Published: May 2025
Bitcoin (BTC) is an open-source, digital currency that is created by proof-of-work (mining) but with a total supply hard-capped at 21 million. The rewards from mining decreases every four years by 50%, making BTC deflationary. As a result, many consider BTC as a store of value (digital gold), in contrast to inflationary fiat. The increasing acceptance by financial institutions and use on corporate balance sheets suggests that BTC, although volatile, may indeed be a store of value.
The on-ramps or purchasing BTC from fiat currency include:
| Institution | On-ramp | KYC | Settlement speed | Fees | Target audience | Liquidity |
|
Centralized exchange (CEX) e.g., Coinbase, Binance, Kraken |
bank → ACH/SEPA/ card → purchase | Yes | immediate credit | 0 – 1.5% +spread | Retail, some institutional | best |
|
Brokers (e.g., Robinhood, PayPal, SoFi) |
Use fiat within app | Yes | immediate credit | 0.4 – 1.5% +spread | Retail (young) | good |
| BTC ATM | Cash → wallet QR | No | On chain (10–30min) | 7–12% | Retail | Low (<$900) |
| Peer-to-peer e.g., Hodl hodl, Bisq | Post offer → accept → transfer | No | variable | 0.25–0.75% + fees | Sophisticate retail | low |
| OTC desk (Galaxy) | Block trades | Yes+AML | Same day to T+2 | 0.05–0.30% + fees | Institutions | good |
Spot BTC refers to BTC that is held on-chain and is exchanged on-chain with the transaction recorded. Spot BTC allows the investor to self-custody (controls private keys to the wallet). Due to hacks of exchanges, the phrase “not your keys, not your bitcoin” arose to highlight the benefits of self-custody. However, there are downsides, such as the loss of the ledger or hard-drive where wallet is stored. For market makers and sophisticated BTC investors, new BTC derivatives were implemented beyond spot BTC.
Perpetual BTC swaps are a non-expiring contract that mimics holding spot BTC with a funding-rate payment exchanged every set timeframe (usually 8h) between long- and short-traders. If perpetuals trade above spot, then longs pay the shorts. The converse occurs when perpetuals trade below spot. Contracts are margined with leverage. Perpetuals are used for short-term, leveraged trades, basis trades (long spot, short perp), and hedging without having to roll futures.
Futures contracts are a legally binding agreements to buy or sell a fixed amount of BTC at a set price on a set future day (expiry date). US use cash-settled bitcoin futures that expire monthly or quarterly. Futures are used to hedge BTC holdings, and arbitrage premium. In ETNs, futures may be in lieu of the underlying security (spot BTC).
Options provide the purchasers the right but not obligation to buy (if call) or sell (if put) BTC at a set strike price on either a set date (for European options on Deribit) or up to and including set date (for US on CME). Use option strategies (covered calls, protective puts, etc) to hedge, generate yield (write options), or to leverage bets on BTC.
Exchange-traded note (ETN) is a senior, zero-coupon debt security whose payoff tracks an underlying reference (here BTC). Issuers create a note rather than a fund share; investors therefore are subject to creditor risk as well as the reference fluctuation. The note may contain the asset (BTC) or futures/options to replicate ownership of the asset.
Exchange-traded product (ETP) is an umbrella term covering 3 wrappers (legal and regulatory container that defines assets with an investment strategy and that dictates how investors own, trade, and are taxed on gains/losses on assets in the wrapper):
- Exchange-traded fund (ETF): equity share in an investment company owning securities or commodities or futures in the securities or commodities.
- Exchange-traded commodity (ETC): secured commodity note physically backed by the commodity held in custody and
- Exchange-traded note (ETN) secured debt note that is a promise to pay on the return of an index or assets; the assets may be held in custody or via options/futures.
Europe uses ETN or ETC as BTC fund wrappers while US uses true ETFs.
Structured note is a broader ETN: an ETN with one or more option contracts to shape a desired payoff: the note may deliver leverage, principal-protection, or any other desired return profile instead of a simple 1:1 move with underlying note. In summary, a structured BTC note is an option-enhanced ETN that turns BTC exposure into a customized payoff.
Europe uses debt securities (ETC or ETN) for BTC Funds.
The EU developed a “Undertakings for Collective Investment in Transferable Securities” (UCITS) to provide a regulatory framework for open-ended funds that invest in a set manner in liquid, transferable securities that meet selected criteria; funds adhering to UCITS may be freely marketed across the EU without further regulatory compliance. UCITS funds in the EU, however, may not be a single commodity (like BTC), so BTC Fund issuers use debt securities and use ETN/ETC wrappers. Selected European BTC funds are listed below.
| Product | Exchange “segment” label | Legal form in the prospectus | Collateral set-up | Who holds the coins |
| BTCE (ETC Group Physical Bitcoin) | ETC (Exchange-Traded Commodity) | Open-ended, asset-backed bearer bond issued by ETC Issuance GmbH | 1 BTC (plus small excess) per note, pledged to a security trustee | BitGo Trust |
| ABTC (21Shares Bitcoin ETP) | ETP / ETN on SIX & Xetra | Senior, secured, non-interest-bearing debt security of 21Shares AG | 100 % physically backed; series-level collateral ring-fenced for investors | Coinbase Custody (primary) |
| VBTC (VanEck Bitcoin ETN) | ETN on Xetra & SIX | Senior secured note of a Liechtenstein SPV | 100 % BTC kept in cold storage and pledged | Bank Frick |
The scheme is: authorized participants provide cash for note creation and the issuer uses the cash to purchase BTC that is then custodied with a regulated custodian (i.e., secured debt security backed by BTC). Authorized participants may request note redemption, so the process reverses. All EU BTC funds are structured as above by may be referred to as ETC, ETP, or ETN but all are 100% physically backed.
US uses Trust Shares for Spot BTC and Open-ended investment companies for BTC Futures funds.
The US has two wrappers: spot BTC ETF and BTC-futures ETF, which are summarized in the table below (APs: authorized Participants).
| Wrapper | Core facts | Typical tickers | Cost profile |
| Spot-bitcoin ETF | Delaware grantor trust; holds physical BTC at Coinbase Custody; creations/redemptions cash-only via APs | IBIT, FBTC, GBTC | 0.19 – 0.59 % TER |
| Bitcoin-futures ETF | ’40-Act investment company; portfolio of cash-settled CME bitcoin futures; rolls monthly | BITO, XBTF, BTF | 0.70 – 0.95 % TER plus futures roll drag |
Front-running concern for BTC-futures ETFs. Because traders know futures-based ETFs must roll and then extend their BTC future positions ahead of expiry, other investors may front-run the trade causing slippage each roll cycle, a potential extra “fee” for these ETFs.
Why create BTC ETFs
Self-custody (hardware wallets, multisig, ledger backups) suits “OG” holders, but it intimidates many mainstream investors—and is incompatible with most retirement plans. Exchange-traded wrappers solve that friction:
- Familiar plumbing: buy with a ticker symbol in a brokerage account.
- Integrated tax reporting: 1099-B (US) or standard EU broker statements.
- Regulated custody & daily Net Asset Value(NAV): delegates private-key risk to qualified custodians.
That convenience comes at a price—management fees, tracking error, and, for futures funds, roll costs—but it opens bitcoin exposure to the largest pools of conventional capital.
Novel US BTC ETFs
| Category | Example tickers (U.S./Canada) | How it works | Primary use-case |
| Leveraged long | BITX – Volatility Shares 2× Bitcoin Strategy ETF. BITU (filed) – ProShares Ultra Bitcoin | Holds swaps or CME futures sized for +200 % of BTC’s single-day move (daily reset). | Short-term, high-octane bullish bets. |
| Inverse / short | BITI – ProShares Short Bitcoin (–1×) SBIT (filed) – ProShares UltraShort Bitcoin (–2×) | Uses futures/swaps to deliver the opposite of BTC’s daily return. | Hedging existing BTC or bearish trades. |
| Covered-call / income | BTCI – NEOS Bitcoin High Income ETF BCCL / BCCC – Global X Bitcoin Covered-Call ETFs | Holds spot-BTC ETPs or BTC-futures ETFs and systematically sells out-of-the-money call options to harvest premium; distributes the premium monthly (BTCI’s current distribution rate ≈ 28 %). | Income seekers willing to trade away some upside for regular cash yield. |
| Defined-outcome / buffered | CBOJ – Calamos Bitcoin Structured Alt Protection ETF | Cash + long-dated call spread on a spot-BTC ETF to floor downside (100 % protection) but cap upside for a one-year term. | Investors wanting exposure only if principal is protected. |
| Trend / rotation (“long-flat”) | BITC – Bitwise Trendwise Bitcoin & Treasuries Rotation Strategy ETF | Momentum rule flips between 100 % BTC futures and 100 % 3-mo T-Bills. | Attempt to stay long in up-trends and sit out drawdowns. |
| Roll-optimised futures | BITC – Bitwise Bitcoin Strategy Optimum Roll ETF (earlier mandate) | Always long CME futures, but picks the contract with best roll yield along the curve to cut contango drag. | Buy-and-hold futures exposure with lower carry cost. |
| Swap-based daily target | T-Rex 2× Long / 2× Inverse Bitcoin Daily Target ETFs (filed) | Uses total-return swaps on spot-BTC ETFs to reach ±2× of the daily move, bypassing CME position limits. | Intraday traders seeking leverage when futures OI is tight. |
Grayscale saga
For years, Grayscale held the largest publicly traded equity to gain exposure to Bitcoin. The fund, GBTC, was a closed-end ETP. With massive investor interest in crypto, GBTC as well as many other Grayscale funds received massive inflows, but these products could not be made “open-ended” due to regulatory restrictions. As a result, GBTC traded at large premia and discounts. In the year before being “opened” following regulatory approval, the fund traded close to 50% discount, basically constituting a prohibitive cost to get out of the position. If investors got short shares, they risked getting a Reg. SHO notice requiring they buy shares, so they were forced to sit long, which is why bids were so low (discount). Investors discounted the fair value by the expected holding cost, which is why we see a convergence to fair value around opening. The principles demonstrated by GBTC show the importance of an effective creation/redemption mechanism on pricing close to NAV.
Eventually, on January 10, 2024, GBTC and eight other spot Bitcoin ETPs received regulatory approval to begin trading, and this cohort of nine all were traded “open” resulting in each trading far closer to NAV. GBTC charged the highest fees at the time of listing and received steady outflows of AUM, costing Grayscale huge sums of money. To reduce costs, they limited redemptions daily which explains the long decay in their holdings.
Long prior to the listing of spot bitcoin funds, Grayscale had claimed the rights to the ticker BTC (notably not the currency!), and decided to spinoff the fund with a lower expense ratio than GBTC to help stem outflows. The spinoff was seeded by 10% of the GBTC assets, resulting in a smaller fund with a lower handle. They did the same with their Ethereum fund ETHE spinning off ETH. The smaller funds were advertised as costing “less than a Big Mac.”
Initial Trading
With the expense ratio in line with the market, BTC did not suffer from outflows like GBTC. While rival funds had to compete to build AUM, BTC already had ample assets due to the spin-off. The question was whether institutional investors would hold BTC. With the low notional, retail investors liked the product, resulting in pretty decent inflows. The low handle we believe represented an attempt to rival mutual funds at one of their few advantages over ETPs: the ability to invest any amount of money rather than multiples of ~$50 as is the case with other crypto funds.
Nonetheless, the managers of the fund realized something was wrong, as evidenced by its resulting reverse split. The stated reasoning—”Reverse share splits can help make the trading of securities more cost-effective for market participants, and that is what Grayscale intends to do for BTC and ETH”—was quite vague. We will dissect the reasoning for this split below, describing benefits, drawbacks, and alternative solutions.
Comparative Analysis of US BTC ETFs
These are all ETPs that hold spot Bitcoin, with slight differences. Below we summarize:
| Fund | Issuer | Expense Ratio | Index Methodology | Approximate AUM (as of May 5, 2025)* | Approximate Handle (as of May 5, 2025)** |
|---|---|---|---|---|---|
| ARKB | Ark Funds | 0.21% | BRRNY | ~$4B | ~$90 |
| BITB | Bitwise | 0.20% | BRRNY | ~$4B | ~$50 |
| BRRR | CoinShares | 0.25% | BRRNY | ~$6B | ~$30 |
| BTC | Grayscale | 0.15% | CBX | ~$4B | ~$40 |
| BTCW | WisdomTree | 0.25% | BRRNY | ~$0.1B | ~$100 |
| FBTC | Fidelity | 0.25% | FIDBCRP | ~$19B | ~$80 |
| GBTC | Grayscale | 1.50% | CBX | ~$18B | ~$70 |
| HODL | VanEck | 0.20% | BBR | ~$1B | ~$30 |
| IBIT | iShares | 0.25% | BRRNY | ~$58B | ~$50 |
*Rounded to nearest billion **Rounded to nearest $10
BRRNY: CME CF Bitcoin Reference Rate - New York;
CBX: CoinDesk Bitcoin Price Index;
FIDBCRP: Fidelity Bitcoin Reference Rate;
BBR: MarketVector Bitcoin Reference Rate
GBTC has very high fees relative to the other funds; the other funds in the table have similar fees. At its peak, GBTC held around ~$46B, but investors rotated into cheaper options. The majority of investments moved to IBIT, despite for example BITB having a cheaper expense ratio but similar price handle and index methodology. The price handle is the integer value of the share price. Unlike most of these funds, IBIT needs to be created/redeemed the day prior to the NAV stamping (page 70) meaning that market makers need to commit more capital to trading IBIT. Despite this weakness, IBIT has amassed considerable assets due to the importance of issuer networks. Investors rely extensively on BlackRock for asset management so the issuer can drive demand. Smaller issuers need to compete to sell their own products, explaining the slightly lower fees offered by ARKB and BITB.
Deviations from NAV for BTC ETFs are due to costs of trading BTC on traditional finance system.
All Bitcoin funds—regardless of their trading volume—experience significant premiums or discounts to NAV. This is primarily because crypto market makers charge fees to buy or sell Bitcoin on behalf of the fund. These underlying costs are passed on to investors, resulting in large and similar NAV deviations across different products. For example, BITB averages 1 million shares traded daily, while IBIT averages 44 million. Both maintain an average bid-ask spread of one cent. Yet despite IBIT’s much higher liquidity, the NAV premiums and discounts for both funds are nearly identical—demonstrating that the primary driver is not liquidity, but the cost of wrapping crypto assets within traditional finance structures. Reducing these wrapping costs is critical for enabling crypto ETPs to trade closer to NAV. The more complex the product (e.g., multi-asset crypto baskets), the greater the wrapping costs become. To illustrate this, compare the NAV deviations of BTC-based baskets with those of a traditional equity ETP like the ProShares Ultra S&P 500. The latter, which holds 500 conventional equity assets and no wrapped crypto, typically trades within 5 basis points of NAV. By contrast, BTC funds frequently swing by 50 basis points—an order of magnitude higher.
Tick size affects trading fees
Now to BTC: This fund has the lowest expense ratio and before the reverse split, shares hovered around $6. That means that to enter positions, investors had to pay half the spread of the shares which was around 20bps. Grayscale was correct that the reverse split would increase efficiency because investors with a fiduciary duty might not be able to allow that transaction cost to excuse slightly lower fees. This reflects an inherent tension in tick size constrained markets with investor accessibility. BTC was created with a low handle to appeal to retail investors who might not want to only purchase Bitcoin exposure in increments of $40-$50, but low handles are unappealing to institutional clients.
Before the reverse split, there weren’t really any outflows of BTC. Funnily, since institutions that held GBTC were given BTC, many could not exit their position due to the tick size constraint. Following the reverse split, BTC was redeemed many times while other funds had inflows (November/December below) as it was much cheaper to sell than before.
Lessons
From the trading of BTC, we can draw a few conclusions that should be followed as passive investing moves on chain
- Tick size constraints impact investors ability to modify positions; a penny spread can sometimes be a prohibitive cost
-
Low handles are desirable for retail investors, but not
institutions
- Low tick sizes on crypto exchanges actually provide the opportunity to reconcile these demands
- The lower pricing increments actually reduce competition for time priority and instead demand better pricing, increasing efficiency of markets
- Issuers source liquidity; first-mover advantage and price competitiveness are less important than the networks individual investors control
-
The large premia/discounts observed in crypto ETPs are systemic
- Closed-end funds, regardless of quantity or type of components, trade at massive discounts
- Open-end funds oscillate between huge valuation changes around fair due to underlying traditional finance rails; these costs can prevent otherwise beneficial transactions