What are bitcoin ETFs and how do you trade them?

What is a bitcoin ETF?

A bitcoin exchange-traded fund (ETF) is an instrument that tracks the price of the underlying asset (ie bitcoin), enabling traders and investors to take a position on the price of the cryptocurrency (‘crypto’ for short) without having to buy and hold it. If the price of bitcoin goes up, so does the price of the ETF; the same correlation exists with falling prices.

Just like more traditional ETFs – such as those tracking stock indices, forex and commodities – spot bitcoin ETFs are traded in the same way that stocks are on regulated exchanges like the ASX (known on our platform as the Australia 200) or NASDAQ (known on our platform as the US Tech 100). This provides a regulated pathway to getting exposure to bitcoin, without the need to buy, store or manage the digital currency.

How do bitcoin ETFs work?

A bitcoin ETF tracks the price of the underlying asset and works the same as a traditional ETF in that it consists of shares which you can buy and own. Alternatively, you can use contract for difference (CFD) trading to speculate on bitcoin’s price movement through the fund without holding shares in the ETF or owning the crypto as an investment. The price of bitcoin ETFs is influenced by price movement in the crypto, so the prices move in tandem.

ETFs are typically created by large financial institutions known as authorised participants (APs). In the case of a bitcoin ETF, the fund will buy the cryptocurrency, store it using a custodian and issue shares. This means that the fund’s shareholders won’t need to manage digital wallets or navigate the complexities of the cryptocurrency landscape, as would be the case with outright bitcoin purchases.

Trading and investing in bitcoin ETFs with us

To trade on the changes in a bitcoin ETF’s price without owning any shares in the fund, you can take a position with us using CFD trading. CFDs are financial derivatives that give you exposure to an underlying asset on a leveraged basis, enabling you to open a trade at a fraction of its full value. While leverage magnifies your profit potential, it also amplifies possible losses – you could even lose more than the initial deposit paid to open the position. It’s important to always manage your risk carefully when trading CFDs.

With us, you can invest in bitcoin ETFs through share trading, which enables you to become a shareholder of the fund. As the ETF tracks the value of bitcoin, you’d have a proportional representation of the cryptocurrency’s market price in your investment portfolio. When share trading, you’d pay the full investment amount – plus other costs where applicable – for your chosen number of shares upfront.¹ Since the price of bitcoin can theoretically rise in perpetuity, the same applies to your profit potential. On the other hand, maximum possible losses – which are based on the theoretical condition of the underlying’s price dropping to zero – are limited to your full investment amount (excluding any additional fees).

Target market determination

Before you invest in an ETF, it’s important to consider the relevant target market determination (TMD) from the ETF issuer to check whether the ETF is consistent with your objectives, financial situation and needs. ETF issuers are required to publish a TMD for every ETF listed on an Australian exchange. It sets out the class of consumers for whom the ETF would likely be suitable for based on certain criteria like the fund’s key attributes.

Most of the ETFs that we offer have been categorised by issuers such as BetaShares and Vanguard as investments that are suitable for consumers who have a high (or very high) ability to bear loss. This consumer profile focuses on an investor’s objectives for the relevant portion of their portfolio only, and not the investor’s overall portfolio.

Bitcoin ETFs vs buying bitcoin outright

There are significant differences between getting exposure to bitcoin using ETFs and owning the cryptocurrency itself. For example, you won’t necessarily own an asset with a bitcoin ETF.

Bitcoin ETFs could also be a more cost-effective alternative to direct coin purchases. With us, for example, you’ll pay zero commission when investing in internationally listed bitcoin ETFs using your share trading account.¹ Keep in mind, though, that other costs – like our 0.7% foreign exchange fee and ETF issuer management fees – will still apply.

Below are some of the key differences between bitcoin ETFs and buying the crypto outright.

When trading a bitcoin ETF using CFDs with us, you wouldn’t hold any shares of the fund. Trading spot bitcoin ETFs by speculating on the price only is usually done through short-term positions.

Share trading (ie buying and owning) of these ETFs is typically done over the long term, which makes it similar to outright buying of the cryptocurrency. Trading and investing in bitcoin ETFs are more accessible ways of getting exposure to the crypto, as you wouldn’t need the technical expertise involved in the processes that enable you to hold the digital currency itself.

How to trade or invest in bitcoin ETFs

You can trade or invest in as many bitcoin ETFs as you like based on your risk tolerance and financial goals. With us, you can either speculate on the performance of a bitcoin ETF using a CFD trading account or you can buy shares in the fund using a share trading account.

Here are the steps you’d take to trade or invest in bitcoin ETFs with us:

1. Research and compare different ETFs
2. Develop a risk management strategy
3. Open a CFD trading or share trading account with us
4. Decide on the bitcoin ETF you want to trade or invest in
5. Place your order
6. Monitor and close your position

Remember, when going long or short using leveraged derivatives like CFDs, potential losses can exceed the initial deposit you paid to open the position. While leverage enables you to get full exposure at only a fraction of the total position size, both possible profits and losses are magnified to the full value of the trade.

When investing in a bitcoin ETF through share trading, it’s important to keep in mind that the biggest loss you could incur is the full amount that you paid to buy the shares (excluding any additional fees). This can only happen in the unlikely event of the share price dropping to zero. Potential profits, on the other hand, could theoretically keep rising as there’s no cap on what the share price can be.

Bitcoin ETFs to watch

Bitcoin ETFs have varying fees and they cater to different risk appetites. They also make provision for preferences like trading volumes and how established the ETF provider is. Due to such factors, each bitcoin ETF presents its own unique potential – so, it’s essential to conduct thorough research before committing to a trade or investment.

Below are some of the popular spot bitcoin ETFs.

The prices above are indicative only and are subject to our website’s terms and conditions.

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Footnotes

¹ We provide commission-free trading to clients buying US and international shares online using our instant currency conversion facility, with a 0.7% FX conversion fee per transaction. Clients who choose to convert currencies manually will pay commission of 2 cents per share, with a minimum charge of $10 on US stocks. We charge £10 or €10 per trade, or 0.1% of the trade value for European markets, whichever is higher. Other fees and charges may apply.