How Do Crypto ETFs Work?

A Bitcoin ETF is the name used in daily language for products that aim to track the price of Bitcoin and are traded on a securities exchange. Instead of buying BTC in a crypto wallet, the investor purchases shares of the product in a brokerage account. However, not every product holds the same assets or has the same legal structure. It is necessary to distinguish how a spot Bitcoin product works compared to a product based on futures contracts.

The distinction between ETF, ETP, and spot products

ETP is a broader term that encompasses exchange-traded products. An ETF is one type within this group. Some spot products referred to in the market as Bitcoin ETFs may have been established under a different legal structure in their respective countries. For example, the SEC investor bulletin explaining the structure of spot Bitcoin and Ether products in the US distinguishes them from ETFs registered under traditional investment fund legislation. The structure in the prospectus should be taken as the basis rather than the product name.

A spot product may directly hold crypto assets to track the price. In a futures product, the underlying instruments are Bitcoin futures contracts. A fund that invests in the crypto sector through a basket of companies is yet another product; holding shares in mining or exchange companies does not mean it will directly track the price of Bitcoin one-to-one. Similar names can create different types of exposure.

Do you have Bitcoin in your wallet when you buy a share?

Generally, no. You hold product shares in your brokerage account. You do not acquire a BTC balance that you can send to any address you want on the Bitcoin network. The custody of the assets held by the product is managed by institutions and processes specified in the prospectus. It should not be assumed that a retail investor has the right to directly convert their shares into Bitcoin.

This difference changes the purpose of use. For someone who wants to make on-chain payments with Bitcoin, keep it in a personal wallet, or use it in another application, an exchange share does not offer the same functionality. Conversely, someone who wants exposure to price movements in a securities account will examine the product’s fees, trading hours, and custody structure. The operational responsibilities of the two paths are different.

Why is the share price not equal to the price of one Bitcoin?

A single share represents a small fraction of the product’s total assets. The amount of Bitcoin per share can vary based on the product structure and expenses. For example, imagine a hypothetical product that holds 100 BTC and has 100,000 shares. If there are no other assets or liabilities, there is 0.001 BTC per share. If the BTC price is $60,000, the simple net asset value (NAV) is $60 per share.

The trading price on the exchange may be slightly above or below this value. Trading above is called a premium, while trading below is called a discount. Creation and redemption processes by market makers and authorized participants can contribute to limiting these differences; however, a zero difference is not guaranteed under all conditions. The transaction price and the net asset value should not be considered the same figure.

Why might spot and futures products provide different returns?

The price of the asset held by the spot product is the primary factor; fees and tracking errors can change the result. A futures product, however, depends on contract prices and the transitions between maturities. Closing an old contract and moving to a new maturity is affected by the price difference between maturities. Therefore, when the spot price of Bitcoin rises, it is not mandatory for the futures product to rise at the same rate.

When evaluating a product’s historical chart, read which price index it tracks and by what method. Leveraged or inverse products may have additional features such as daily targets and rebalancing. The result of holding these products for a long time may not be calculated by simply applying the daily target to the total period return. The title “Bitcoin product” should not hide these important differences.

Total cost is not just the management fee

The product may have an annual expense ratio, brokerage commissions, bid-ask spreads, and currency conversion costs. Expenses are mostly reflected in the product’s asset value over time; they are not always deducted from your account like a separate invoice. If there is a temporary fee waiver, its expiration date and scope are also important. The current rate should be obtained from the product’s official document.

Hypothetically, an annual expense ratio of 0.25% on a $10,000 position creates an annual impact of approximately $25 if the value remains constant. Trading commissions and spreads are separate from this. In an account funded with TL, currency conversion costs may also be added. While the product rises 10% in dollar terms, your result in TL may differ due to the USD/TRY exchange rate changes.

Trading hours and price gaps

While crypto markets can trade continuously, including weekends, a securities product is subject to the hours of the exchange where it is traded. If supported off-session trades exist, their liquidity and conditions may also be different. If the Bitcoin price changes significantly during the period when the product is not trading, a gap may form in the share price at the next opening.

For this reason, comparing the closing price directly with the current Bitcoin price is misleading. Check whether the data belongs to the same time. Holiday calendars and the broker’s order acceptance hours also affect the result. Being able to follow the Bitcoin chart while the exchange is closed does not mean you can sell the product share at your desired price at the same time.

Fund flow and trading volume are not the same thing

Exchange volume is created when product shares change hands between investors. Not every one of these transactions requires the product to buy new Bitcoin. Net fund flow is related to the processes of creating and redeeming new shares. Reading a daily trading volume of $1 billion as $1 billion in new Bitcoin purchases confuses these two events.

The total value of assets under management can also change due to both price and net flows. For example, even if there is no new entry, the dollar value of the assets held increases when Bitcoin rises. The date and currency of the fund flow data, as well as which products it covers, should be specified. End-of-day data from different providers may be finalized at different times.

Key information to look for in the product document

The underlying asset, tracking method, expense ratio, custodian, share creation/redemption rules, and the exchange where it is traded are the starting points. Then, check your brokerage firm’s conditions for product access, currency conversion, and custody. Tax and legal consequences vary by country and personal situation; do not automatically assume that a product description in another country is valid in Turkey. Regulatory approval or listing on an exchange does not mean that losses in the Bitcoin price will be covered.

Sources

• SEC Investor.gov: Bitcoin and Ether ETPs
• iShares Bitcoin Trust: product documents and features
• ProShares: Bitcoin product based on futures