What is a Bitcoin ETF?

Over the past year, Bitcoin has made a bit of a comeback. From around NZ$26,000 at the start of 2023, the price of Bitcoin is now hovering close to NZ$70,000.

So while the initial hype surrounding all things crypto has subsided, it’s clear there’s still money to be made investing in Bitcoin.

And some of the latest financial products to allow punters to risk their cash on crypto are the new Bitcoin ETFs that have recently been approved by the US Securities and Exchange Commission.

So if you’re interested in investing in crypto and are curious about these new investment products, here Canstar wraps up how Bitcoin ETFs work, how you can invest in them and their alternatives.

What is a Bitcoin ETF?

An Exchange Traded Fund, or ETF, groups together multiple securities and trades them as one block on a stock exchange.

For example, an NZX50 ETF contains shares of all the 50 largest companies on the New Zealand Securities Exchange (NZX) grouped together into one package. When you buy shares of an NZX50 ETF, you are essentially buying a little piece of all the 50 biggest companies without the need to make 50 separate purchases.

While Bitcoin ETFs have been around for a few years now, most have worked by tracking the Bitcoin market, for example Bitcoin futures – contracts used to buy and sell Bitcoin. This has allowed investors to speculate on Bitcoin’s price without actually owning any of the cryptocurrency.

ETFs that actually use investors’ money to purchase Bitcoin have, up until recently, not been approved for trading on major stock exchanges – because regulators have considered them too risky. However, the US Securities and Exchange Commission recently approved 11 Bitcoin funds for listing and trading in the US.

This has opened the door for people to easily invest in Bitcoin without having to purchase the cryptocurrency themselves through a crypto exchange.

Fewer risks (of being ripped off, not losing your money!)

In the past, if you’ve wanted to buy Bitcoin, you’ve had to go through a cryptocurrency exchange. While the purchase process is pretty straightforward, ensuring your crypto is safely stored has been more of a problem.

Since the height of cryptomania a couple of years ago, many exchanges have closed. And some, like Sam Bankman-Fried’s fraudulent FTX, have imploded spectacularly, taking millions of dollars of their customers’ investments with them.

In comparison, the newly approved Bitcoin ETFs are being offered by highly respected and highly regulated investment companies, such as BlackRock – the world’s latest asset management company – so investors can rest assured their money has actually been invested in Bitcoin, and not used by a millennial to buy a Lamborghini.

Investing process is easier

Buying crypto through an exchange and securely storing them requires a modicum of tech savvy. However, the fact that the new ETFs are listed on US stock exchanges such as the Nasdaq and the New York Stock Exchange’s electronic platform Arca means that everyday investors can easily trade through user-friendly apps such as Sharesies, Hatch or Stake.

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Things to remember before investing in a Bitcoin ETF

There are a couple of main points to take into consideration before investing in a Bitcoin ETF in the US from here in NZ:

Costs associated with investing in US markets

While investing in overseas markets is easy through share-trading apps, there are added costs involved, including a one-off payment of around $5 to meet your US tax requirements.

Throughout the process there are also multiple institutions clipping the ticket, meaning overall fees could be more than buying your Bitcoin directly from a crypto currency exchange that operates here in NZ.

However, the biggest extra cost is often currency conversion fees. To invest in US markets you need US dollars, and converting your NZ$ to US$, and then back again, will incur an FX fee at every stage. Also, currency exchanges are always susceptible to exchange-rate fluctuations.

It’s still Bitcoin

Although the new US Bitcoin ETFs have given the controversial cryptocurrency a slight veneer of legitimacy, it’s still a highly risky investment.

The price of Bitcoin is volatile. It isn’t Meta stock, and Bitcoin doesn’t make iPhones. If you can’t afford to lose your money, then think twice before investing your hard-earned cash in a few lines of computer code.

About the author of this page

This report was written by Canstar’s Editor, Bruce Pitchers. Bruce has three decades’ experience as a journalist and has worked for major media companies in the UK and Australasia, including ACP, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.