What is an ETF?

In short

An ETF is an exchange-traded fund that you buy and sell on a stock exchange, just like a share. Its goal is usually to track the performance of an index or an asset.

By the Cryptonomy editorial team · Updated · 2 min read

Want to track Bitcoin’s price through a brokerage account, without managing a wallet and keys? That’s one of the uses of an ETF, short for Exchange-Traded Fund.

Think of it as a shared basket of investments: the manager follows specific rules about what goes in it, and investors buy shares of the basket on the stock exchange. Depending on the ETF, it may hold stocks, bonds or other assets. The share price moves throughout the trading session.

How it works in crypto

A spot Bitcoin ETF holds Bitcoin through a custodian and aims to track its price. You own shares of the fund, not Bitcoin that you can send to your own wallet or use for payments.

An ETF based on futures contracts gains exposure through contracts instead of holding the coin directly. The cost of rolling over those contracts can make its performance differ from the price in the spot market.

Why it matters

ETFs connect traditional finance with the crypto market. They provide access through brokerage services, without the investor having to safeguard private keys themselves. Custody and management are handed over to the product’s providers, along with a corresponding dependence on them.

We consider the distinction between exposure to the price and owning the coin itself essential. An ETF can serve the first need, but it doesn’t offer the freedom to move and use the coin that someone with crypto in their own wallet has.

What to watch out for

The exchange-traded wrapper doesn’t remove the risk of a drop in value. There are also management fees, trading commissions and the difference between the buy and sell price (the spread). An ETF that tracks only Bitcoin doesn’t, on its own, offer diversification across different assets.

Crypto trades around the clock, while an ETF follows the trading hours of its exchange. Readers in Greece should also pay attention to the name: many European exchange-traded crypto products are ETPs, a broader product category, rather than ETFs. Their legal structure, availability and tax treatment can’t be inferred from their name alone.

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