What is an ETF?
An ETF (exchange-traded fund) is a portfolio that allows investors to benefit from the growth of multiple assets without actually having to purchase any of those assets directly. Unlike other funds, ETFs can be traded on stock exchanges like shares. This means their value can fluctuate based on the portfolio’s real-time performance.
An ETF is usually made up of a mixture of different assets across various sectors to help investors diversify and offset risk. For example, the Vanguard S&P 500 UCITS ETF is one of the most popular in the UK and tracks the stock performance of 500 of the largest companies listed on stock exchanges in the United States. However, an ETF can also be set up to track the price of a specific commodity. This would theoretically open the door for a Bitcoin ETF, however crypto ETFs have been banned in the UK by the Financial Conduct Authority (FCA).
How is an ETF different from an ETN?
You can purchase crypto ETNs in the UK, including as part of an ISA. They have been approved by the FCA and many major platforms offer a cETN option.
ETNs and ETFs are both exchange-traded products (ETPs) designed to mirror a performance, such as that of a cryptoasset. They are a way to invest in the performance of something without directly purchasing it. The crucial differences are that ETFs hold assets, while ETNs are structured as unsecured debt. The note element of an ETN is the promise to pay the holder a return based on a particular metric, in this case the performance of a cryptoasset. This can mean ETNs are more risky than ETFs because their value is also affected by the creditworthiness of the issuer, however they do not experience the same tracking errors that can be seen with ETFs.
Can you buy a Bitcoin ETF in the UK?
No. While Bitcoin ETFs are available in other countries, UK investors still need to use a crypto exchange and make a direct purchase, or invest in cETN instead. A lot of UK cryptocurrency fans will have been excited by the 2024 US Securities and Exchange Commission (SEC) decision to allow investors to purchase a spot Bitcoin ETF, but similar approval from UK regulators is some way off and US ETFs are not available for purchase in the UK. The green light in the US only came about after a protracted legal challenge following the SEC’s repeated refusal to approve requests because of concerns over fraud and potential price manipulation.
These reasons were ultimately judged as inadequate in court, but SEC chairman Gary Gensler remained critical of the ETF after approval, saying: "Bitcoin is primarily a speculative, volatile asset that's also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing."
Investing in an ETF – or a cETN in the UK – means you can buy into Bitcoin without the hassle or risk of digital wallets, or the complication of using crypto exchanges. In the UK, a cETN also allows you to benefit from the tax-free ISA wrapper, whereas direct purchases will be liable for tax once gains are realised.
What is the US spot Bitcoin ETF?
In the US, investors can buy a spot Bitcoin ETF. This is different to a Bitcoin ETF and other crypto ETFs because a spot ETF holds the actual cryptocurrency itself, in this case Bitcoin. The ETF’s value is therefore directly connected to the real-time price of Bitcoin because it owns that asset. Anyone investing in the spot ETF would essentially be buying a share of the fund’s Bitcoin holdings, so you would expect it to fluctuate in value in the same way as the cryptocurrency itself.
A spot Bitcoin ETF would be a much more direct way of investing in crypto than a traditional ETF, which would hold a more diverse range of assets, such as shares in companies related to the crypto industry. As a result, a traditional ETF would be less likely to accurately mirror the performance of the cryptocurrency itself. This could be a good thing if it protects your investment from dramatic dips, but it could also limit potential gains if the price of Bitcoin increases.
Will UK crypto regulation change?
The rise in crypto popularity has led to a shift in the UK regulatory landscape, even if it remains some way behind the US and other countries in key areas. The Financial Conduct Authority (FCA) has lifted its ban on crypto ETNs and its roadmap to fully regulate cryptoassets in the UK outlines how new regulations will be drawn up, including when they are likely to be introduced to the UK crypto market. This all means you might expect crypto ETFs will soon follow ETNs to the market.
However, since Bitcoin and other cryptocurrencies broke into the financial mainstream, the FCA has stayed mostly steadfast in its regulatory approach. Like its US counterpart, it has warned of the dangers of investors losing all of their money and the risk of scammers stealing crypto holdings. For direct crypto purchases, the FCA only regulates for marketing and anti-money laundering, so if something were to go wrong, there would be little recourse for investors. This is in contrast to the regulation of conventional investments and protection under the Financial Services Compensation Scheme (FSCS) or the Financial Ombudsman Service (FOS). With these programmes, you can get some or all of your money back if you are scammed or your provider goes bust.
The regulator’s plans to bring more crypto activities under its supervision could certainly be seen as a significant step towards a UK Bitcoin ETF in the future, but as it stands there are still hurdles to overcome. As part of its statement lifting the ban on cETNs, the FCA said: "ETFs marketed to UK retail investors are unable to invest directly into cryptoassets under our current regulatory framework for funds. This framework would need to be updated before retail investors could access cryptoasset ETFs."
Is an ETF less risky than buying Bitcoin directly?
Bitcoin is a high-risk asset, along with most other cryptoassets. While the additional regulation that has come with the cETN – and more would come with the release of a UK Bitcoin ETF – could be seen to reduce some risks, the inherent risk is still there. The utility of Bitcoin is still questionable, as its use as a payment method has seemingly stalled, leaving it as primarily a speculative investment. Its value shot up in recent years, but has also nosedived in recent memory, so investing in it through any means is risky.
That being said, it is easier to consider crypto options alongside other high-risk assets through the cETN, and an ETF would provide a further option, without the hassle and risks associated with crypto exchange platforms. Ultimately, cryptoassets are highly volatile and there is little or no financial protection if things go wrong. This means investing is only really suited to investors who understand the inherent risks associated with crypto and are prepared to lose all the money they invest.
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