In this episode of Yahoo Finance Future Focus, our host Brian McGleenon explains what a Bitcoin ETF is and how it differs from other investments. Spot exchange-traded funds (ETFs) have emerged as a transformative tool in the cryptocurrency market, offering investors a direct way to gain exposure to Bitcoin price movements. Unlike derivatives-based ETFs, spot Bitcoin ETFs invest directly in Bitcoin, reflecting its current price. Since each ETF share corresponds to a specific amount of Bitcoin held in reserve, these funds provide a regulated and secure gateway for both individual and institutional investors to participate in the cryptocurrency market. The recent approval of several Bitcoin ETFs by the US Securities and Exchange Commission (SEC) in January led to a notable increase in the price of Bitcoin. Increased inflows from major fund managers such as BlackRock and Franklin Templeton have fueled Bitcoin's rally, highlighting the growing importance of spot Bitcoin ETFs in shaping the cryptocurrency landscape.
Video version
Brian McGlennon: Welcome to the future focus of Yahoo Finance. Now, the price of Bitcoin has been rising since several Bitcoin exchange-traded funds or ETFs were approved by the US Securities and Exchange Commission in January. But what exactly is a spot Bitcoin ETF? Why did it cause the price of Bitcoin to rise?
So spot Bitcoin ETFs work in the same way as traditional ETFs. But instead of tracking a basket of stocks, for example, Bitcoin ETFs track the current price of Bitcoin. Now, each ETF share sold corresponds to an equivalent amount of actual Bitcoin held in reserve.
There are currently 11 Bitcoin ETFs offered by fund managers such as BlackRock, Fidelity, and Franklin Templeton. Now, these managers work with accredited participants who purchase Bitcoin for an exchange-traded fund (ETF). The earned bitcoins are then held in digital wallets by custodians, such as Coinbase.
Each ETF has issued shares representing the Bitcoin purchased, which corresponds to the current spot price of the underlying asset. Now, these shares can be bought and sold on traditional exchanges, making it easier for ordinary investors and large institutions to invest in Bitcoin without actually owning it directly.
For example, BlackRock's iShares Bitcoin Trust ETF is listed on the Nasdaq. While Fidelity's Fidelity Wise Origin Bitcoin BTC Fund is listed on the New York Stock Exchange. This setup allows investors to learn about Bitcoin without having to directly manage digital wallets or store private keys, which can be complex and risky for some investors.
Now, all of these dynamics have had an impact on Bitcoin's price since the SEC approved ETFs in January of this year. In the short term, increased institutional investment through spot ETFs has increased demand for Bitcoin, causing the price of the digital asset to rise.
The recent approval of Bitcoin exchange-traded funds by the SEC also marked a shift in how regulators look at cryptocurrencies, granting a certain level of legitimacy to Bitcoin as an asset class and increasing liquidity in the Bitcoin market overall.
Now, the UK's financial regulator, the Financial Conduct Authority, appears to be following its US counterpart's lead after making a recent statement that it intends to allow bitcoin-backed exchange-traded notes, or ETNs, specifically, for professional investors.
However, it is always essential to note that investing in Bitcoin and spot ETFs comes with its risks. Investors should be careful and aware of the volatility associated with Bitcoin. Additionally, investors do not actually hold Bitcoin when investing in spot ETFs. Instead, they rely on third-party custodians. As always, investors should be careful to consider their risk tolerance before investing in these newly approved products.
Thank you for joining us.
