Looking for the adrenaline rush of investing in Bitcoin but without the bother of crypto-exchanges and digital wallets? An exchange-traded fund might do the trick -- except for the fact that an investor won’t find one tracking Bitcoin anywhere in the $6.6 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, proponents of a first U.S. Bitcoin ETF see grounds for optimism.

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 category. ETPs trade like stocks and can track (almost) any asset class by directly acquiring the securities or replicating their performance through derivatives. Niche ETPs track everything from cannabis stocks and uranium miners to space-related investments and regular currencies.

2. What’s out there now?

The largest Bitcoin ETP -- the $1.8 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 in February, 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 what’s known as physically backed, meaning that it holds Bitcoin. An ETF planned by VanEck Associates Corp. also intends to physically hold the cryptocurrency.

3. 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 $36 billion billion from $2.9 billion a year earlier. The recently launched Bitwise 10 Crypto Index Fund’s (ticker BITW) market capitalization swelled to $1.2 billion in mid-May following its December launch. In Canada, demand has been robust. The Purpose Bitcoin ETF saw more than $165 million worth of shares change hands at its launch and accumulated about $1 billion in assets less than two months after its debut. When demand is strong it’s not unusual for the value of these funds to exceed the holdings, which means investors pay a premium for access. The fund’s value can also be lower than that of the assets when demand is weak.

4. 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.

5. Why have regulators shunned a Bitcoin ETF?

As well as worries that prices can be manipulated and liquidity is insufficient, there’s 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 305%. Also, the SEC has 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.

6. Who is interested in launching one?

After the SEC received a request for the VanEck Bitcoin Trust in December, at least nine more issuers, including Galaxy Digital Holdings Ltd. and Fidelity Investments, applied within months. 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.

7. What are the current hurdles to approval?

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

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

Market watchers say they’ve improved 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 choice of Gary Gensler as SEC chairman; Gensler once taught a class at MIT’s Sloan School of Management called “Blockchain and Money.” But Gensler has also acknowledged issues regarding fraud and told lawmakers in May that the cryptocurrency market could benefit from “greater investor protection.” He has asked for the agency to be given increased authority over trading venues, in comments that were seen as a setback in the push for a Bitcoin ETF. Gensler gave issuers cause for hope in August, signaling that regulators may be more open to a Bitcoin ETF if it was based on futures, rather than versus physically holding the cryptocurrency itself. Within a week, ProShares and Invesco filed applications for funds based on futures.

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