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Bitcoin ETFs: Basics and fundamentals

Jonathan G.
Bitcoin BTC ETFs: basics & fundamentals

    Bitcoin ETFs, or exchange-traded funds, have been a hot topic in the last couple weeks.

    Unlike buying Bitcoin directly from cryptocurrency exchanges, which can be complex and potentially risky, Bitcoin ETFs provide a more familiar and regulated investment option for both institutional and retail investors.

    This has led to a run on popular Bitcoin spot ETFs such as IBIT and BITO, with the asset class generating close to $10 billion in trading volume—in a single day!

    In this guide, we'll dive into all things ETFs and explore how the Bitcoin spot ETFs have been evolving.

    What is an ETF?

    ETFs, or exchange-traded funds, first emerged in the early 1990s.

    At that time, the concept of ETFs was revolutionary because it combined the features of both mutual funds and individual stocks. Like mutual funds, ETFs offered investors diversified exposure to a basket of assets, but like individual stocks, they could be bought and sold on stock exchanges throughout the trading day.

    Following the success of the first ETFs, the asset class quickly gained popularity among investors seeking cost-effective, diversified investment options. In the late 1990s and early 2000s, ETF providers introduced a variety of new ETFs tracking different asset classes, sectors, and investment strategies.

    Over the years, the ETF market continued to expand and evolve, with innovations such as leveraged and inverse ETFs, which offer amplified exposure to market movements, and thematic ETFs, which focus on specific investment themes or sectors.

    Today, the ETF market has grown into a multi-trillion-dollar industry, with thousands of ETFs available to investors covering virtually every asset class, region, and investment strategy imaginable.

    As such, ETFs have become an integral part of the investment landscape, offering investors a convenient, cost-effective way to build diversified portfolios and gain exposure to a wide range of investment opportunities.

    What is a Bitcoin ETF?

    There are two main types of Bitcoin ETFs: Bitcoin spot ETFs and futures-based Bitcoin ETFs.

    A Bitcoin spot ETF is an exchange-traded fund that directly holds Bitcoin as its underlying asset.

    As for futures-based Bitcoin ETFs, their value is derived from Bitcoin futures contracts, and don’t actually own and custody native Bitcoin like Bitcoin spot ETFs do.

    An advantage of spot ETFs is you gain exposure to the price movements of Bitcoin without needing to buy, hold, and secure Bitcoin yourself. Instead, you can buy shares of the ETF through your brokerage accounts, similar to purchasing shares of a stock. The ETF then holds Bitcoin on behalf of you, the investor, in a secure cold storage wallet.

    In January 2024, the SEC approved the first US-listed Bitcoin spot ETFs—a watershed moment for the world's biggest cryptocurrency and the broader crypto industry.

    Since then, Bitcoin spot ETFs have gained momentum:

    • On February 28, 2024, Bitcoin spot ETFs generated $7.6 billion in trading volume.
    • Merrill Lynch and Wells Fargo—two of the most renowned banks globally—have offered Bitcoin spot ETFs to eligible wealth management clients.
    • The popularity of Bitcoin spot ETFs has led experts to compare them with Gold ETFs—one of the most popular asset classes to date. Moreover, analysts believe that Bitcoin spot ETFs could eclipse Gold ETFs in the upcoming years.
    Fidelity Bitcoin BTC ETF

    If you’d like to keep track of Bitcoin ETFs, make sure to follow this tracker.

    Crypto ETFs: future outlook

    The success of the Bitcoin spot ETFs has been unprecedented.

    With that said, Bitcoin probably won't be the last cryptoasset to be listed in an ETF. Many people believe that Ether—the native currency of the Ethereum blockchain—might be the next asset to be listed as a spot ETF.

    For anyone new to crypto, it's important to note that cryptocurrencies such as Ether (ETH) and Solana (SOL) are slightly different than Bitcoin.

    While Bitcoin leverages the proof of work (PoW) mechanism and is considered a store of value i.e. “digital gold,” both Ether and Solana are based on the proof of stake (PoS) mechanism and aren’t necessarily seen as stores of value. As such, the path forward for Ether and Solana might not be as straightforward, as regulators may put up roadblocks.

    Regardless, the success of Bitcoin spot ETFs has given the entire crypto ecosystem a much-needed wave of momentum—so it will be interesting to see how things develop going forward.

    How to buy Bitcoin directly with Phantom

    If you’d like to purchase Bitcoin and other cryptocurrencies directly, instead of through an ETF, we’re here to help!

    But first, why is it beneficial to purchase cryptocurrencies directly?

    • Complexity: As you can see here, each Bitcoin spot ETF has a different ticker, price, and custodian—making it extremely difficult to get a good overview and make a confident purchasing decision. However, when you buy Bitcoin directly, there's none of that and only one ticker: BTC.
    • Fees: When you buy shares in an ETF, you’ll have to pay multiple fees—which can be significant depending on your spend. Conversely, if you purchase Bitcoin directly, you avoid management and middleman fees and only pay transaction i.e. network fees.
    • Self-custody: When you purchase Bitcoin or other cryptocurrencies through an ETF, you do not own these digital assets directly, nor do you have access to them. If you’d like to have full control of your digital assets, it's best to purchase them directly and self-custody them in a crypto wallet such as Phantom.
    • Decentralized finance (DeFi): Self-custody of cryptoassets comes with another benefit: DeFi. For example, if you hold 0.10 BTC in your Phantom wallet, you can deposit that BTC into DeFi protocols such as marginfi, Kamino, or Drift to earn yield and as collateral for your trades.

    Alright, so how do you buy, sell, and trade Bitcoin and other cryptocurrencies with Phantom?

    Here are some ideas:

    • First things first, download and create your Phantom wallet.
    • Option 1: Create an account on a centralized exchange such as Coinbase or Kraken. Next, purchase USDC and send it to your Phantom wallet using the Solana network (SPL tokens). Then, go to Jupiter, connect your Phantom wallet, and swap your USDC for Bitcoin—either WBTC or TBTC: these are “wrapped Bitcoin”, which are native to the Solana blockchain, so they might always have a slight price difference to native Bitcoin on centralized exchanges such as Coinbase or Kraken. However, as discussed above, centralized changes also have higher fees and don’t allow for self-custody—Phantom, on the other hand, allows you to self-custody all your digital assets.
    • Option 2: you can also purchase Bitcoin, USDC, and other cryptocurrencies directly within you Phantom wallet using MoonPay, PayPal, and Robinhood.
    • Option 3: purchase Bitcoin, USDC, and other cryptocurrencies on Jupiter directly using your Phantom wallet and credit card.

    After purchasing cryptocurrencies, you can a) hold it in your Phantom wallet, b) send it to your cold wallet, or c) deposit it into DeFi protocols such as marginfi, Kamino, or Drift to earn yield and as collateral for your trades.

    Disclaimer: This guide is strictly for educational purposes only and doesn’t constitute financial or legal advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.