Bitcoin ETFs: What to Know

The U.S. has approved one bitcoin ETF, but rather than being tied to the currency, it is tied to bitcoin futures.
Dec 21, 2021

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After years of wild ups and downs on cryptocurrency markets, bitcoin has made its debut on the New York Stock Exchange. On October 19, the financial firm ProShares launched the first exchange-traded fund linked to bitcoin.

The ETF (ticker: BITO) doesn't invest directly in bitcoin. Rather, it will be based on futures contracts tied to the cryptocurrency. But it's a milestone for cryptocurrency trading, because it means everyday investors can give their portfolios exposure to the volatile asset without fussing with online exchanges or bitcoin wallets.

Bitcoin ETFs definition

Bitcoin ETFs would combine the best parts of two popular investments: the ease of investing in an ETF and exposure to the popular cryptocurrency bitcoin.

The products will operate much like any other ETF. But instead of tracking a market exchange like the S&P 500 or the Dow Jones Industrial Average, bitcoin ETFs will track the price of bitcoin — or in the case of the ProShares ETF, a related financial product.

Why do investors want a bitcoin ETF?

Investing in bitcoin itself can be complicated, but investing in a bitcoin ETF would give investors easy access to the world of cryptocurrency. There are several reasons why a bitcoin ETF could make it simpler to invest in cryptocurrency. First, bitcoin itself can be tricky to store and secure. There have been several instances of investors being blocked from accessing their bitcoin because they forgot their passwords (sometimes with millions of dollars on the line). According to data from cryptocurrency research and software firm Chainalysis, about 18% percent of bitcoin may be lost or stuck in inaccessible wallets.

Another consideration is the fact that ETFs can be traded right from investors’ existing brokerage accounts. Though mainstream crypto exchanges have made buying and selling digital assets more accessible, ETFs are available through more conventional avenues used by investors.

» Ready to get started? Here are the best online brokerages

Bitcoin ETF regulation

The first attempt to create a bitcoin ETF was in 2013, and there have been a handful since. As the conducted a lengthy review of the topic, it had publicized concerns about potential manipulation and fraud that could come with a bitcoin ETF approval. The SEC still has not signed off on any ETFs that would hold cryptocurrency directly.

Foreign exchanges don’t seem to have the hang-ups the SEC has with bitcoin ETFs, and several crypto products have already been approved in Europe and Canada.

Other ways to invest in cryptocurrency

Cryptocurrency is still relatively new and should be approached with caution. But if you’re excited about crypto and feel like you have space in your portfolio to add an investment with a little more pizazz, here are some ways you can invest:

1. Directly in cryptocurrency. Bitcoin is becoming more common — you can even use it to shop on Amazon. There are many types of cryptocurrencies to choose from, including bitcoin, ether and tether. Bitcoin is the largest and most established of all the cryptocurrency players, but that doesn’t make it a safe bet. It’s good to practice caution when adding any new investment to your portfolio. Learn more about how to invest in crypto.

» Ready to invest? Here are our picks for the best bitcoin and crypto exchanges

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2. Crypto-related investments. If you don’t want to navigate a whole new form of currency, you can still invest in the future of money. Coinbase, a major cryptocurrency exchange, went public in April 2021, meaning you can buy its company stock. (Learn how to buy Coinbase stock.) There are also blockchain ETFs. Blockchain is the central technology behind cryptocurrencies, and there are plenty of companies involved in its development and utilization. There are several ETFs made up of those companies, which can give investors exposure to crypto technology without investing directly in the currencies themselves.

Disclosure: The author Andy Rosen owned BTC at the time of publication. NerdWallet is not recommending or advising readers to buy or sell BTC or any other cryptocurrency.

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