What is a Bitcoin ETF? BlackRock and Grayscale’s Multi-Billion Dollar Investment Vehicle

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Many of the crypto-curious still view buying Bitcoin from a crypto exchange as an intimidating and opaque process.

The technical aspects of holding Bitcoin—such as crypto wallets, Bitcoin addresses and private keys—are confusing to newcomers, and scare some investors away.

All of this has intensified the appeal of a spot Bitcoin ETF, or exchange-traded fund, which enables investors to gain exposure to Bitcoin without the hassle of owning it themselves.

Following years of delays and rejections, the U.S. Securities and Exchange Commission (SEC) approved applications for multiple spot Bitcoin ETFs in January 2024. The list of those operating spot Bitcoin ETFs in the U.S. is a roll-call of major financial institutions, including asset managers like BlackRock and Fidelity.

Other countries were quicker off the mark, with Bitcoin ETFs launching in Canada, Brazil and Europe ahead of the U.S.

What is an ETF?

• 💸 An ETF is an investment vehicle that is publicly traded, like a stock, but tracks the performance of 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.

The first ETF launched in 1993, and they became popular as a way for retail investors to invest in a basket of assets at once. If you wanted to invest in 500 of the largest companies in America at once, you could buy shares in a S&P 500 ETF.

A Bitcoin 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.

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

Why the need for a Bitcoin ETF?

So, why wouldn’t investors just buy Bitcoin?

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

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

Holding Bitcoin places the burden of security squarely on you, making you responsible for keeping your own private keys safe (unless you want to entrust them to the exchange). This may mean buying a hardware wallet to protect purchased Bitcoin, or storing private keys in a secure manner. You’d also have to work out how to file taxes for sales of Bitcoin that resulted in capital gains.

With a Bitcoin 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.

How does a Bitcoin ETF work?

A Bitcoin ETF is managed by a firm that buys and holds the actual Bitcoin; the price is pegged to the Bitcoin 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. Bitcoin ETFs also offer new types of trading opportunities, including short-selling, where investors can bet against Bitcoin.

But there are also some key differences between a Bitcoin 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. Bitcoin is decentralized, so that won’t happen with a Bitcoin ETF.

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

The road to a U.S. Bitcoin ETF

Many hedge funds and other investment firms have filed applications with the U.S. SEC for Bitcoin ETFs over the years, but it took over a decade for one to be approved.

Gemini founders Cameron and Tyler Winklevoss were first out of the gate with an application for the Winklevoss Bitcoin Trust in 2013. In 2018, the U.S. Patent and Trademark Office awarded the Winklevoss brothers a patent for “exchange-traded products.”

For the next decade following the Winklevoss’ application, the SEC rejected multiple applications for a spot Bitcoin ETF, citing the cryptocurrency’s volatility and vulnerability to price manipulation.

The tides began to shift in 2023, when the world’s largest asset manager, BlackRock, shocked the financial world with its filing to run a Bitcoin ETF.

In October 2023, the SEC was formally ordered by a court to review Grayscale’s application to convert its flagship Grayscale Bitcoin Trust (GBTC) into a spot Bitcoin ETF, with the court finding that the regulator had failed to adequately explain its reasoning for disapproving its application.

In January 2024, the SEC finally approved multiple spot Bitcoin ETFs, with SEC chair Gary Gensler conceding that “circumstances, however, have changed” following the court’s decision.

A brief history of spot Bitcoin ETFs

• July 2013: The Winklevoss Bitcoin Trust files the first Bitcoin ETF proposal.
• June 2018: The SEC rejects the Winklevoss’ second Bitcoin ETF proposal.
• September 2020: The world’s first Bitcoin ETF is listed on the Bermuda Stock Exchange.
• February 2021: Canada’s first Bitcoin ETF launches, the Purpose Bitcoin ETF (BTCC). Two more would be approved in the same month: the Evolve Bitcoin ETF (EBIT) and the CI Galaxy Bitcoin ETF (BTCX).
• October 2021: Launch of the first U.S.-listed Bitcoin-linked ETF, the roShares Bitcoin Strategy ETF (BITO). It does not hold Bitcoin itself on its balance sheet, but tracks the price of Bitcoin through related assets.
• June 2023: The SEC approves the 2x Bitcoin Strategy ETF (BITX) from Volatility Shares and the first leveraged Bitcoin futures ETF.
• August 2023: London-based Jacobi Asset Management launches Europe’s first Bitcoin ETF.
• August 2023: A U.S. judge orders that the SEC’s denial of Grayscale’s application to convert its Grayscale Bitcoin Trust (GBTC) into a spot Bitcoin ETF be reviewed.
• October 2023: Following the SEC’s failure to appeal, the U.S. Court of Appeals formally orders the SEC to review Grayscale’s application.
• December 2023: SEC chair Gary Gensler states that the regulator was “taking a new look” at applications for a spot Bitcoin ETF, and reviewing “between eight and a dozen filings.”
• January 2024: The SEC approves multiple U.S. spot Bitcoin ETFs.
• March 2024: BlackRock’s IBIT reaches $10 billion in assets under management.

What’s so special about a Bitcoin ETF?

A Bitcoin ETF in the U.S. is expected to bring a new level of mainstream trustworthiness and acceptance to Bitcoin investing. In 2020 and 2021, big publicly traded companies including Square and Tesla bought Bitcoin 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 spot Bitcoin ETF by the SEC effectively brings Bitcoin to Wall Street, with the Bitcoin ETF traded through the same places as Tesla stock, bonds, gold, oil, or any other traditional assets. It also means that institutional investors can more easily speculate on the price of Bitcoin, without the need to hold the cryptocurrency themselves.

After the launch

Just a day after the launch of the Bitcoin ETFs, trading volumes hit $1.9 billion, with inflows of over a billion dollars in the first week. But it wasn’t all good news. The price of Bitcoin dropped as investors who’d held Grayscale Bitcoin Trust (GBTC) shares took the opportunity to cash out, causing selling pressure.

Inflows continued to break records in the months following the launch of the Bitcoin ETFs, with BlackRock’s iShares Bitcoin Trust (IBIT) hitting $10 billion in assets under management (AUM) just seven weeks after its launch, becoming the fastest ETF ever to reach this milestone. The first gold-backed ETF, by contrast, took over two years to achieve this figure.

Almost 4% of the entire supply of Bitcoin was held by Bitcoin ETFs by early March, with spot Bitcoin ETFs hitting $50 billion in AUM—more than half the value of AUM held by gold-backed ETFs.

“We thought that maybe Bitcoin was a competitor to gold, but it has actually run up the leaderboard, and now it’s starting to nip at the heels of the S&P 500 Index ETFs,” MicroStrategy CEO Michael Saylor said at the time.

In early March 2024, BlackRock filed a prospectus with the SEC to add Bitcoin ETFs to a strategic portfolio dubbed the Strategic Income Opportunities Fund.

Following the approval of spot Bitcoin ETFs, attention quickly turned to the possibility of spot ETFs for other cryptocurrencies such as Ethereum. As of January 2024, multiple asset managers have filed applications for spot Ethereum ETFs, including many of those who have already launched Bitcoin ETFs, such as BlackRock and Grayscale.