Spot and futures Bitcoin ETFs: how they work and which to choose
Exchange-traded funds focused on Bitcoin (Bitcoin ETFs) allow investors to benefit from changes in the price of the world's first cryptocurrency without having to buy, store, or transfer digital assets themselves. These instruments trade on traditional stock exchanges, providing access to the cryptocurrency market through familiar investment infrastructure.
There are two main types of Bitcoin ETFs: spot and futures. Although both are linked to the price of BTC, they differ in their underlying assets, management mechanisms, liquidity requirements, tracking accuracy, and investment risks.
What is an ETF?
An ETF (Exchange-Traded Fund) is an investment fund whose shares trade on a stock exchange, much like the shares of publicly listed companies.
ETFs can hold various types of assets, including stocks, commodities, bonds, and cryptocurrency-related instruments. The primary purpose of most ETFs is to track the performance of a particular asset, market index, or investment strategy.
How does a Bitcoin ETF work?
A Bitcoin ETF is a type of exchange-traded investment fund whose performance is linked to changes in the price of Bitcoin.
Instead of purchasing BTC directly, investors buy shares of the fund through a broker. This allows them to participate in cryptocurrency market movements without creating their own digital wallets or managing private keys.
Depending on its structure, a Bitcoin ETF may hold actual Bitcoin or derivative* instruments whose value depends on BTC.
* Derivatives are financial instruments whose value depends on the price of an underlying asset, such as a cryptocurrency, stock, currency, or commodity. They include futures, options, and perpetual contracts. These instruments allow investors to profit from changes in the price of an underlying asset without owning it directly.
Bitcoin ETF shares trade on traditional stock exchanges, so investors do not necessarily need to register with a cryptocurrency trading platform to purchase them.
As the digital asset market develops, interest in these investment products continues to grow. Two categories of Bitcoin ETFs have become particularly widespread:
- Spot Bitcoin ETFs — funds that directly hold BTC.
- Futures Bitcoin ETFs — funds that invest in futures contracts linked to the price of Bitcoin.
Each option has specific characteristics that investors should consider when choosing an investment strategy.
What is a spot Bitcoin ETF?
A spot Bitcoin ETF is an exchange-traded fund that holds Bitcoin as its underlying asset.
The fund's management company purchases BTC and arranges for its storage through dedicated infrastructure, typically using a specialized custodian*.
* A custodian is a specialized financial institution or service provider responsible for holding and safeguarding clients' assets, including securities and cryptocurrencies. In the case of spot Bitcoin ETFs, the custodian stores the Bitcoin owned by the fund, manages the custody infrastructure, and protects the private keys required to access the cryptocurrency.
Investors purchase shares of the fund, whose value reflects changes in the market price of the Bitcoin held by the fund.
As a result, ETF shareholders gain economic exposure to BTC without directly owning the cryptocurrency.
Example of how a spot Bitcoin ETF works
Suppose there is a hypothetical spot Bitcoin ETF called BTC-one.
The fund holds 10,000 BTC and has issued a total of 1 million shares.
Under these conditions, each share theoretically represents:
10,000 BTC / 1,000,000 shares = 0.01 BTC.
Therefore, changes in Bitcoin's market price directly affect the value of BTC-one's assets and, consequently, its share price.
In practice, the share price also depends on fund expenses, the share creation and redemption mechanism, and the balance between supply and demand on the stock exchange.
Advantages of spot Bitcoin ETFs
No need to store cryptocurrency yourself
Investors do not need to create a digital wallet, safeguard a seed phrase, or manage private keys themselves. The fund arranges BTC custody through specialized market participants.
This reduces the risks of mistakes when handling cryptocurrency independently, although it does not eliminate technological and custody-related risks.
Access through traditional stock exchanges
ETF shares can be traded through conventional brokerage infrastructure. For many investors, this is more convenient than dealing directly with cryptocurrency exchanges.
Operation within a regulated financial environment
Spot ETFs operate in accordance with the laws and financial regulatory requirements of their respective jurisdictions. A regulated fund structure may increase confidence among investors who prefer traditional investment instruments.
Relatively simple investment model
Because the fund holds Bitcoin directly, its performance is primarily determined by changes in BTC's spot price.
Investors do not need to understand the complexities of futures trading or contract rollover mechanisms.
Disadvantages of spot Bitcoin ETFs
High volatility of the underlying asset
Bitcoin's price can fluctuate significantly over short periods. Accordingly, spot Bitcoin ETF shares are also exposed to substantial price volatility.
Potential deviations from the BTC price
Despite holding Bitcoin directly, an ETF may not perfectly replicate the cryptocurrency's price movements.
Differences may arise from management fees, operating expenses, stock exchange trading conditions, and temporary deviations between the market price of ETF shares and the fund's net asset value.
Additional investment costs
Managing an ETF involves certain expenses. Depending on the specific product, annual management fees may reach 2.5%, although many funds charge significantly less.
When purchasing cryptocurrency directly on a spot exchange, trading fees are often lower. However, a fair comparison must also account for other potential costs, including custody, withdrawals, and blockchain network fees.
Continued market and infrastructure risks
A regulated investment structure does not make Bitcoin investments risk-free. Beyond BTC price fluctuations, investors depend on the reliability of the fund's management company, custodian, and other infrastructure providers.
The same general principles apply to spot Ethereum ETFs and exchange-traded funds focused on other digital assets. Their advantages and disadvantages are largely similar to those of spot Bitcoin ETFs.
What is a futures Bitcoin ETF?
A futures Bitcoin ETF is an exchange-traded investment fund whose returns are linked to changes in the price of BTC through investments in futures contracts rather than direct purchases of the cryptocurrency.
A futures contract is a derivative financial instrument traded on an exchange under which the buyer and seller undertake obligations to transact in an underlying asset at a predetermined price on a specified future date.
Depending on the terms of the contract, settlement may involve the actual delivery of the underlying asset (physically settled futures) or a cash payment reflecting the difference between the agreed price and the asset's settlement value at expiration (cash-settled futures).
Futures contracts allow market participants to take positions based on Bitcoin's future price without purchasing BTC on the spot market.
The fund builds a portfolio of futures contracts, while investors can participate in the strategy's results by purchasing ETF shares.
Example of how a futures Bitcoin ETF works
Suppose an investment company establishes a fund called BitFutures. Instead of purchasing Bitcoin, the fund invests in futures contracts.
For example, the fund buys futures contracts priced at $55,000 per Bitcoin, with expiration in three months. If BTC rises more than the market anticipated, these contracts may increase in value, raising the value of the fund's assets. If Bitcoin's price falls, the fund may incur losses.
To allow ordinary investors to invest in BitFutures, the fund issues shares that trade on a stock exchange. By purchasing these shares, investors effectively gain exposure to a portfolio of futures contracts without buying Bitcoin itself.
For example, an investor purchases 1,000 BitFutures shares at $10 each, investing a total of $10,000.
Three months later, the value of the futures contracts increases, and the fund's share price rises from $10 to $12.
The investor's shares are now worth $12,000. If the investor sells, the profit is $2,000, or 20%, excluding fees and taxes. If the share price had fallen instead, the investor would have incurred a loss.
Thus, a futures Bitcoin ETF allows investors to benefit from changes in the value of Bitcoin futures contracts without having to purchase cryptocurrency or trade futures themselves.
Advantages of futures Bitcoin ETFs
Futures-based funds offer several advantages that are also characteristic of spot ETFs.
Investing without purchasing Bitcoin
Investors buying shares of a futures Bitcoin ETF do not need to purchase BTC, create a cryptocurrency wallet, or independently manage the security of digital assets.
Regulated investment infrastructure
Futures ETFs operate within traditional financial markets and are subject to the requirements of the relevant regulators.
This allows investors to gain exposure to cryptocurrency-related instruments through familiar financial institutions.
Exchange trading opportunities
ETF shares can be bought and sold throughout the trading session. Sufficient ETF liquidity allows investors to open and close investment positions efficiently.
However, the ability to execute large trades without significantly affecting the market price depends on the specific fund.
Opportunities for different investment strategies
Futures ETFs can be used not only to gain exposure to rising BTC prices but also as part of hedging or short-term trading strategies.
Their performance depends on both Bitcoin price movements and the derivatives market's characteristics.
Disadvantages of futures Bitcoin ETFs
No direct ownership of the underlying asset
Investors do not receive Bitcoin and do not become owners of the futures contracts themselves. Instead, they purchase shares in a fund that manages a portfolio of derivatives.
More complex return mechanism
Futures prices are influenced not only by the current BTC price but also by contract expiration dates, market expectations, financing costs, and other factors.
As a result, a futures Bitcoin ETF's performance may differ from Bitcoin's price movements on the spot market.
Contract rollover costs
Futures contracts have limited lifespans. To maintain continuous market exposure, the fund manager must close or replace expiring contracts with new ones.
This process is known as rolling over, or rolling, a futures position.
If new contracts are more expensive than expiring ones, regular rollovers may negatively affect the fund's returns.
Additional fees
In addition to standard management expenses, futures-based funds incur costs associated with trading derivatives and maintaining their positions. These expenses can reduce investors' overall returns.
Futures market risks
These ETFs are exposed to risks associated with derivatives, margin requirements, the potential use of leverage*, and the fulfillment of contractual obligations.
* Leverage is a mechanism that allows investors to open trading positions larger than their available capital through borrowed funds or derivative instruments. For example, with 5x leverage, an investor can open a $5,000 position using only $1,000 of their own capital.
Depending on the trading infrastructure, counterparty and clearinghouse* risks may also be present.
* A clearinghouse is a financial institution that records the obligations of exchange-traded transaction participants, calculates settlement amounts, and facilitates the fulfillment of obligations under established rules.
Why can a futures ETF's price differ from Bitcoin's price?
One of the most significant factors is the structure of the futures market.
When contracts with later expiration dates trade at higher prices than near-term contracts, the market is said to be in contango.
When a fund continuously rolls positions forward, it may incur additional costs because it buys more expensive contracts to replace expiring ones.
The opposite situation, in which longer-dated futures contracts trade at lower prices than near-term contracts, is known as backwardation.
Depending on market conditions, backwardation may have a positive effect on the returns generated by rolling futures positions.
Therefore, investors in futures Bitcoin ETFs should understand that even when Bitcoin's price rises, the fund's returns may be lower than expected.
Spot Bitcoin ETFs do not require continuous replacement of futures contracts, so they are not exposed to this particular source of tracking differences.
Which Bitcoin ETFs are available to investors?
Financial markets offer a variety of exchange-traded products focused on Bitcoin and Ethereum.
However, the specific funds available to investors depend on their country, local regulations, trading venues, and brokerage terms.
Major investment companies, including BlackRock, Invesco, ARK Invest, and Fidelity, have participated in the development of the spot Bitcoin ETF market by submitting applications to launch related investment products.
Before purchasing shares in a particular fund, however, investors should carefully examine its characteristics.
What to consider when choosing an ETF
Fees and additional expenses
Different funds use different fee structures. It is therefore important to review management fees, brokerage charges, and other expenses that may reduce overall investment returns.
Reliability of the fund management company
The reputation of the organization responsible for managing the fund is an important consideration.
Investors generally prefer providers with transparent structures, clearly defined investment strategies, and proven experience in financial markets.
Fund liquidity
The more liquid an ETF is, the easier it is for investors to execute trades without significant deviations between the execution price and current market quotations.
When assessing liquidity, it is useful to consider trading volumes, bid-ask spreads, and the specific trading characteristics of the fund's shares.
Investment portfolio composition
Not all exchange-traded products focus exclusively on Bitcoin.
Some instruments provide exposure to multiple cryptocurrencies or a basket of digital assets. These products may be used to diversify cryptocurrency investments.