Analysis of the composition and types of Bitcoin ETFs

 Analysis of the composition and types of Bitcoin ETFs

A Bitcoin ETF (Exchange Traded Fund) is a financial instrument that allows investors to participate indirectly in Bitcoin investments through the traditional stock market, without the need to directly own or manage the cryptocurrency. At its core, it provides investors with risk-controlled exposure by tracking the price of Bitcoin or related derivatives. Here's a breakdown of its core components and global market practices:

 1. The main types of Bitcoin ETFs

Depending on the underlying asset and investment strategy, Bitcoin ETFs are divided into the following two main categories:

1.  Spot Bitcoin ETF (Physical-Backed ETF)
   • Definition and operation: Directly hold Bitcoin as the underlying asset, and the ETF share price is linked to the spot price of Bitcoin in real time. For example, each ETF may represent a certain percentage of Bitcoin (e.g., 0.001 BTC), and investors can indirectly enjoy the benefits of Bitcoin price fluctuations by buying and selling ETF shares.
   •  Advantage:

•  High transparency: The asset structure is simple, which directly reflects the supply and demand of the Bitcoin market.
• No leverage risk: There is no rolling cost or premium loss of futures contracts.
  • Challenge: Bitcoin custody security and compliance issues need to be addressed, often relying on regulated custody such as Coinbase.
    
    

2.  Futures Bitcoin ETF
   • Definition & Operation: Indirectly tracking prices by investing in Bitcoin futures contracts on platforms such as the Chicago Mercantile Exchange (CME). For example, the ProShares Bitcoin Strategy ETF (BITO) is fully configured with CME futures contracts and employs a "rolling contract" strategy to maintain positions.
   •  Advantage:

•  Avoid the risk of direct holding: No need to deal with cryptocurrency storage.
• Stronger compliance: Compliant with traditional financial regulatory frameworks, the US SEC only approved such products in the early days.
  •  Challenge:
• Tracking error: The contango/backwardation of a futures contract may cause deviation from the spot price.
•  Management costs: Frequent monthly changes increase costs.

 2. The investment target and asset portfolio of the Bitcoin ETF

 Depending on the strategy, the ETF may contain the following assets:

1. Pure Bitcoin spot or futures: For example, the Purpose Bitcoin ETF (BTCC) holds Bitcoin directly, while BITO only invests in futures contracts.
2. Hybrid asset portfolio: Some ETFs combine Bitcoin with other assets to diversify risk. For example:
   • The Valkyrie Bitcoin Strategy ETF (BTF) is an allocation of Bitcoin futures, U.S. Treasury bonds, and blockchain sector stocks.
   • 3iQ CoinShares Bitcoin ETF (BTCQ) holds Bitcoin and uses cold storage technology to secure it.
     
     
3. Leveraged or inverse strategies: For example, the ProShares Short Bitcoin ETF (BITI) allows short Bitcoin futures.

 3. Examples of the global Bitcoin ETF market

 The regulatory environment in different regions has given rise to a variety of product forms:

1.  U.S. market
   •  Spot ETFs: SEC approved multiple products in 2024, including:

• iShares Bitcoin Trust (IBIT): The largest managed by Coinbase.
• Fidelity Wise Origin Bitcoin Trust (FBTC): Low fee (0.25%) attracts institutional investors.
  • Futures ETF: ProShares BITO is the first approved product with a size of more than US$1 billion.

2.  Canadian Market (Regulatory Pioneer)

   • Purpose Bitcoin ETF (BTCC): The world's first spot ETF (2021), once leading in terms of asset size.
   • 3iQ CoinShares Bitcoin ETF (BTCQ): Uses multi-signature wallet technology with a fee of 1.3%.

3.  European market

   • ETC Group Physical Bitcoin (BTCE): Listed on the Xetra exchange in Germany, the custodian is BitGo.
   • 21Shares Bitcoin ETP (ABTC): Issued in Switzerland, covering units denominated in Euro and US Dollar.

4.  Other regions

   • Brazil: QR Asset (QBTC11) is listed on the B3 exchange and holds bitcoin directly.
   • Hong Kong: Issuance of cryptocurrency ETFs is permitted, but mainly for international investors.

 4. Core considerations for investing in Bitcoin ETFs

1. Fee structure: Management fees range from 0.2% (e.g. Bitwise BITB) to 1.5% (Grayscale GBTC), and long-term holding needs to pay attention to costs.
2. Liquidity: U.S. ETFs are usually traded more than $300 million, such as IBIT, which has an average daily trading volume of more than $300 million.
3. Regulatory developments: The SEC's custody and anti-fraud provisions for spot ETFs continue to tighten, which may affect the product structure.
4. Market volatility adaptation: Futures ETFs may benefit from inverse strategies in bear markets, while cash ETFs more directly reflect bull markets.

 Fifth, the future development trend

1. Diversified targets: Ethereum spot ETFs have entered the regulatory approval process and may replicate the success path of Bitcoin ETFs.
2. Global expansion: Australia, Japan and other markets are exploring localized products, such as the Monochrome Bitcoin ETF (IBTC), which plans to list on Cboe Australia.
3. Technological innovation: On-chain proof-of-reserves (such as the Merkle Tree audit) may become the new standard for enhanced transparency.

 summary

Bitcoin ETFs provide a variety of options for investors with different risk appetites through two major types: spot and futures. Its core value is to lower the barrier to entry for cryptocurrency investment, while relying on the traditional financial regulatory framework to enhance security. As global regulation becomes clearer, Bitcoin ETFs are expected to be a key bridge between cryptocurrencies and traditional capital markets, but investors still need to carefully assess core risks such as fees, liquidity, and market volatility.