Here’s How the New Bitcoin ETFs Will Work

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Regulators have given the green light to the first U.S. exchange-traded funds that directly hold bitcoin. Crypto enthusiasts hope the new funds—backed by asset managers such as BlackRock and Fidelity Investments—will draw more mainstream investors into bitcoin.

In many ways, the new ETFs are similar to the gold ETFs that emerged in the early 2000s and became a popular way to invest in the precious metal. Instead of buying physical bars of gold, investors could buy shares in a gold fund through their brokerage, just like buying stocks.

Similarly, the new spot bitcoin ETFs are designed to make it easier to buy bitcoin. You won’t need to set up a digital wallet and memorize your keys, and you won’t need to create an account at a crypto exchange. You can just use the same brokerage account that you might already use to trade stocks, bonds and other ETFs.

It is a fund that holds bitcoin for investors. The term “spot" simply means that it holds actual bitcoin, rather than a derivative tied to the price of bitcoin. The price of the ETF’s shares should rise and fall in line with the fluctuations of bitcoin’s price in the cryptocurrency markets.

In 2021, the Securities and Exchange Commission opened the door to ETFs that hold bitcoin futures—a type of derivative that tracks the price of the digital currency. But the SEC resisted allowing spot bitcoin ETFs that hold actual bitcoins. The agency justified its stance by arguing that the spot bitcoin market was susceptible to market manipulation.

Advocates for crypto investing said it was illogical to allow bitcoin futures-based ETFs but not spot bitcoin ETFs. One fund manager sued the agency, winning a court ruling in August that pressured the SEC to allow spot bitcoin ETFs.

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