What is a Spot Bitcoin ETF? How Does It Work?

Exchange-traded funds ETFs are securities that track the underlying performance of a collection of assets or commodities. Over the last decade, Bitcoin has emerged as one of the top-performing assets globally, growing from a little-known peer-to-peer payment network to a worldwide phenomenon. Bitcoin's success has also spurred the creation of an entirely new asset class with a market capitalization of over $1 trillion. On January 10, 2024, the Securities and Exchange Commission approved 11 new spot bitcoin ETFs. So, what is a spot ETF, and what does it mean for BTC holders?


What is a Spot Bitcoin ETF?

 A spot bitcoin ETF is an exchange-traded fund that tracks bitcoin's spot or current price. The ETF is backed by Bitcoin because it holds an equivalent amount of Bitcoin to back every share it sells.

Investors can easily add bitcoin exposure to their portfolio through a spot bitcoin ETF. Spot ETFs, including new spot bitcoin ETFs, allow fund shares to be created or redeemed based on market demand. This enables investors to get exposure to the current bitcoin price without holding the asset itself.

While Bitcoin futures ETFs were approved for trading by the U.S. Securities and Exchange Commission in October 2021, they can only trade bitcoin futures. Futures are complex derivative instruments that track the potential prices of an asset in the future.


How does a Spot Bitcoin ETF work?

Bitcoin ETFs purchase a specific amount of bitcoins that a custodian securely stores offline in a digital wallet. These wallets are often "cold wallets," meaning that the bitcoins' keys are stored offline and cannot be accessed online. The ETFs then issue shares representing the bitcoins held by the fund, which are priced to reflect the current spot price of bitcoin and can be traded on traditional stock exchanges.

Investors and traders can now easily buy and sell an asset tied to the current value of bitcoin through spot bitcoin ETFs. This eliminates the need for them to hold Bitcoin itself and provides a more straightforward option for those seeking exposure to it in retirement accounts without having to open a self-directed IRA that could keep it directly.


How does a Bitcoin Spot ETF maintain its price?

Large financial institutions called authorized participants (APs) play a key role by buying or selling ETF shares to align the ETF's market price with its net asset value (NAV).

Here's how a Bitcoin spot ETF works.

If the ETF's market price is higher than its NAV, APs buy the underlying assets — Bitcoin — and exchange them for ETF shares, selling the ETF shares at the higher market price.

If the ETF's market price is lower than its NAV, APs buy ETF shares, redeem them for Bitcoin, and sell BTC at a higher market price. This process keeps the ETF's price in line with the value of its underlying assets.


Which countries have Spot Bitcoin ETFs? 

Spot Bitcoin exchange-traded funds (ETFs) are traded in just 5 markets and are incorporated in 10 countries worldwide. The countries where spot Bitcoin ETFs are incorporated include the US, Canada, Germany, Brazil, Australia, and tax havens like Bermuda, Jersey, Switzerland, Liechtenstein, and Guernsey. 


Spot Bitcoin ETFs are mainly traded in the US, Europe, and Canada, while smaller markets for these funds have emerged in Brazil and Australia. The US is currently the leading country for spot Bitcoin ETFs, with a total of $34.78 billion in assets spread across 10 ETFs that were approved earlier this year. 

The global spot Bitcoin ETF market is valued at $41.74 billion, with the US accounting for a significant 83.3% share. Canada, which had previously held the top spot, now trails behind with only a 7.4% market share.

Of the top 10 spot Bitcoin ETFs, 5 are from the US, 3 are from Europe, and 2 are from Canada.

Canada's 6 Bitcoin ETFs have $3.09B assets, up from $2.79B on December 18, 2023. This shows moderate outflows despite the BTC price increase.


Europe holds 8.8% of the global market share for spot Bitcoin ETFs, with a collective asset size of $3.67 billion. It has the highest number of spot Bitcoin ETFs available, with 13 in total, incorporated in countries such as Jersey, Guernsey, Germany, Switzerland, and Liechtenstein.


11 Spot Bitcoin ETFs in the US 

An ETF's expense ratio represents the amount its clients pay for various expenses such as portfolio management, administration, marketing, and distribution. 

Here are the 11 SEC-approved Spot Bitcoin ETFs as of January 31, 2024:

Spot Bitcoin ETF

Expense Ratio


ARK 21Shares Bitcoin ETF (ARKB)


0% fee for six months (or until $1 billion in assets)

Bitwise Bitcoin ETF (BITB)


0% fee for six months (or until $1 billion in assets)

Fidelity Wise Origin Bitcoin Trust (FBTC)


Fees waived till July 31, 2024

Franklin Bitcoin ETF (EZBC)


0% fee till August 2, 2024 (or until $10 billion in assets)

Grayscale Bitcoin Trust (GBTC)


No fee waiver

Hashdex Bitcoin ETF (DEFI)*


No fee waiver

Invesco Galaxy Bitcoin ETF (BTCO)


0% fee for six months (or until $5 billion in assets)

iShares Bitcoin Trust (IBIT)


0.12% fee for 12 months (or until $5 billion in assets)

Valkyrie Bitcoin Fund (BRRR)


0% fee for three months

VanEck Bitcoin Trust (HODL)


No fee waiver

WisdomTree Bitcoin Fund (BTCW)


0% fee for six months (or until $1 billion in assets)


How many Spot Bitcoin ETFs exist?

Currently, 32 spot Bitcoin ETFs are available worldwide, holding $41.74 billion in assets. This equates to approximately 4% of the total Bitcoin supply or 839,323 BTC. 

The largest spot Bitcoin ETF is the Grayscale Bitcoin Trust (GBTC), which has a total asset value of $22.83 billion. GBTC accounts for over half of the global spot Bitcoin ETF market, with a 54.7% market share. However, GBTC's dominance may be challenged due to ongoing net outflows, including the upcoming sale of 35 million GBTC shares by Genesis.


When did the first Spot Bitcoin ETF appear?

In 2020, the first three spot Bitcoin ETF products were launched, coinciding with Bitcoin's bull run. In June 2020, Germany's ETC Group Physical Bitcoin became the earliest spot Bitcoin ETF product to begin trading, followed by 3iQ The Bitcoin Fund and VanEck Bitcoin ETN towards the end of the year. 

Grayscale Bitcoin Trust, which launched in 2013, is the longest-running active spot Bitcoin ETF, but only converted from a unit trust to an ETF structure in 2024.


The highly anticipated US approvals brought nine new spot Bitcoin ETFs to the global market in 2024. It is unclear whether additional spot Bitcoin ETFs will be launched in other markets this year.


Do Spot Bitcoin ETFs have custodianship risk? 

Most current spot Bitcoin ETFs use Coinbase as their custodian for Bitcoin. Fidelity Wise Origin Bitcoin Fund (FBTC) uses Fidelity as its custodian. VanEck Bitcoin Trust uses Gemini.

Experts are worried about the risks associated with Coinbase being the primary custodian for most spot Bitcoin ETFs. If Coinbase experiences difficulties, such as a cyberattack, regulatory penalties, or a decline in revenue, investors wonder if their Bitcoin ETF holdings will still be safe.


While there are ways for ETFs and investors to recover their assets in the event of a Coinbase bankruptcy, it may not be immediate or automatic. Consider custodianship risks when looking for a spot Bitcoin ETF to avoid these risks.


What's next for Spot Bitcoin ETFs?

Since the SEC approved 11 spot bitcoin ETFs, a wave of new applications have been submitted for approval, indicating the possibility of additional ETFs.


The approval of spot bitcoin ETFs does not guarantee the approval of other crypto ETFs. In the SEC's approval announcement, Chairman Gary Gensler emphasized that the decision only applies to ETPs holding one non-security commodity — Bitcoin.


Do Spot Bitcoin ETFs impact the price of Bitcoin?

Spot ETFs may lead to increased demand for Bitcoin, as these funds buy from crypto exchanges to meet the demand of the spot ETFs. In the long term, the demand for Bitcoin may rise as retirement plans, 401(k) plans, and financial advisors begin offering spot Bitcoin ETFs to diversify portfolios into "alternative assets." 


Benefits of Spot Bitcoin ETFs to crypto

Legitimizing Bitcoin

The recent approval of spot bitcoin ETFs has increased the legitimacy of Bitcoin as an asset class, making it accessible to investors from various backgrounds through investment accounts such as IRAs and 401(k)s. 

Increased liquidity and prices

Increased liquidity is a notable advantage of spot Bitcoin ETFs as they can facilitate the buying and selling of large blocks of Bitcoin based on demand. This could stabilize prices over the long term. The demand for bitcoin may increase over time due to increased purchases by spot bitcoin ETFs. While a spot bitcoin ETF may not directly affect the price of bitcoin, this could eventually lead to a boost in the price. 


Investors might also benefit from lower trading fees by adopting Bitcoin through a spot ETF. Additionally, this can make accessing Bitcoin easier than using certain crypto exchanges.


Drawbacks of Spot Bitcoin ETFs to crypto

The price of spot bitcoin ETFs is linked to highly regulated securities, which means that any regulatory actions taken against the ETF could affect the price of Bitcoin itself.


Investors cannot take custody of the asset when investing in a spot bitcoin ETF. This means they must trust a third-party custodian to hold their Bitcoin. As the saying goes, "Not your keys, not your Bitcoin."


When comparing the costs of trading spot bitcoin ETFs versus purchasing and storing bitcoin yourself, it's essential to consider the annual fees. While the short-term costs of trading ETFs may be lower, the expense ratios over time could make owning it more costly.


Alternatives to Spot Bitcoin ETFs

You can opt for other investment alternatives that can expose you to the price of Bitcoin. Purchasing Bitcoin directly from an exchange to own the asset. This allows you to take custody of Bitcoin. Preferably, you should buy and hold your Bitcoin in a hardware wallet for safekeeping.


Investing in Bitcoin mining stocks is an excellent opportunity to support companies that own and operate large data centers for mining Bitcoin. These companies are publicly traded, so you can invest in them.


Frequently Asked Questions (FAQ)


1. What is a Spot Bitcoin ETF?

A Bitcoin ETF (Exchange-Traded Fund) is a financial product that allows investors to gain exposure to Bitcoin without needing to buy, store, or manage the cryptocurrency directly. Instead, the ETF holds Bitcoin on behalf of its investors, who can buy and sell shares of the ETF on traditional stock exchanges.


2. How do Spot Bitcoin ETFs operate?

Spot Bitcoin ETFs operate by holding Bitcoin as their underlying asset and issuing shares representing ownership in that Bitcoin. These shares are then traded on stock exchanges, allowing investors to buy and sell them just like stocks. The value of the ETF is tied to the performance of the Bitcoin it holds


3. What are the benefits of investing in a Spot Bitcoin ETF?

Investing in a Bitcoin ETF offers several advantages, including:

  • Convenience: Investors can gain exposure to Bitcoin without dealing with the complexities of owning and storing the cryptocurrency themselves.

  • Regulated market: Bitcoin ETFs are traded on regulated stock exchanges, providing investors with a familiar and secure way to invest.

  • Liquidity: Spot ETF shares can be bought and sold throughout the trading day, offering liquidity that may not be available in other forms of Bitcoin investment.


4. Are Spot Bitcoin ETFs regulated?

Yes, Spot Bitcoin ETFs are regulated financial products. They are subject to oversight by regulatory bodies such as the Securities and Exchange Commission (SEC) in the United States. This regulation helps ensure transparency and investor protection.


5. How are Spot Bitcoin ETFs different from buying Bitcoin directly?

While both Spot Bitcoin ETFs and buying Bitcoin directly offer exposure to the cryptocurrency, there are key differences:

  • Ownership: When you buy Bitcoin directly, you own the actual cryptocurrency. With a Spot Bitcoin ETF, you own shares of the ETF, representing ownership in Bitcoin held by the fund.

  • Accessibility: Spot Buying Bitcoin directly requires setting up a digital wallet and using cryptocurrency exchanges. Bitcoin ETFs can be bought and sold through traditional brokerage accounts.

  • Custody: Spot Bitcoin ETFs typically rely on trusted custodians to hold the cryptocurrency securely, while buying Bitcoin directly requires managing your own storage solutions.


6. Are spot Bitcoin ETFs suitable for all investors?

Like any investment, spot Bitcoin ETFs carry risks and may not be suitable for all investors.


7. How can I invest in a spot Bitcoin ETF?

To invest in a Bitcoin ETF, you'll need to open a brokerage account with a firm that offers access to the specific ETF you're interested in. Once your account is set up, you can buy and sell shares of the ETF through your brokerage platform, just like you would with any other stock or ETF.


8. Are there any tax implications associated with investing in a Spot Bitcoin ETF?

The tax implications of investing in a Spot Bitcoin ETF will depend on factors such as your country of residence and the specific tax laws that apply to ETF investments. You should consult a tax professional to understand the potential consequences before investing.