ETF Central Guide: Understanding the Different Types of Bitcoin ETFs

Spot Bitcoin ETFs

Let’s use the Bitwise Bitcoin ETF

as an example. Why are they called “spot” ETFs? Because they hold actual Bitcoin and track the live, or “spot” price of Bitcoin during trading hours.

However, it’s important to note that spot Bitcoin ETFs are not investment companies registered under the Investment Company Act of 1940 (the “1940 Act”) and therefore aren’t afforded its protections. This structure mirrors what we see in many gold ETFs, which are organized as grantor trusts.

Spot Bitcoin ETFs typically store their reserves with a digital asset custodian in cold wallets for added security, moving Bitcoin to hot wallets only as needed to facilitate ETF creation and redemption. In the case of BITB, the custodian is Coinbase Custody Trust Co., LLC.

One notable limitation: spot Bitcoin ETFs are restricted by the SEC to cash creation and redemption processes rather than in-kind transfers. This can introduce higher operational costs and potential tracking error.

Expense ratios for these ETFs are reasonable. For instance, BITB charges a 0.2% fee. Some ETFs also offer temporary fee waivers at launch, such as BITB’s waiver on the first $1 billion in AUM for six months, though this has since expired.

Who should use these ETFs? Spot Bitcoin ETFs are ideal for advisors and retail investors looking for stock-like exposure to Bitcoin, particularly in tax-sheltered accounts where direct ownership of Bitcoin may be difficult to implement.

Bitcoin Futures ETFs

Before spot Bitcoin ETFs debuted in January 2024, the ETF industry found a workaround through Bitcoin futures ETFs, which are still available today. The best-known example is the ProShares Bitcoin Strategy ETF

. Unlike spot Bitcoin ETFs, futures ETFs do not hold actual Bitcoin.

Instead, their portfolios consist of money market instruments like Treasury securities used as collateral to gain exposure to CME Bitcoin futures contracts and occasionally S&P CME Bitcoin Futures Daily Roll Index swaps with counterparties like Societe Generale.

How are futures ETFs different from spot Bitcoin ETFs? While their prices typically track Bitcoin closely, they can diverge due to the roll process. This happens because futures contracts expire monthly, forcing the ETF to “roll” into new contracts.

If the futures curve is in contango (future contracts are priced higher than spot), this roll process introduces inefficiencies that can erode returns over time.

These funds are also much more expensive than spot ETFs. For example, BITO charges a 0.95% expense ratio, nearly five times higher than most spot Bitcoin ETF fees.

One quirk of Bitcoin futures ETFs like BITO: they can produce high yields. Because all ETFs registered under the Investment Company Act of 1940 must distribute nearly all taxable income, BITO’s income often comes from gains on futures contracts or swap agreements, leading to sizable monthly payouts.

Who should use these ETFs? Bitcoin futures ETFs can be useful for tax-loss harvesting if you’re holding spot Bitcoin ETFs or for investors seeking Bitcoin-linked exposure with the potential for high monthly income distributions.

Covered Call Bitcoin ETFs

Bitcoin futures aren’t the only way to generate Bitcoin-linked income – you can also sell options, specifically covered calls.

Why use this strategy? One key factor in options pricing is the volatility of the underlying asset: the higher the volatility, the higher the option premiums. And Bitcoin, as one of the most volatile assets out there, creates substantial income potential.

The Roundhill Bitcoin Covered Call Strategy ETF

is an example of this. It uses a synthetic strategy via the iShares Bitcoin Trust ETF

IBIT

, which recently had its options chain approved.

 I say synthetic because YBTC doesn’t hold IBIT shares directly; instead, it establishes a synthetic stock position by combining a long call and a short put. From there, it sells covered calls against this position to generate income. This approach, sometimes called a “poor man’s covered call,” allows for tax efficiency while reducing upfront capital requirements.

Of course, covered calls cap the ETF’s upside potential, but Roundhill makes this trade-off transparent. On its website, the fund clearly lists the strike prices, notional exposure, expiry dates, and remaining upside potential for its call options.

The result is exceptionally high income. As of now, YBTC offers a massive 40.75% distribution rate. This metric annualizes the most recent payout and divides it by the ETF’s net asset value (NAV). While currently paid monthly, Roundhill has announced that YBTC will switch to weekly distributions starting in January.

Who should use this ETF? YBTC is designed for income-hungry investors with a high-risk tolerance. It’s a way to diversify income streams beyond traditional dividend stocks, bonds, or REITs – but be prepared for significant volatility and capped upside

Leveraged / Inverse Bitcoin ETFs

Finally, if the previous options aren’t risky enough for you, there are leveraged and inverse Bitcoin ETFs like the ProShares Ultra Bitcoin ETF

and the ProShares UltraShort Bitcoin ETF

SBIT

.

What do they do? These ETFs target daily 2x and -2x returns of the Bloomberg Bitcoin Index, respectively. BITU lets you magnify gains (and losses) with 2x exposure, while SBIT allows you to bet against Bitcoin with -2x exposure. They offer a way to achieve amplified Bitcoin-linked returns without directly using margin or futures contracts.

How do they achieve this? Both ETFs primarily rely on derivatives – mainly swaps – to meet their daily targets. Currently, these swaps include contracts tied to IBIT with counterparties like Goldman Sachs, Barclays, and Nomura. There’s also some use of CME Bitcoin futures to fine-tune exposure.

Of course, these ETFs come with a laundry list of risks. For one, leveraged ETFs face the risk of total closure if Bitcoin experiences a 50% drawdown in a single day (or close to it), wiping out leveraged positions.

Counterparty risk from swaps is also a concern, as failure to deliver could leave the fund exposed. Additionally, the unpredictable effects of daily compounding make these funds unsuitable for holding longer than a day. Lastly, they’re expensive – both BITU and SBIT charge a hefty 0.95% expense ratio.

Who should use these ETFs? Short-term traders only. These are tactical tools for experienced investors seeking amplified or inverse Bitcoin exposure, and they’re not designed for buy-and-hold strategies.

This article is for informational purposes only and does not in any way constitute investment advice. The author may express their own opinions, which may not represent the opinions of ETF Central or its affiliated partners. It is essential that you seek advice from a registered financial professional prior to making any investment decisions.