlying asset, which in this case is Bitcoin.

💡Reputation

The reputation of an ETF issuer refers to the standing and trustworthiness of the company managing the ETF. In the video, it is suggested that choosing an ETF from a reputable issuer with a history of managing ETFs can lead to better results in terms of tracking the asset's price and managing investor funds. Reputation is important as it can indicate the reliability and competence of the ETF provider.

💡Assets Under Management (AUM)

Assets Under Management (AUM) refers to the total market value of investments that an investment manager supervises on behalf of investors. In the context of the video, a higher AUM for an ETF may indicate greater investor confidence and is often associated with better liquidity, making it easier for investors to buy and sell shares of the ETF.

💡Tracking Error

Tracking error is the divergence between the performance of an ETF and the performance of the asset or index it is designed to track. As discussed in the video, while an ETF aims to mirror the performance of Bitcoin, it never does so perfectly due to tracking errors. These can arise from market conditions, the ETF management's strategy, or the fees associated with the ETF.

💡Regulation

Regulation refers to the oversight and governance by a regulatory body, such as the Securities and Exchange Commission (SEC) in the United States. The video explains that ETFs are regulated, which adds a layer of investor protection. This is in contrast to buying actual Bitcoins, where investors are responsible for their own security and management.

💡Liquidity

Liquidity refers to the ease with which an asset can be bought or sold in the market without affecting its price. The video mentions that higher AUM often correlates with greater liquidity for an ETF, which is beneficial for investors as it allows them to enter and exit their investments with minimal impact on the ETF's price.

💡Halving Event

The Bitcoin halving event is a process by which the reward for mining new Bitcoins is cut in half. This event occurs approximately every four years and is designed to control inflation and maintain the scarcity of Bitcoin. In the video, it is suggested that the 2024 halving event, combined with the increased demand from ETFs, could drive up the price of Bitcoin due to a mix of higher demand and tightening supply.

💡Investor Protection

Investor protection refers to measures taken to safeguard the interests of investors and ensure fair practices in the financial markets. The video highlights that ETFs, being regulated, offer an additional layer of investor protection compared to buying and holding actual Bitcoins, where investors are on their own in terms of security and management.

Highlights

A Bitcoin ETF allows investors to speculate on Bitcoin's price movements without actually owning the cryptocurrency.

ETF stands for Exchange Traded Fund, a financial instrument that tracks the price of an asset like Bitcoin.

ETFs are regulated by the Securities and Exchange Commission in the United States for investor safety and fraud prevention.

A Bitcoin Spot ETF tracks the current price of Bitcoin, as opposed to a Futures ETF which tracks contracts for future transactions.

Investors can buy Bitcoin ETFs through online brokers like Robinhood, eToro, Fidelity, WeBull, and Charles Schwab.

ETFs aim to mirror the performance of Bitcoin but may experience tracking errors due to market conditions and management strategies.

ETFs are more accessible to the general public and do not require technical knowledge about Bitcoin wallets or security.

Trading ETFs is easier and can be done through many popular platforms, unlike actual Bitcoins which require a wallet.

ETFs are not available for trading 24/7 and may not be accessible during extreme market volatility as a protective measure.

Investors in ETFs pay management fees, which makes holding an ETF more expensive than holding actual Bitcoins.

ETFs can only be traded for cash, while Bitcoin can be used as a means of payment for various products and services.

Choosing an ETF involves considering management fees, the reputation of the issuer, and the ETF's assets under management.

The approval of Bitcoin spot ETFs can impact Bitcoin's price by creating buying pressure as companies hold actual bitcoins to back their notes.

Institutional investors like pension funds and hedge funds can invest in Bitcoin through ETFs, potentially driving the price up further.

The 2024 Bitcoin halving event, which reduces new Bitcoin generation by half, could combine with ETF availability to increase demand and price.

Investors should do their own research and not consider the information as investment advice when considering Bitcoin ETFs.

Bitcoin ETFs are a good solution for those who want to bet on Bitcoin's price without the technical hassles of managing actual Bitcoins.

In extreme market conditions, trading an ETF may not be possible, and investors are at the mercy of the ETF issuer.

Transcripts

What is a Bitcoin ETF?

Is it better than buying actual Bitcoins?

How do I choose the best ETF overall

and how does it impact the price of Bitcoin?

Well…stick around,

in this episode of Crypto Whiteboard Tuesday

we’ll tackle these questions and more.

Hi, I’m Nate Martin from 99Bitcoins.com

and welcome to Crypto Whiteboard Tuesday,

where we take complex cryptocurrency topics,

break them down

and translate them into plain English.

Before we begin,

don't forget to subscribe to the channel

and click the bell so you’ll immediately get notified

when a new video comes out.

Today’s topic is the Bitcoin spot ETF.

Up until recently, buying bitcoin was a process that required you

to buy actual bitcoins and hold them

either in your own Bitcoin wallet

or have someone else hold them for you,

like in a Bitcoin exchange.

But if you’re not interested in holding the actual coins

and only want to speculate on Bitcoin’s price movements,

then this process is a bit of an overkill,

as it requires you to take care of the security of your coins.

Nowadays, by investing in a Bitcoin ETF,

you can speculate on Bitcoin’s price

without buying actual bitcoin.

ETF stands for Exchange Traded Fund

and it’s a financial instrument

that aims to track the price of a particular asset

or asset group, in this case, Bitcoin.

In simple terms,

it’s a note that you buy from a company

that aims to track the price of Bitcoin,

and you can sell that note

when you want to get out of your investment.

Let’s break down the ETF abbreviation

into its components to see how it works:

The E, or Exchange in ETF, means ETFs are bought and sold

like any other stock on an exchange.

The T, or Traded, means ETFs are traded

and experience price changes throughout the day.

And the F, or Fund, means that ETFs generally hold

a collection of assets in one fund

in order to effectively track the price it’s aiming to track.

One important feature is that the Securities and Exchange Commission,

an independent federal agency, regulates ETFs in the United States,

This means that the government oversees the trading of ETFs

in order to ensure investor’s safety and to prevent fraud.

Now you may have heard the Bitcoin ETF

being referred to as a Bitcoin Spot ETF.

Let’s break that term down as well.

A Bitcoin Spot ETF is the term used for a note,

or a financial instrument in technical terms,

that tracks the current price of Bitcoin.

This is opposed to a Futures ETF that tracks bets,

or to put it more technically, contracts to buy or sell Bitcoin,

at a future date.

So how exactly do you buy a Bitcoin ETF?

Well, you can find an online broker such as Robinhood, eToro,

Fidelity, WeBull and Charles Schwab.

You can also ask for a Bitcoin ETF

to be included in your traditional IRA, Roth IRA or 401(k) plan.

But I guess you may be asking

“Does an ETF track the price of Bitcoin to a tee?”

The answer is - not exactly.

While the ETF aims to mirror the performance of Bitcoin,

ETFs always experience tracking errors

that create a gap between the ETF’s price

and Bitcoin’s actual price.

These tracking errors can occur due to market conditions,

the ETF management’s strategy

or the fees that are associated with the ETF.

So let’s try to summarize how buying an ETF

compares to buying Bitcoin.

For starters, ETFs are much more accessible

to the general public

as acquiring them doesn't require much technical know how.

When you buy an ETF

you don’t have to worry about getting a Bitcoin wallet,

creating a backup of your seed phrase

or keeping your wallet in a safe place.

ETFs are also much easier to trade,

as it’s possible to do so through many popular platforms.

Additionally, the fact that ETFs are regulated

adds another layer of investor protection,

while when you buy actual bitcoin, for better or for worse –

you’re on your own.

On the downside,

ETFs aren’t available to buy or sell 24/7

like you can do with actual bitcoins on a cryptocurrency exchange.

Meaning when the markets are closed,

you can’t trade your ETF shares.

Additionally, when bitcoin’s price becomes extremely volatile,

some ETFs might not be available for buying or selling

as a protective measure from the ETF issuer.

This means that you may not be able to take advantage

of big price swings when they happen.

ETFs also require you to pay a management fee for holding them.

Although these fees are relatively low,

they still make an ETF more expensive to hold

than actual Bitcoins,

which aren’t associated with any holding fees.

There’s also the tracking error which we’ve already covered –

an ETF will never track the price of Bitcoin correctly by 100%.

Unlike Bitcoin, ETFs can only be traded for cash

whereas Bitcoin can be used as a means of payment

for a variety of products and services.

And finally,

while holding an ETF allows you to earn from Bitcoin’s price movements,

it doesn’t allow you to have full custody of actual Bitcoins,

meaning you’re always exposed to the risk of

a certain ETF issuer going bust or defaulting on their promises.

Assuming you still want to buy a Bitcoin ETF,

let’s go over how to choose the best one for you.

At the time of shooting this video

there are 11 different Spot Bitcoin ETF options

available in the US.

I’ll start out by saying there’s no such thing as a perfect ETF.

Choosing an ETF is based on personal preferences

as much as it’s based on hard data.

Here’s a list of things you’d want to consider

before choosing your ETF:

The first thing you’ll want to look at

is the management fees of the ETF

also known as expense ratio.

Lower fees directly affect the overall return

and make the investment in the ETF

more correlated to investing in actual Bitcoins.

At times ETF issuers offer to waive the management fees

for a certain period in order to attract new investors.

Another thing to consider when choosing an ETF

is the brand name and reputation of the ETF issuer.

Choosing an ETF from a reputable issuer

with a track record of managing ETFs

can yield better results

in terms of correctly tracking bitcoin’s price

and of managing your funds overall.

If the issuer has experience with crypto related assets,

that’s an additional plus.

Finally, you’d want to look at the ETF’s

assets under management, or AUM.

Higher AUM may reflect greater investor confidence in the ETF

and this also usually correlates with greater liquidity,

meaning it’s easier to buy and sell your ETF shares.

Finally, let’s address how the approval of the bitcoin spot ETFs

may affect Bitcoin’s price.

Since the companies issuing the ETFs are required

to hold actual bitcoins

in order to back up the notes they are issuing,

buying pressure is created

and the price tends to go up as ETFs become more common.

Additionally, the availability of a Bitcoin spot ETF

allows institutional investors such as pension funds,

hedge funds and other investor groups

to invest in Bitcoin as well,

potentially creating even more buying pressure,

driving the price up further.

Combine all of this with the 2024 halving event

which will cut the generation of new Bitcoin in half

and you get a mix of higher demand

with tightening supply, and when that happens,

the price of an asset almost invariably goes up.

Having said that,

keep in mind that anything can happen,

especially with Bitcoin,

what I’m sharing with you is not investment advice.

You should always do your own research

and decide for yourself if you want to invest in anything.

To sum things up,

a Bitcoin ETF is a good solution

if you just want to bet on Bitcoin’s price

without all of the technical hassles of securing

and managing your Bitcoins.

But remember,

in extreme market conditions

you may not be able to actually trade your ETF,

and you’ll always be at the mercy of the ETF issuer.

That’s it for today’s episode of Crypto Whiteboard Tuesday.

Hopefully by now you understand what a Bitcoin spot ETF is -

A note issued by a company that holds bitcoin for its investors,

and attempts to accurately track the price of Bitcoin.

Maybe you’d like to start investing in Bitcoin ETFs.

If so, we’ve included a list of links in the description

to a number of places where you can get started.

You may still have some questions.

If so, just leave them in the comment section below.

And if you’re watching this video on YouTube,

and enjoy what you’ve seen,

don’t forget to hit the like button.

Then make sure to subscribe to the channel

and click that bell so that you’ll be notified

as soon as we post new episodes.

Thanks for joining me here at the Whiteboard.

For 99bitcoins.com, I’m Nate Martin,

and I’ll see you…in a bit.