Looking for the adrenaline rush of investing in Bitcoin but without the bother of crypto-exchanges and digital wallets? An exchange-traded fund might appeal, except an investor won’t find one tracking Bitcoin in the $5.8 trillion U.S. ETF universe -- at least not yet. While exchange-traded crypto-tracking products exist in Europe and a Bitcoin ETF opened in February in Canada, U.S. regulators have repeatedly batted down attempts to introduce them citing concerns about potential manipulation and thin liquidity. Yet with the world’s largest digital coin rallying to new heights and a change of leadership at the Securities and Exchange Commission, the prospect of a first U.S. Bitcoin ETF appears to be rising.

1. What would a Bitcoin ETF look like?

ETFs are part of a broader family known as exchange-traded products, though people frequently use “ETFs” to refer to all of them since they are by far the largest and most popular contingent. ETPs trade like stocks and can track (almost) any asset class by directly acquiring the securities or replicating the performance through derivatives. Niche ETPs track everything from cannabis stocks and uranium miners to space-related investments and regular currencies. The largest Bitcoin ETP -- the $1.7 billion Bitcoin Tracker EUR, listed on the Stockholm Stock Exchange -- invests in swap contracts to mirror the cryptocurrency’s returns. The Purpose Bitcoin ETF (ticker BTCC), which debuted in Toronto, invests directly in “physical/digital Bitcoin,” its issuer, Purpose Investments Inc., said. Meanwhile, several U.S. investment trusts follow Bitcoin and are similar to ETFs but with certain restrictions. The Grayscale Bitcoin Trust (ticker GBTC) is physically backed, meaning that it holds Bitcoin. An ETF planned by VanEck Associates Corp. also intends to physically hold the cryptocurrency.

2. Is there demand for an ETF?

There’s good reason to think so. GBTC has swelled in size during Bitcoin’s bull run into early 2021, with total assets soaring to more than $27 billion from $2.8 billion a year earlier. Demand for crypto-related products has been so relentless that investors piled into the trust even as its market value soared to 40% more than the value of Bitcoin it held. The recently launched Bitwise 10 Crypto Index Fund (ticker BITW) swelled to a valuation of more than $700 million in early February following its December debut, meaning it was valued 63% above its net asset value.

3. Why would investors pay such premiums?

Because buying investment trusts is easier than purchasing the coins themselves. Shares can be bought and sold on brokerage platforms, without the need to set up digital wallets or move money to a crypto exchange. Industry experts argue that the premiums on trust products would dwindle if a Bitcoin ETF were approved. The problem with trusts is, unlike ETFs, new shares can’t be quickly created. For example, only accredited investors can create BITW shares with a minimum initial stake of $25,000. A lockup period bars the sale of new shares for 12 months. The supply constraints helped contribute to those soaring premiums.

4. Why have regulators shunned a Bitcoin ETF?

As well as worries that prices can be manipulated and liquidity is insufficient, there’s also concern that Bitcoin’s famous volatility may be too much for regular investors. Bitcoin’s last three full-year returns were a 74% loss followed by gains of 95% and 306%. The regulator also questioned whether funds would have the information necessary to adequately value cryptocurrencies or related products. There have also been questions about validating ownership of the coins held by funds and the threat from hackers.

5. Who is interested in launching one?

As of early February, the only active filing with the SEC was the request for the VanEck Bitcoin Trust made in December. That fund would value its shares based on prices contributed by what the index provider judges to be the top five exchanges for the cryptocurrency. Bitwise Asset Management is also seeking to launch a broader cryptocurrency ETF. It’s one of numerous issuers who have already tried to start a Bitcoin ETF, beginning with the Winklevoss twins in 2013. Other attempts were made by Direxion, ProShares, First Trust, Grayscale, WisdomTree and GraniteShares, all without success.

6. What are the current hurdles to approval?

The wild price swings -- in the early weeks of 2021 Bitcoin rose more than 40% then fell 24% before surging more than 50% -- have reignited worries about exposing ETF investors to such volatility. Furthermore, Treasury Secretary Janet Yellen noted that Bitcoin is an area of concern for terrorist and criminal financing. Critics also say the issues involving industry manipulation have yet to be effectively addressed. Because the amount of Bitcoin is finite, the fear is large holders would be able to move the market.

7. So what are the chances of an ETF this year?

Market watchers say they’re improving as Wall Street heavyweights such as Paul Tudor Jones and Stan Druckenmiller adopt the cryptocurrency and the likes of Robinhood and PayPal make it it easier to use and trade Bitcoin. Some crypto fans were encouraged by President Joe Biden’s nomination of Gary Gensler as SEC chairman; Gensler once taught a class at MIT’s Sloan School of Management called “Blockchain and Money.” But he has also acknowledged industry issues with fraud and light regulation. Don’t expect a decision until the new chairman is in place between now and July.

Reference Shelf

• A beginner’s guide to buying Bitcoin.

• A QuickTake explainer on Bitcoin and another on the its origin and blockchain. More detailed Q&As cover halving, new flavors of crypto, Bitcoin lingo, security tokens, central banks and digital currencies, China’s moves toward a digital currency, yield farming and decentralized finance applications.

• Economist Nouriel Roubini argues that the recent rise is a bubble.

• An article on the rise in Bitcoin ownership concentrated among so-called whales.

• Two explainers, one aimed at kindergartners and the other a you-too-can-mine-Bitcoin project, plus an exploration of the double-spending problem.

• A Gensler-Led SEC may end the wait for a Bitcoin ETF.

• It looks like Wall Street is running Bitcoin -- at least for now.

For more articles like this, please visit us at bloomberg.com

©2021 Bloomberg L.P.