None of the six ETFs on our list own actual Bitcoin. Instead, they hold Bitcoin futures contracts, and in some cases the shares of companies and other ETFs active in the cryptocurrency space.
Bitcoin ETFs don’t own Bitcoin because the SEC is concerned that BTC is traded on non-regulated cryptocurrency exchanges. SEC Chair Gary Gensler is on the record stating that given the novel character of cryptocurrency, relying on the proven and highly regulated futures market is a much safer approach for Bitcoin exchange-traded funds.
Futures are an agreement between two parties to sell a particular asset at a future date. They allow traders to speculate about how prices may move in the future with minimal upfront investment because they frequently use leverage, or borrowed money.
Here’s how it works in the case of the ProShares Bitcoin Strategy ETF (BITO). The fund buys positions in one-month CME Bitcoin futures contracts. As the contracts near expiration, the fund gradually sells them and buys longer-dated contracts.
If the price of BTC is rising, BITO uses its gains to add to a pool of funding held in cash and Treasuries. If the price of BTC falls, it takes funds from the pool to pay for the losses on futures contracts.
Most of the Bitcoin ETFs included here use a similar strategy. Note that by attempting to earn money opposite to BTC’s price moves, the ProShares Short Bitcoin ETF (BITI) follows a slightly different strategy.
None of these approaches are perfect. Tracking the price of Bitcoin doesn’t always replicate the performance of the underlying market, and there are extra costs as the managers roll forward the futures contracts they’re buying.
