BTC ETF: Everything You Need To Know

Three years after the infamous “crypto winter” of early 2018, BTC has surged to nearly triple its previous $20,000 high water mark,  and has surpassed a $1 trillion market cap—making it by far the largest cryptocurrency in an overall crypto market worth $2 trillion.

With more mainstream popularity than ever, many new people are interested in acquiring some BTC. But many of the crypto-curious still view buying BTC from an exchange as an intimidating and opaque process. The technical aspects of holding BTC—such as crypto wallets, BTC addresses and private keys—are confusing to newcomers, and scare some investors away.

All of this has intensified the appeal of a BTC ETF, or exchange-traded fund. And while Canada now boasts three BTC ETFs, the U.S. still has yet to approve any for trading.

What is an ETF?

• An ETF is an investment vehicle that is publicly traded, like a stock, but tracks an underlying asset or index, rather than one company.
• An ETF is a way for investors to get exposure to the value of its underlying asset, like gold or oil.
• ETFs trade on a traditional stock exchange, and their value should rise when the asset increases in price, and fall when it decreases.

A BTC ETF works in much the same way as any other ETF. Investors buy shares in the ETF through whatever brokerage they buy stocks, and can trade them the same way they’d trade shares in Apple or Tesla.

BTC ETFs track the current price of BTC, and should act in lockstep with BTC’s price swings.

Why the need for a BTC ETF?

So, why wouldn’t investors just buy BTC?

For most regular retail investors, BTC and cryptocurrencies in general still look risky.

Besides having unclear regulations around them, owning BTC requires keeping a BTC wallet and trusting crypto exchanges, both are still uncharted territory for people unfamiliar with the space, and require a certain level of self-education.

Holding BTC places the burden of security squarely on you. This means that you would be responsible for keeping your own private key safe. This may mean buying a hardware wallet to protect purchased BTC, or storing private keys in a secure manner. You’d also have to work out how to file taxes for sales of BTC that resulted in capital gains.

With a BTC ETF, investors need not worry about private keys, storage, or security; they own shares in the ETF just like their shares of stock, and can gain exposure to the cryptocurrency market without having to go through the hoops of purchasing and holding crypto.

And to put it plainly, that is an extremely appealing proposition for many regular folks—as well as sophisticated institutional investors.

That’s why so many hedge funds and other investment firms have filed applications with the U.S. Securities and Exchange Commission (SEC) for BTC ETFs—we count at least seven particularly high-profile BTC ETF applications as of April 2021, from the likes of Fidelity, VanEck, SkyBridge Capital, Bitwise, and others.

Gemini founders Cameron and Tyler Winklevoss were first out of the gate with an application for the Winklevoss BTC Trust in 2013. In 2018, the U.S. Patent and Trademark Office awarded the Winklevoss brothers a patent for “exchange-traded products.” But the SEC still hasn’t approved their ETF—or any others.

Monday marked the 6 year anniversary of the first filing of the Winklevoss BTC Trust ETF. Onward and upward!

— Tyler Winklevoss (@tyler) July 4, 2019

How does a BTC ETF work?

A BTC ETF is managed by a firm that buys and holds the actual BTC; the price is pegged to the BTC held in the fund. The firm lists the ETF on a traditional stock exchange, and you, the investor, trade the ETF just as you would any other stock. BTC ETFs also offer new types of trading opportunities, including short-selling, where investors can bet against BTC.

But there are also some key differences between a BTC ETF and other ETFs.

First, some ETFs, like those that track the S&P 500, represent equity shares, so you get a cut of the dividends that any company in the ETF pay to their shareholders. When Tesla pays a dividend and you have shares in an ETF that includes Tesla, you get a (smaller) dividend. BTC is decentralized, so that won’t happen with a BTC ETF.

Second, just like with other ETFs, you have to pay fees to the company offering the ETF. But with a BTC ETF, some portion of your fees would go to paying the custody and management fees for the purchase and storage of the BTC that underlies the ETF.

A brief history of BTC ETF progress

• July 2013: The Winklevoss BTC Trust files the first BTC ETF proposal.
• June 2018: The SEC rejects the Winklevoss’ second BTC ETF proposal.
• October 2019: The SEC rejects Bitwise’s BTC ETF proposal.
• February 2020: Wilshire Phoenix becomes the latest project to have its BTC ETF project rejected by the SEC.
• September 2020: The world’s first BTC ETF is listed on the Bermuda Stock Exchange.
• December 2020: VanEck files its latest proposal for a BTC ETF, after pulling its previous proposals before formal rejection multiple times.
• February 2021: Canada’s first BTC ETF launches, the Purpose BTC ETF (BTCC). Two more would be approved in the same month: the Evolve BTC ETF (EBIT) and the CI Galaxy BTC ETF (BTCX).

What’s so special about a BTC ETF?

A BTC ETF in the U.S. is expected to bring a new level of mainstream trustworthiness and acceptance to BTC investing. In 2020 and 2021, big publicly traded companies including Square and Tesla bought BTC as an investment for their balance sheets, which spurred new adoption—but the cryptocurrency is still seen by many conservative investors as a risky bet or even a gimmick.

The approval of a BTC ETF by the SEC would mean institutional investors can more easily speculate on the price of BTC. It would functionally bring BTC to Wall Street, with the BTC ETF traded through the same places as Tesla stock, bonds, gold, oil, or any other traditional assets.

And it would likely be a huge boost to the price of BTC.

Why hasn’t the SEC approved a BTC ETF?

Since 2017, the SEC has repeatedly rejected proposals for BTC ETFs.

The SEC’s main argument is that BTC’s price is prone to market manipulation. And even if a BTC ETF only drew prices from the most scrupulous cryptocurrency exchanges, BTC’s price could be manipulated on less reputable exchanges with looser restrictions.

The other common concerns the SEC often cited include a lack of transparency in crypto markets and potential lack of liquidity.

But that was all during the Jay Clayton era.

In January 2021, newly elected U.S. President Joe Biden announced his choice for the next SEC chair would be Gary Gensler, whose past experience teaching a course on cryptocurrency at M.I.T. prompted a new wave of optimism that the SEC will approve a BTC ETF imminently.

The Future of BTC ETFs in the U.S.

Of course, just because Gensler knows about crypto doesn’t necessarily mean he will take a pro-crypto stance as SEC Chair. But that isn’t stopping investors with skin in the game from banking on Gensler opening the BTC ETF floodgates.

“I’m hoping that with the introduction of Gary Gensler now into the regulatory rubric, and my understanding of where he’s coming from, although I don’t know it personally, is that possibly we can get an ETF in place by the end of the year,” Anthony Scaramucci, whose SkyBridge Capital has applied for a BTC ETF, told Decrypt in March.

SkyBridge is one of the firms that has a BTC fund for its own clients, which isn’t quite an ETF, but it aims to convert that fund into an ETF if and when the SEC approves a BTC ETF.

Another is Grayscale Investments, the largest U.S. crypto asset firm, which offers publicly-traded investment products pegged to specific cryptocurrencies, such as the Grayscale BTC Trust (GBTC). In April, Grayscale confirmed that it intends to convert its BTC Trust to a BTC ETF if and when the SEC allows it.

SEC approval would represent a major step towards BTC being seen as a legitimate investment by the same traditional investors who have dismissed it for years.

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