What is a Bitcoin ETF?

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  • Bitcoin has been awarded its first ETF – a Bitcoin futures ETF from ProShares
  • ETFs are commonplace in the institutional investing world
  • What are ETFs and what is the difference between a Bitcoin ETF and a Bitcoin futures ETF?

The terms ‘Bitcoin ETF’ and ‘Bitcoin futures ETF’ have been thrown around a lot in the past week, and with good reason, as Bitcoin finally has its first ETF – a Bitcoin futures ETF from ProShares. But what exactly is an ETF and what’s the difference between a Bitcoin ETF and a Bitcoin futures ETF? Our quick guide explains the core differences.

What is an ETF?

The acronym ETF stands for ‘Exchange Traded Fund’. An ETF is an investment vehicle that tracks the performance of a particular asset or group of assets and allows institutional investors to diversify their investments without actually owning the asset itself. ETFs provide a simpler alternative to buying and selling individual assets and are particularly favored by those looking to trade on the price, sacrificing benefits such as dividends received from holding stock.

Because many traditional ETFs target baskets of stocks with a common theme (e.g. technology, sustainability) they allow investors to easily diversify their holdings or invest in one particular sector. A Bitcoin ETF therefore is one that mimics the price of Bitcoin without investors actually buying and storing the asset. It’s clear to see, then, why institutions have been waiting for such a product to get into the market.

What About a Bitcoin Futures ETF?

A Bitcoin futures ETF is slightly different because of the nature of the asset. Bitcoin futures are essentially agreements made between two parties to buy an agreed amount of bitcoin at a certain price at an agreed point in the future – say one month. Seeing as the price will probably not be the same as on the day of the agreement, the difference is settled in cash when the contract expires.

The major difference between a Bitcoin ETF and a Bitcoin futures ETF is that In the case of Bitcoin futures, physical Bitcoin is replaced by the cash equivalent and no actual bitcoin changes hands. A Bitcoin futures ETF therefore has the same principle as a physical Bitcoin ETF only it tracks the price of Bitcoin futures rather than the core Bitcoin price, which can sometimes vary by hundreds of dollars.