In 2021, the first Bitcoin (BTC -0.41%) exchange-traded funds (ETFs) hit the U.S. market. Following the launch, Morningstar analyst Ben Johnson told investors in no uncertain terms, “These aren’t the Bitcoin ETFs you’re looking for.” That’s because the first generation of Bitcoin ETFs buy and sell futures contracts, rather than investing in the cryptocurrency itself.
The problem with that strategy is that price changes in futures contracts do not always mirror price changes in Bitcoin. Additionally, to maintain indefinite exposure, issuers roll Bitcoin futures contracts from one month to the next, meaning they sell contracts as the expiration date approaches and buy new contracts. But rolling the contracts costs money, and the fees are passed along to shareholders.
The upshot is the first Bitcoin ETFs provide indirect exposure to Bitcoin, and consequently fail to tightly track its price. For instance, the futures-linked ProShares Bitcoin ETF has declined 37% since making its market debut in October 2021, but Bitcoin has gained 60%. In other words, the first Bitcoin ETF to hit the U.S. market has underperformed Bitcoin by 97 percentage points since its inception.
Ben Johnson at Morningstar was correct: Those were not the Bitcoin ETFs investors wanted. Fortunately, spot Bitcoin ETFs — which actually own Bitcoin — launched in January 2024, and the cryptocurrency is now doing something it has never done before: It is seeing strong adoption among institutional investors.
Here’s why that matters.
Spot Bitcoin ETFs reduce friction for institutional investors
The SEC approved 11 spot Bitcoin ETFs in January 2024. Those new funds let investors add Bitcoin exposure to existing brokerage accounts, while eliminating the hassle and high fees associated with cryptocurrency exchanges.
Consider this assessment from John Eade, president of Argus Research:
Not long ago, the only way to gain exposure to Bitcoin was to invest in it directly. The process was arduous and required self-service in an unregulated market. But investing in Bitcoin has come a long way thanks to the January debut of spot Bitcoin ETFs. This new type of security gives investors exposure to Bitcoin without the need to buy, store, or manage it.
Importantly, because spot Bitcoin ETFs buy and hold the cryptocurrency rather than future contracts, they track the price of Bitcoin very closely. For instance, the iShares Bitcoin Trust (IBIT 1.05%) has returned 110% since making its debut in January 2024, while Bitcoin itself has advanced 111%.
Consequently, the new spot Bitcoin ETFs have already unlocked substantial demand among retail investors and institutional investors, such that several experts have called them the most successful ETF launches in history. In particular, the iShares Bitcoin Trust stands out. It hit $10 billion in assets faster than any ETF on record, according to The Wall Street Journal.
Institutional investors have contributed heavily to that trend. The number of institutions holding a spot Bitcoin ETF increased from 965 to 1,100 between the first and second quarters of 2024, such that they are “being adopted by institutions at the fastest rate of any ETF in history,” according to Matt Hougan, chief investment officer at Bitwise.
That has colossal implications for Bitcoin’s future price trajectory. Institutional investors have about $120 trillion in assets under management, and allocating even a small fraction of that sum to Bitcoin could drive its price much higher. Indeed, Cathie Wood at Ark Invest thinks institutions will eventually allocate “a little more than 5% of their portfolios to Bitcoin,” driving the price of a single Bitcoin to $3.8 million.
Image source: Getty Images.
Options trading on the iShares Bitcoin Trust could accelerate institutional adoption
In November 2024, the Nasdaq Stock Exchange introduced options trading on the iShares Bitcoin Trust, a milestone that provides another catalyst to institutional adoption. Options contracts afford the holder the right (but not the obligation) to buy or sell securities at a predetermined date and price.
One important application of options trading is the hedging of long positions. For instance, institutional money managers with positions in the iShares Bitcoin Trust could protect their portfolios from a potential Bitcoin crash by purchasing put options, which afford the holder the right to sell a security at a specific price during a predetermined period.
What does it all mean?
Spot Bitcoin ETFs have already boosted institutional demand for Bitcoin, such that the cryptocurrency’s price has surged 111% since the new funds hit the U.S. market in January. And demand for spot Bitcoin ETFs could continue to build as institutions incorporate options into their trading strategies. That could drive Bitcoin’s price even higher in the coming years.