The DACFP Financial Advisor Guide to
Spot Bitcoin ETFs

Spot bitcoin ETFs let you own bitcoin without having to create a digital wallet or secure private keys.

Exchange Traded Funds are regulated by the U.S. Securities and Exchange Commission; they hold $8 trillion in assets, and investors added $500 billion in 2023, firmly establishing ETFs as the most popular investment vehicle in the country. Of course, all investments involve risk. Before investing, make sure you understand the risks of these investments.

This is the name of the ETF and its trading symbol.

This is the name of the company that operates the ETF, also known as the ETF sponsor, and the sponsors URL.

When choosing an ETF, it’s important to consider the experience and financial stability of the sponsor. These two statistics can be helpful. Some investors gain comfort knowing that a sponsor survived past financial crises or are managing assets worth trillions of dollars – suggesting that the sponsor has the expertise, experience and extensive client and asset base to allow it to survive future crises.

On the other hand, crypto is new. Firms that were established half a century ago might not have much knowledge or experience in this new field – and that’s why many investors prefer ETF sponsors that were created specifically to focus on crypto. And because crypto is new, these sponsors are fairly new as well.

Is the sponsor focused on crypto? If so, it offers several crypto investments, not just a spot bitcoin ETF, demonstrating its experience and expertise in this new asset class. On the other hand, a firm that offers investments in multiple asset classes might have broader experience and expertise that’s helpful when investing in crypto. Consider these issues and decide for yourself.

Every year, hundreds of ETFs that don’t have $50 million or more in Assets Under Management are closed. You don’t want to get a letter saying the ETF you bought is closing. Although you’ll get your money back (based on the fund’s closing value, which might be more or less than the amount you’d invested), you could incur tax implications – and you’d have to choose a new investment for the money.

So, the question you need ask is this: Will the fund eventually have enough AUM to continue operating?

This tells you the annual cost of owning the ETF. Bitcoin costs more to trade than stocks, and Crypto Custodians and Surveillance Partners charge fees that stock ETFs don’t incur.

When you buy shares of stocks, you are issued stock certificates representing your investment. The certificates are held by your brokerage firm in “street name” for safekeeping. If the brokerage firm fails, the Securities Investor Protection Corporation will replace them for you. SIPC is for brokerage firms what FDIC is for banks.

SIPC covers your ETF (which is a security) but not bitcoin (which isn’t). This means ETF sponsors must carefully safeguard the bitcoin they buy for their investors.

Due to this, every sponsor hires a Crypto Custodian. You’ve heard about frauds involving crypto custodians – most notably, FTX in 2022 – and therefore the selection of a custodian is extremely important.

When you invest in any ETF, not all of your money is used to buy the asset you’re seeking. Some of your money is held in cash. This facilitates the ability of the ETF to return money to investors who are selling their shares without having the ETF having to sell bitcoin. It also lets the sponsor collect its fee. So…who is holding and protecting the ETF’s cash?

Although stocks are easily priced, since they tend to trade on a single exchange (such as the New York Stock Exchange or NASDAQ), bitcoin trades on dozens of exchanges worldwide 24/7, and each exchange sets its own price. As a result, bitcoin prices can vary from exchange to exchange at any given moment.

This is deeply worrisome to the SEC, which insists on investor fairness – and having different prices simultaneously isn’t fair.

So, who can investors rely on when trying to determine the current and accurate price? We can’t rely on the ETF sponsors themselves, because they suffer from potential conflicts of interest (they naturally want the price to be high!).

Therefore, the SEC has required that sponsors of spot bitcoin ETFs partner with an independent third-party. This outside company’s job is to surveil the crypto market in real-time to determine the current and correct price of bitcoin. The sponsor’s selection of a Surveillance Partner is therefore immensely important – because you want to be confident that your ETF’s pricing is current and correct.

Should you invest in an index fund to capture the returns of the market (known as passive investing) or should you invest in a fund whose manager picks selected investments (active investing) in an effort to beat the market?

We won’t try to resolve the debate here. Instead, we’ll just say that some spot bitcoin ETFs are passive (they buy/sell bitcoin) while others are active (they try to buy and sell bitcoin before the price rises/falls). Make sure you choose an ETF that reflects your preference.

How’s the fund doing? You don’t just want to know if your fund is up or down; you also want to know how your fund is performing in comparison to the overall market. Every ETF makes this comparison to a benchmark, and this category tells you what the ETF is comparing itself to. You want to make sure that it’s a fair comparison.