Compiled by: ChainCatcher
What are ETFs?
Exchange Traded Funds (ETFs) are funds that can hold a variety of underlying assets and trade on an exchange like stocks. Since the first ETF was listed in the United States in 1993, ETFs have revolutionized investment access, providing a low-cost, transparent way to invest in a variety of asset classes.
ETFs can contain various types of investments, from a single commodity to a large number of stocks or bonds.
Bitcoin ETF is a single commodity ETF
Single commodity ETFs are a unique niche within the ETF universe. Unlike diversified ETFs, which hold a basket of different assets, single commodity ETFs direct investment into one specific commodity, such as Bitcoin, gold, silver, oil, or agricultural products.
By focusing on a single commodity, these ETFs simplify the complex process for individual investors seeking to gain exposure to a specific market segment without owning the stock directly.
For example, if an individual investor wanted to participate in oil price trading, it would be very cumbersome (or even impossible) to store a few barrels of crude oil and trade based on their own views on oil prices. Oil ETFs track the price of a related oil index and trade on a stock exchange, providing liquidity and ease of entry and exit without the complexity of directly taking custody of the oil. Spot Bitcoin ETFs offer the same investment model for Bitcoin.
Spot ETF vs Futures ETF
Bitcoin ETFs are broadly divided into two categories: spot and futures. Spot Bitcoin ETFs hold Bitcoin directly, and their value reflects the current price of the digital asset. In contrast, futures Bitcoin ETFs invest in contracts that speculate on the future price of Bitcoin, providing price exposure without directly owning it.
The following table summarizes the differences between spot and futures Bitcoin ETFs, and can draw the conclusion that "spot ETFs are better" through intuitive comparison:
From which dimensions can we compare the current spot Bitcoin ETFs in the market?
In general, factors to consider when comparing these ETFs include:
1. Hosting and Security
Different ETF providers may have different approaches to custody (i.e., storage and security of Bitcoin). Key considerations include the custodian’s track record and reputation, the type of wallet used (offline “cold” storage vs. online “hot” wallets), the security protocols in place, and insurance coverage.
2. Cash purchase vs. physical redemption
For retail investors, the distinction between cash purchases and physical redemptions of ETF units may seem subtle. However, for larger transactions, some ETF providers may allow authorized participants to use actual Bitcoin for these processes. This physical method is subject to regulatory frameworks and may have an impact on market dynamics and liquidity.
3. Rates
The expense ratio, which represents the annual operating expense of an ETF, is also an important factor to consider. While a fee (e.g., 1.0%) may seem insignificant, over a long holding period, even small differences in fees can add up to significant amounts. For example, on an initial $10,000 investment, a 0.5% difference in fees over a 20-year holding period can result in a $6,400 difference in returns (assuming a 10.0% annual return).
Currently, most Bitcoin spot ETF issuers choose fee rates between 0.19% and 0.30%, and Ethereum ETF issuers may do the same.
4. Tracking Error – Accuracy of Tracking Performance
Tracking error is an important metric that measures how closely an ETF's performance tracks Bitcoin's actual price movements. A lower tracking error indicates a more accurate reflection of Bitcoin's market performance, which is critical for investors seeking exposure to Bitcoin prices.
