Crypto ETFs: What Do Spot Bitcoin and Ether Funds Hold?

Until January 2024 there was no ETF on a US exchange that held bitcoin itself. There were funds holding futures contracts, and over-the-counter trusts whose prices often drifted far from the assets inside. With the SEC's approval, funds holding actual bitcoin began trading on exchanges for the first time; six months later the same came for ether. This article explains what these funds are, not whether to buy them.

What's Inside, and How the Price Forms

Each fund share represents a set amount of bitcoin. The share count changes as large broker-dealers (authorized participants) bring assets to create new shares or hand shares back to take assets out. This mechanism keeps the fund's price close to the value of the bitcoin inside: if the gap widens, arbitrageurs step in.

The fund's net asset value (NAV) is struck each day against a reference price calculated at a set time, not against a single crypto exchange's price. More: What Is an ETF?

Where the Tracking Gap Comes From

A fund's return never equals bitcoin's return exactly. Three things open the gap:

• Expense ratio. The annual management fee is deducted in small daily slices from the bitcoin inside the fund. At launch most of the new funds sat around 0.2-0.25% a year; the oldest fund, converted from a trust, started at 1.5%. Fees can change; the current rate is on each fund's own page.
• Trading hours. Bitcoin trades seven days a week, around the clock; the fund trades only during US hours. A weekend move shows up in the fund as a single gap at Monday's open.
• Spread and premium/discount. Fund shares can change hands slightly above or below NAV. More: Liquidity and the Spread

Three Routes, Three Structures

Futures-based funds carry one more cost beyond the last row: each month expiring contracts are swapped for later ones, and later contracts are usually more expensive. That "roll cost" does not exist in a spot fund.

The Limits the Structure Brings

Spot crypto funds are registered in the US as trusts, not under the 1940 Act that governs classic investment funds. In practice, some investor protections specific to investment funds (board structure, portfolio rules) don't apply in the same way. What the fund does is written in its prospectus, and that is the one document worth reading.

As a fund shareholder you have no claim on the bitcoin itself: you can sell your shares on the exchange, but you can't withdraw the bitcoin inside to your own wallet.

This article is based on SEC decisions and fund prospectuses; expense ratios can change at the fund sponsors' discretion.