The New Bitcoin ETFs by Vinay Sharma 

February 13, 2024

The SEC approved multiple spot Bitcoin ETFs to begin trading on January 18th. Quite a few launched from some the largest ETF providers in the country and from many niche providers. With the launches has come an increase in news coverage of Bitcoin ETFs and Bitcoin in general, and an increase in advertisement, bringing the crypto-currency back to the forefront of many investor’s minds. 

I’ll start with how this happened. The SEC had previously ruled that ETFs investing in Bitcoin futures (an agreement to buy or sell Bitcoin at some future date) could be created, but had blocked any that held Bitcoin itself as the asset (spot Bitcoin ETFs). Grayscale Investments subsequently sued since the firm had tried to move its Grayscale Bitcoin Trust into an ETF wrapper and was one of the firms denied because the Trust had direct Bitcoin holdings. Grayscale won the suit, and the judge issued an opinion that called the previous SEC ruling into question. That court decision led the SEC to reverse its stance on spot Bitcoin ETFs. 

So how do these new Bitcoin investment vehicles differ from what was available before?   These ETFs hold Bitcoin in digital wallets with a custodian that is willing to handle such wallets – usually in what is called “cold storage” or offline, both of which are meant to secure them against hacking. Cold storage or offline wallets are kept on computers that are not connected to the internet, which limits access to them. The ETFs buy and sell Bitcoin as needed when shares are created or redeemed, just like with any other ETF.

The result should be that these ETFs track the performance of what Bitcoin is worth right now better than the Bitcoin futures-based ETFs that came before, assuming there are no liquidity problems. In addition, because futures returns have a carry component, the difference between what the futures price was and what the actual price is as the expiration date of the futures nears, investors should also get a more “pure” exposure to Bitcoin’s change in value. But that carry component can be positive or negative, depending on whether people expect whatever the futures contract is based on to be worth more or less than right now.

All in all, however, these spot Bitcoin ETFs should better track the performance of Bitcoin than the Bitcoin futures-based ETFs that preceded them, and they make it easier for investors that do not want to deal with digital wallets and trading to gain exposure to Bitcoin. 

Are there new risks, too? 

When looking at the potential risks, even if you take out the question as to whether investing in Bitcoin is the right thing for investors, these new ETFs do introduce some new risks that weren’t present in the Bitcoin futures-based ETFs.  

At APCM we are always striving to stay at the cutting edge of the investment industry and have no plans to stop the devotion to constantly evolving and improving. And please do not forget that this is an important element of the service that we provide to our clients. If you have questions that arise in your organization, we are here as a resource to further your financial and investment acumen.

  • The first new risk is that of security. The number of Bitcoin potential held by these ETFs will be a very tempting target for hackers. While the ETF providers and custodians are putting in place many security measures, we have already seen entire crypto-currency exchanges brought down by hacks that emptied digital wallets. And the very security and anonymity that make crypto-currencies attractive to many also makes it nearly impossible to recoup stolen coins.  
  • Next is a matter of processing of trading Bitcoin so that the ETFs can adjust their holdings when shares are created or redeemed. Trading of Bitcoin is still largely done on exchanges that are not regulated at all, and often the exchanges will have different prices for Bitcoin at the same time. So while there is regulation around the purchase and sale of the ETF, there is little for acquiring or divesting the Bitcoin itself. Bitcoin futures, however, are themselves regulated just as the ETFs holding them are.  
  • Which adds the final risk I’ll discuss here, that of regulatory change. Now that ETFs that hold Bitcoin are being traded on regulated exchanges, additional regulation of the crypto-currency market is likely inevitable. And there is a great deal of uncertainty what that regulation will be and how it will affect prices once it comes. 

These new ETFs are a different way to gain exposure to Bitcoin, but they are not necessarily better for all investors. For a variety of reasons, APCM does not recommend exposure to crypto-currencies themselves in any client accounts at this time. As fiduciaries for our clients, we continue to monitor the space to determine if and when the asset class can be a prudent addition to our clients’ portfolio strategies. Our responsibility to our clients is our first priority in all of our minds and actions. Your APCM client service representative would be happy to answer any questions you may have. 

Vinay Sharma

CFA®, CIPM®, Senior Portfolio Manager

Alaska Permanent Capital Management