1. Introduction

1.1 Research Background and Objectives

Bitcoin, as a decentralized digital currency, has attracted widespread attention and discussion globally since its birth in 2009. Its unique technical architecture, decentralized nature, and potential investment value have attracted the attention of many investors and financial institutions. However, due to the high volatility of the Bitcoin market, regulatory uncertainty, and technical complexity, many investors are hesitant to get involved.

The emergence of Bitcoin ETF (Exchange-Traded Fund) provides investors with a more convenient, low-cost, and regulated way to participate in the Bitcoin market. Bitcoin ETF is a financial product that tracks the price of Bitcoin. Investors can buy and sell Bitcoin ETF shares through a stock exchange without directly holding Bitcoin. This investment method not only reduces the threshold for investors but also increases market liquidity and transparency.

The development process of Bitcoin ETF is full of twists and turns. Since the Winklevoss brothers first submitted the Bitcoin ETF application in 2013, the Bitcoin ETF has experienced years of regulatory review and market controversy. It wasn’t until January 2024 that the U.S. Securities and Exchange Commission (SEC) approved 11 Bitcoin spot ETFs, marking the formal entry of Bitcoin ETF into the mainstream financial market. This historic breakthrough not only brings new development opportunities to the Bitcoin market, but also has a profound impact on the global financial market.

This study aims to delve into the development history, market impact, investment strategies, risks, and regulation of Bitcoin ETF, providing comprehensive and in-depth analysis and reference for investors, market participants, and regulators. Through the research on Bitcoin ETF, we hope to help investors better understand this emerging investment tool, seize investment opportunities, and provide a basis for regulators to formulate reasonable regulatory policies, promoting the healthy and stable development of the Bitcoin ETF market.

2. Bitcoin ETF Overview

2.1 Definition and Principles of Bitcoin ETF

Bitcoin ETF is a type of exchange-traded open-ended index fund that tracks the price of Bitcoin, allowing investors to buy and sell fund shares through a stock exchange, thereby indirectly investing in Bitcoin. Unlike directly purchasing and holding Bitcoin, investors do not need to worry about issues such as storage, security, and trading of Bitcoin, and can participate in the Bitcoin market through a traditional securities trading account.

The operation principle of Bitcoin ETF is based on the creation and redemption mechanism, which ensures that the price of the ETF is closely linked to the actual price of Bitcoin. When investors want to buy Bitcoin ETF, they purchase ETF shares from authorized participants (usually large financial institutions). Authorized participants then deliver Bitcoin to the ETF issuer in exchange for newly created ETF shares. These Bitcoins are stored in a secure custody account, managed by professional custodians. Conversely, when investors want to redeem ETF shares, authorized participants buy ETF shares from investors and return the redeemed Bitcoins to the ETF issuer.

Throughout the process, the price of the ETF remains consistent with the actual price of Bitcoin through arbitrage mechanisms. If the market price of the ETF is higher than the actual price of Bitcoin, authorized participants can profit by purchasing Bitcoin and creating new ETF shares. They buy Bitcoin at a lower price, deliver it to the ETF issuer in exchange for new ETF shares, and then sell these shares at a higher price in the market. Conversely, if the market price of the ETF is lower than the actual price of Bitcoin, authorized participants can profit by redeeming ETF shares and selling Bitcoin. They purchase ETF shares at a lower price, redeem them for Bitcoin, and then sell the Bitcoin at a higher price in the market. This arbitrage mechanism ensures that the price of the ETF does not deviate significantly from the actual price of Bitcoin, providing investors with a convenient and efficient way to invest in Bitcoin.

2.2 Types of Bitcoin ETF

Bitcoin ETF can be divided into two main types: spot Bitcoin ETF and futures Bitcoin ETF according to their investment targets and operation methods. These two types of ETF have certain differences in investment strategies, risk characteristics, and market performance. Investors can choose the Bitcoin ETF that suits them according to their investment goals, risk tolerance, and investment experience.

2.2.1 Spot Bitcoin ETF

Spot Bitcoin ETF refers to an exchange-traded open-end index fund that directly holds physical Bitcoin as its underlying asset. When investors purchase shares of the Spot Bitcoin ETF, they indirectly hold a certain amount of Bitcoin. The price of this ETF directly reflects the market price of Bitcoin, and its investment returns mainly come from the rise in Bitcoin price. The operation of the Spot Bitcoin ETF is relatively simple, as the fund manager provides investors with a way to directly participate in the Bitcoin market by purchasing and holding physical Bitcoin. Investors can buy and sell shares of the Spot Bitcoin ETF on a stock exchange, making it as convenient as trading stocks.

The emergence of spot Bitcoin ETF provides investors with a more convenient, secure, and regulated way to invest in Bitcoin. Compared to directly purchasing and holding Bitcoin, spot Bitcoin ETF has the following advantages:

1. First, spot Bitcoin ETF can be bought and sold through traditional securities trading accounts, without the need to open a dedicated cryptocurrency trading account, reducing the investment threshold and operational complexity.
2. Secondly, the spot Bitcoin ETF is managed by professional fund managers who have rich investment experience and professional risk management capabilities, which can better safeguard the security of investors’ funds.
3. In addition, spot Bitcoin ETFs are listed and traded on stock exchanges, subject to strict regulation, providing better protection for investors’ rights.

In January 2024, the U.S. Securities and Exchange Commission (SEC) approved 11 spot Bitcoin ETFs, including BlackRock’s iShares Bitcoin Trust (IBIT) and Grayscale Investments’ Grayscale Bitcoin Trust (GBTC). The listing of these spot Bitcoin ETFs has attracted a lot of attention from investors and inflow of funds, promoting the development of the Bitcoin market. Taking Grayscale Investments’ GBTC as an example, as the world’s largest Bitcoin trust fund, GBTC already had a significant amount of Bitcoin holdings before the approval of spot Bitcoin ETFs. After the approval of spot Bitcoin ETFs, GBTC successfully transformed into a spot Bitcoin ETF, further expanding its asset size and market influence. As of [specific date] in 2024, GBTC’s asset size has reached [X] billion U.S. dollars, making it an important participant in the Bitcoin market.

2.2.2 Futures Bitcoin ETF

Bitcoin futures ETF refers to an exchange-traded open-end index fund that invests in Bitcoin futures contracts. Unlike spot Bitcoin ETF, Bitcoin futures ETF does not directly hold physical Bitcoins, but tracks the price trend of Bitcoin through investing in Bitcoin futures contracts. Bitcoin futures contract is a standardized contract that specifies the rights and obligations to buy or sell Bitcoins at a specific price at a specific time in the future.

The operation of futures Bitcoin ETF is relatively complex, the fund manager needs to adjust the investment portfolio by trading Bitcoin futures contracts in order to track the price of Bitcoin. Investors purchasing shares of futures Bitcoin ETF are indirectly investing in Bitcoin futures contracts.

The emergence of futures Bitcoin ETF provides investors with a way to participate in Bitcoin investment through the futures market. Compared with spot Bitcoin ETF, futures Bitcoin ETF has the following features:

1. One is that it has leverage effect, investors can amplify investment returns through the leverage of futures contracts, but it also increases investment risks at the same time.
2. Secondly, there is the cost of rolling over futures contracts. Since futures contracts have expiration dates, the fund manager needs to roll over the contracts before they expire, which may incur certain costs.
3. Third, the price fluctuations are relatively large. Due to factors such as the trading mechanism of the futures market and investor sentiment, the price fluctuations of futures Bitcoin ETFs are usually larger than spot Bitcoin ETFs.

In terms of market role, Bitcoin futures ETFs provide investors with more investment choices and risk management tools. For investors who wish to participate in Bitcoin investment through the futures market, Bitcoin futures ETFs are a convenient investment method. At the same time, Bitcoin futures ETFs can also serve as a hedging tool to help investors hedge against Bitcoin price fluctuations. However, due to the complexity and risks of the futures market, investors need to carefully assess their risk tolerance and investment experience when choosing Bitcoin futures ETFs, understand the trading rules and risk characteristics of futures contracts, in order to avoid investment losses.

3. The current development of Bitcoin ETF

3.1 Global Bitcoin ETF Issuance

As of November 2024, multiple Bitcoin ETFs have been issued globally, distributed in various regions such as the United States, Canada, Europe, Asia, etc. These Bitcoin ETFs show different characteristics in terms of issuance quantity and scale.

1. In terms of issuance, the United States is the country with the largest number of Bitcoin ETF issuances in the world. In January 2024, the U.S. Securities and Exchange Commission (SEC) approved 11 Bitcoin spot ETFs, a historic move that has put the United States in a leading position in the Bitcoin ETF market. These approved Bitcoin ETFs include products issued by well-known financial institutions such as BlackRock’s iShares Bitcoin Trust (IBIT), Fidelity’s Fidelity Bitcoin ETF (FBTC), and Grayscale Investments’ Grayscale Bitcoin Trust (GBTC). In addition to the United States, Canada is also an active region for Bitcoin ETF issuance. Since 2021, Canada has successively approved multiple Bitcoin ETFs, including Purpose Bitcoin ETF and Evolve Bitcoin ETF. These Bitcoin ETFs are listed and traded on the Toronto Stock Exchange, providing Canadian investors with a convenient way to participate in the Bitcoin market.
2. In terms of issuance scale: Bitcoin ETFs in the United States also dominate.

The issuance of Bitcoin ETFs varies in different regions, mainly affected by factors such as regulatory policies, market demand, and investor awareness. The United States, as the world’s largest financial market, with a sound regulatory system and a mature investor base, provides favorable conditions for the development of Bitcoin ETFs. Although the approval process for Bitcoin ETFs by the U.S. Securities and Exchange Commission (SEC) is lengthy, once approved, it will attract a large influx of funds. Canada has relatively relaxed regulations on Bitcoin ETFs, and its securities regulatory agencies approved the listing of Bitcoin ETFs earlier, giving Canada a certain advantage in the Bitcoin ETF market. The development of Bitcoin ETFs in the European region is relatively slow, mainly due to differences in regulatory policies among European countries, leading to certain difficulties in the issuance and listing of Bitcoin ETFs. In addition, the Bitcoin ETF market in the Asian region is gradually emerging. Hong Kong approved the first batch of Bitcoin spot ETFs in April 2024, including products issued by Huaxia Fund (Hong Kong), Jyske International, Boshi International, etc. The listing of these Bitcoin ETFs provides Asian investors with new channels to participate in the Bitcoin market.

3.2 Analysis of Major Bitcoin ETF Products

3.2.1 BlackRock Bitcoin ETF (IBIT)

The BlackRock Bitcoin ETF (IBIT) is a Bitcoin spot ETF issued by BlackRock, the world’s largest asset management company. The ETF was listed on the US stock exchange in January 2024. Since its listing, with its strong brand influence, rich asset management experience, and professional investment team, it has quickly attracted the attention and capital inflow of a large number of investors, becoming one of the largest Bitcoin ETFs globally.

The impact of IBIT on the market is far-reaching. On the one hand, as the Bitcoin ETF issued by BlackRock, the world’s largest asset management company, the listing of IBIT marks the formal entry of Bitcoin into the mainstream financial market, bringing more institutional investors and capital inflows to the Bitcoin market. This helps to improve the liquidity and stability of the Bitcoin market, promoting the healthy development of the Bitcoin market. On the other hand, the successful listing of IBIT also provides a reference for the issuance and development of other Bitcoin ETFs, driving competition and innovation in the Bitcoin ETF market. Many financial institutions have followed BlackRock’s example and launched their own Bitcoin ETF products, making the variety of products in the Bitcoin ETF market more diverse and investors’ choices more varied.

3.2.2 Fidelity Bitcoin ETF (FBTC)

Fidelity Bitcoin ETF (FBTC) is a Bitcoin spot ETF issued by the well-known American financial services company Fidelity. Fidelity has a deep heritage and a wide customer base in the traditional financial sector, and its launch of FBTC aims to provide investors with a convenient, secure, and regulated way to invest in Bitcoin.

FBTC’s investment strategy focuses on tracking the price trend of Bitcoin. By partnering with professional Bitcoin custody institutions, FBTC ensures the proper storage of its Bitcoin assets, providing investors with investment returns closely related to the performance of the Bitcoin market. In terms of performance, since its listing in January 2024, FBTC has demonstrated strong competitiveness in the market. Despite the high volatility of the Bitcoin market, FBTC, with its professional investment management team and strict risk control system, effectively tracks the price trend of Bitcoin, providing investors with relatively stable investment returns.

In terms of market competitiveness, FBTC has multiple advantages. Firstly, as a financial services company with a century-long history, Fidelity has outstanding brand reputation and extensive customer resources. This enables FBTC to quickly gain market recognition and investor trust upon its launch, attracting a large influx of funds. Secondly, Fidelity has rich experience and professional expertise in investment management and risk management. The investment team of FBTC consists of a group of seasoned financial experts and cryptocurrency analysts who can closely monitor the dynamics of the Bitcoin market, adjust investment strategies promptly to respond to market changes. Additionally, FBTC also emphasizes cooperation with regulatory agencies, strictly adheres to relevant laws and regulatory requirements, ensures the compliant operation of products, and provides investors with a more secure and reliable investment environment.

3.3 Capital Flow and Market Performance

The flow of funds in Bitcoin ETF is an important indicator reflecting market investors’ sentiment and market heat. By analyzing the inflow and outflow of funds, we can gain insights into investors’ demand and confidence in Bitcoin ETF, as well as the overall market trend.

From the perspective of fund inflows and outflows, since the approval of Bitcoin spot ETF in January 2024 in the United States, the Bitcoin ETF market has attracted a large amount of fund inflows. Among them, the fund inflow of the US Bitcoin ETF is the most significant, products such as IBIT from BlackRock and FBTC from Fidelity quickly attracted a large amount of funds after listing, becoming the main targets of fund inflows. Driven by fund inflows, the Bitcoin ETF market is showing a vigorous development trend. However, the fund flow of Bitcoin ETFs is not always smooth, affected by factors such as Bitcoin price fluctuations, market sentiment, macroeconomic environment, etc., there is a certain volatility in fund inflows and outflows. When Bitcoin prices rise or fall sharply, investors often adjust their investment strategies according to market conditions, leading to changes in fund inflows and outflows of Bitcoin ETFs.

The flow of funds in Bitcoin ETFs is closely related to the price trend of Bitcoin. On the one hand, when the price of Bitcoin rises, investors’ enthusiasm for investing in Bitcoin often increases, leading to an increased demand for Bitcoin ETFs, driving funds into the Bitcoin ETF market. This inflow of funds further drives up the price of Bitcoin, creating a positive feedback mechanism. For example, from January to March 2024, the price of Bitcoin rose from around $40,000 to over $70,000, and during the same period, the inflow of funds into Bitcoin ETFs also showed a significant increase. On the other hand, when the price of Bitcoin falls, investors’ investment confidence may be affected, leading to a withdrawal of funds from the Bitcoin ETF market. This outflow of funds may further exacerbate the decline in the price of Bitcoin, creating a negative feedback mechanism. In May and June 2024, there was a certain degree of pullback in the price of Bitcoin, and the inflow of funds into Bitcoin ETFs correspondingly decreased, with some products even experiencing outflows of funds.

To demonstrate the relationship between the fund flow of Bitcoin ETF and the price trend of Bitcoin more intuitively, we can explain it through data analysis and chart presentation. According to historical data statistics, there is a high correlation between the fund inflow and outflow of Bitcoin ETF and the price trend of Bitcoin. When the price of Bitcoin rises, the fund inflow of Bitcoin ETF tends to show a growth trend; when the price of Bitcoin falls, the fund inflow of Bitcoin ETF tends to decrease. This correlation indicates that the fund flow of Bitcoin ETF is to a certain extent influenced by the price trend of Bitcoin, reflecting investors’ expectations and confidence in the Bitcoin market.

4. Opportunities brought by Bitcoin ETF

4.1 Opportunities for Investors

4.1.1 Lowering the investment threshold

Before the appearance of Bitcoin ETF, investors who want to invest in Bitcoin need to open an account on a cryptocurrency exchange, complete a series of complex operations such as identity verification and fund deposit. At the same time, they also need to master the related technical knowledge of Bitcoin storage, trading, and handle the potential security risks of cryptocurrency exchanges, such as hacker attacks and fund theft. These series of operations and risks make many ordinary investors hesitate.

The launch of Bitcoin ETF provides investors with a new way of investing. Investors only need to have a traditional securities trading account to buy and sell Bitcoin ETF shares just like trading stocks. This method greatly simplifies the investment process and reduces the investment threshold. Investors no longer need to worry about the storage security of Bitcoin, nor do they need to delve into the technical principles and trading mechanisms of Bitcoin. They only need to focus on the price trends of Bitcoin ETF to participate in the Bitcoin market investment.

4.1.2 Diversified Investment Risk

In modern investment theory, diversification is one of the important strategies to reduce risk. Traditional investment portfolios are mainly composed of assets such as stocks, bonds, and cash. However, these assets often show strong correlations under the influence of economic cycles, market fluctuations, and other factors. When the market experiences a significant decline, assets such as stocks and bonds may suffer losses simultaneously, leading to a substantial decrease in the value of the investment portfolio.

Bitcoin as an emerging asset class has risk-return characteristics different from traditional assets. Its price trend has low correlation with macroeconomics, monetary policy, and other factors, and to some extent can diversify investment risks. By incorporating Bitcoin ETF into the portfolio, investors can achieve diversified asset allocation and reduce the overall risk of the portfolio.

In addition, Bitcoin ETF can also be combined with other cryptocurrency-related assets for further optimization of the risk-return characteristics of the portfolio. For example, investors can combine Bitcoin ETF with Ethereum ETF, stablecoins, and other assets to adjust the allocation proportions of different assets according to their risk preferences and investment objectives, achieving a more personalized investment portfolio.

4.2 Opportunities in the Cryptocurrency Market

4.2.1 Increase market liquidity

Market liquidity refers to the ability of assets to be quickly bought and sold at reasonable prices. Before the launch of Bitcoin ETF, the liquidity of the Bitcoin market mainly depended on the trading activities of cryptocurrency exchanges. However, due to factors such as regulatory uncertainty in the cryptocurrency market and the high professional requirements of market participants, the liquidity of the Bitcoin market is relatively low, and trading costs are high.

The emergence of Bitcoin ETF has brought new sources of liquidity to the Bitcoin market. On the one hand, Bitcoin ETF is listed and traded on the stock exchange, attracting a large number of investors from traditional financial markets to participate. These investors include institutional investors, retail investors, etc., with large capital scale and high trading activity, injecting a large amount of liquidity into the Bitcoin market. On the other hand, the creation and redemption mechanism of Bitcoin ETF allows Bitcoin to flow freely between the ETF market and the spot market, further enhancing market liquidity. When the ETF market price is higher than the spot market price, authorized participants can profit by purchasing Bitcoin and creating ETF shares, thereby increasing the market demand for Bitcoin; conversely, when the ETF market price is lower than the spot market price, authorized participants can profit by redeeming ETF shares and selling Bitcoin, thereby increasing the market supply of Bitcoin.

4.2.2 Promote market standardization

In the early stages of the development of the Bitcoin market, due to the lack of effective supervision and regulation, there are many problems in the market, such as price manipulation, fraud, money laundering, etc. These problems not only harm the interests of investors, but also hinder the healthy development of the Bitcoin market.

The development of Bitcoin ETF has prompted regulatory agencies to strengthen supervision of the cryptocurrency market. When approving Bitcoin ETFs, regulatory agencies will impose strict requirements on the operation mode, risk management, information disclosure, etc., to ensure the protection of investors’ rights and interests. At the same time, the listing and trading of Bitcoin ETFs also make the trading in the Bitcoin market more transparent and standardized. The trading data of ETFs are subject to real-time monitoring by securities exchanges, and trading information is publicly transparent, reducing the possibility of market manipulation and fraud.

4.3 Opportunities for Financial Institutions

4.3.1 Expanding Business Areas

Traditional financial institutions are actively expanding their business areas to meet the needs of investors when facing the opportunities brought by Bitcoin ETF. Many financial institutions such as banks, securities companies, and fund companies have entered the Bitcoin ETF market successively, expanding their business scope and increasing revenue sources by issuing Bitcoin ETF products, providing trading services, custody services, etc.

Taking banks as an example, some banks have started to provide custody services for Bitcoin ETFs. The custody of Bitcoin ETFs requires a high level of security and professionalism, and banks, with their rich experience and strong technological capabilities in the traditional asset custody field, can provide secure and reliable custody services for Bitcoin ETFs. By providing custody services, banks can not only generate custody fee income but also strengthen cooperation with other financial institutions and expand business channels.

Securities firms also play an important role in the Bitcoin ETF market. Securities firms can provide trading services for Bitcoin ETFs to investors, including account opening, trade execution, clearing, and settlement. At the same time, securities firms can leverage their research teams and market analysis capabilities to provide investment advice and market analysis reports on Bitcoin ETFs to investors, helping them make informed investment decisions. By offering these services, securities firms can increase trading commission income and enhance customer stickiness.

Fund companies are the main issuers of Bitcoin ETFs. By issuing Bitcoin ETF products, fund companies attract investors’ funds and achieve the growth of asset under management. Fund companies need to have professional investment management capabilities and risk management capabilities to ensure the investment performance and asset security of Bitcoin ETFs. In the process of issuing Bitcoin ETF products, fund companies can also cooperate with other financial institutions, such as cooperating with custodian banks to ensure asset security, cooperating with securities companies to conduct product sales and trading services, forming industry chain cooperation, and jointly expanding the market.

4.3.2 Innovative Financial Products

The emergence of Bitcoin ETF has sparked the enthusiasm of financial institutions to innovate related financial products. Financial institutions have developed a series of derivative financial products around Bitcoin ETF, such as Bitcoin ETF options, futures, etc., to meet the diverse investment needs of investors.

Bitcoin ETF options are options contracts with Bitcoin ETF as the underlying asset. Investors can acquire the right to buy or sell Bitcoin ETF at a specific price in the future by purchasing Bitcoin ETF options. Bitcoin ETF options provide leverage and risk hedging functions, offering investors more investment strategy choices. For example, investors can profit from rising Bitcoin prices by buying Bitcoin ETF call options; at the same time, investors can hedge against the risk of falling Bitcoin prices by buying Bitcoin ETF put options.

Bitcoin ETF futures are standardized futures contracts that specify the rights and obligations to buy or sell Bitcoin ETF at a specific price at a specific time in the future. Trading Bitcoin ETF futures is characterized by high leverage and high liquidity, attracting a large number of speculators and hedgers to participate. For speculators, Bitcoin ETF futures can provide opportunities to quickly obtain profits; for hedgers, Bitcoin ETF futures can help them hedge against price risks in the Bitcoin market and protect the value of their investment portfolios.

In addition to options and futures, financial institutions are also exploring other financial product innovations related to Bitcoin ETF. For example, some financial institutions have launched Bitcoin ETF linked funds, providing investors with an indirect way to invest in Bitcoin through investing in Bitcoin ETF. Bitcoin ETF linked funds have advantages such as low investment threshold and simple operation, suitable for a wide range of ordinary investors. In addition, some financial institutions combine Bitcoin ETF with other assets to develop new hybrid investment products to meet the risk-return preferences of different investors.

5. Challenges faced by Bitcoin ETF

5.1 Market Risk

5.1.1 Bitcoin price fluctuations

Bitcoin prices are highly volatile, which is one of the main market risks faced by Bitcoin ETFs. The Bitcoin market is influenced by various factors, including market supply and demand, macroeconomic environment, policies and regulations, investor sentiment, etc., and changes in these factors lead to frequent fluctuations in Bitcoin prices. Over the past few years, the price of Bitcoin has experienced many significant ups and downs. Between 2020 and 2021, the price of Bitcoin surged from a low of about $4,000 to a high of about $69,000, an increase of over 1600%; while between 2022 and 2023, the price of Bitcoin plummeted significantly from its peak, dropping to around $16,000.

The high volatility of Bitcoin prices directly impacts the net asset value and returns of Bitcoin ETFs. When the price of Bitcoin rises, the net asset value of Bitcoin ETFs also increases, allowing investors to gain corresponding profits; when the price of Bitcoin falls, the net asset value of Bitcoin ETFs also decreases, potentially causing losses to investors. Due to the uncertainty of Bitcoin price fluctuations, investors find it difficult to accurately predict changes in the net asset value of Bitcoin ETFs, increasing investment risks.

For long-term investors, short-term fluctuations in the price of Bitcoin may not have a significant impact on their investment decisions, as they are more concerned about the long-term investment value of Bitcoin. However, for short-term investors, price fluctuations in Bitcoin may result in significant fluctuations in their investment returns, and even losses. Some investors may buy Bitcoin ETFs when the price of Bitcoin rises, but rush to sell when the price falls, leading to investment losses.

6. Impact of Bitcoin ETF on the Market

6.1 Impact on Traditional Financial Markets

6.1.1 Change the Investment Landscape

The emergence of Bitcoin ETF has opened a door to the cryptocurrency market for traditional investors. In the past, due to the high risk, technical complexity, and regulatory uncertainty of the Bitcoin market, many traditional investors have been hesitant. However, the launch of Bitcoin ETF allows investors to participate in Bitcoin investment through traditional securities trading channels with lower thresholds. This innovative move has attracted a large number of investors who were originally only involved in traditional financial markets, including institutional investors and individual investors, who have started to include Bitcoin ETF in their investment portfolios.

In the example of the US market, since the approval of the Bitcoin spot ETF in January 2024, well-known financial institutions such as BlackRock and Fidelity have attracted a large amount of funds. The participation of these institutional investors has not only changed the investment structure of the Bitcoin market, but also had a profound impact on the investment landscape of traditional financial markets. Many institutional investors such as pension funds and hedge funds have begun to see Bitcoin ETFs as a new asset allocation choice to achieve portfolio diversification. According to statistics, in the months following the approval of the Bitcoin spot ETF, the asset management scale of Bitcoin ETFs in the US market has rapidly grown to reach billions of dollars.

The emergence of Bitcoin ETF has also prompted traditional financial institutions to adjust their investment strategies and business models. Some banks and securities companies have started to provide trading services for Bitcoin ETF to investors, while also researching how to combine Bitcoin ETF with other financial products to develop more innovative investment products. This series of changes has driven the integration of traditional financial markets with cryptocurrency markets and changed the investment ecology of traditional financial markets.

6.1.2 Promote the integration of financial innovation

The development of Bitcoin ETF has brought new business opportunities and innovation momentum to traditional financial institutions. In order to meet the demand for Bitcoin ETF from investors, traditional financial institutions have increased their investment in the field of cryptocurrencies and carried out related business innovations. Some banks have started to provide Bitcoin custody services to ensure the security of Bitcoin ETF assets; securities companies are actively involved in the issuance and trading of Bitcoin ETFs, providing convenient trading channels for investors.

In addition to directly participating in Bitcoin ETF business, traditional financial institutions are also exploring other ways to collaborate with the cryptocurrency market. Some financial institutions have begun to study how to improve their business processes and enhance efficiency and reduce costs using blockchain technology. For example, some banks are exploring the use of blockchain technology for cross-border payments to enhance the speed and security of payments; some stock exchanges are also researching how to use blockchain technology to issue and trade securities, improving market transparency and efficiency.

The emergence of Bitcoin ETF has also promoted the innovation of financial products. In order to meet the diversified investment needs of investors, financial institutions have begun to develop a series of derivative financial products around Bitcoin ETF. The emergence of Bitcoin ETF options, futures, and other products provides investors with more investment strategies and risk management tools. Investors can hedge or speculate on the price of Bitcoin by purchasing Bitcoin ETF options or futures. The emergence of these derivative financial products further enriches the variety of products in the financial market and improves market liquidity and efficiency.

6.2 The Impact on the Cryptocurrency Market

6.2.1 Price Discovery Mechanism

The emergence of Bitcoin ETF has had a significant impact on the price discovery mechanism of Bitcoin. Before the launch of Bitcoin ETF, the Bitcoin market was mainly composed of decentralized cryptocurrency exchanges, with dispersed market information and a relatively complex price formation mechanism. There were certain differences in the Bitcoin prices between different exchanges, making it difficult for investors to obtain accurate market price information.

Bitcoin ETF is listed and traded on traditional stock exchanges, with its price reflected in real-time in the securities trading system, providing high transparency and liquidity. Investors can monitor the price trend of Bitcoin ETF in real-time through the trading data of the stock exchange, enabling a more accurate assessment of Bitcoin’s market value. The creation and redemption mechanism of Bitcoin ETF also establishes an effective arbitrage mechanism between the spot market of Bitcoin and the ETF market. When the market price of Bitcoin ETF is higher than its net asset value, authorized participants can profit by purchasing Bitcoin and creating ETF shares, thereby increasing the demand for Bitcoin and driving up its price; when the market price of Bitcoin ETF is lower than its net asset value, authorized participants can profit by redeeming ETF shares and selling Bitcoin, thereby increasing the market supply of Bitcoin and causing its price to fall. This arbitrage mechanism helps narrow the price differences of Bitcoin between different markets, allowing the price of Bitcoin to more reasonably reflect its intrinsic value.

Taking the U.S. market as an example, after the Bitcoin spot ETF was approved for listing, the price discovery efficiency of the Bitcoin market has been significantly improved. The price fluctuations of Bitcoin are more stable, and the price differences between different exchanges have also noticeably narrowed. This indicates that the emergence of Bitcoin ETF contributes to improving the price discovery mechanism of Bitcoin and enhancing market efficiency.

6.2.2 Market Competition Pattern

The emergence of Bitcoin ETF has had a profound impact on the competitive landscape of the cryptocurrency market. On the one hand, the launch of Bitcoin ETF has attracted more funds into the Bitcoin market, making Bitcoin’s position in the cryptocurrency market more solid. As the earliest and largest cryptocurrency by market capitalization, Bitcoin has always been the core asset of the cryptocurrency market. The emergence of Bitcoin ETF has further enhanced the visibility and attractiveness of Bitcoin, attracting more investor attention and investment in Bitcoin. This has enabled Bitcoin to occupy a more favorable position in competition with other cryptocurrencies, further expanding its market share.

On the other hand, the development of Bitcoin ETFs has also had an impact on other cryptocurrency products. Before the launch of Bitcoin ETFs, some investment products related to Bitcoin, such as Bitcoin trusts and Bitcoin futures, had a certain market share. However, with the emergence of Bitcoin ETFs, attracting a large number of investors who originally invested in these products due to its lower costs, higher liquidity, and better regulatory protection. This has put greater competitive pressure on other Bitcoin-related products, squeezing their market share to some extent.

The emergence of Bitcoin ETF has also prompted other participants in the cryptocurrency market to continuously innovate and improve. In order to stand out in the competition, some cryptocurrency exchanges have started to launch more innovative products and services, such as cryptocurrency options, futures, leveraged trading, etc., to meet the diverse investment needs of investors. Some cryptocurrency projects are also constantly enhancing their technical capabilities and application scenarios to improve their competitiveness.

7. Development Trends and Prospects

7.1 Future Development Trends of Bitcoin ETF

7.1.1 Product Innovation and Diversification

With the continuous development of the Bitcoin ETF market, product innovation and diversification will become important trends in the future. Financial institutions will continue to explore new investment strategies and product designs to meet the increasingly diverse needs of investors. Composite products will be one of the important directions for Bitcoin ETF innovation. For example, combining Bitcoin with other assets such as gold and stocks to develop Bitcoin ETF products with diversified investment portfolios. These composite products can reduce risks through diversified investments, while utilizing the correlation between different assets to achieve more stable returns. Investors can balance the risk of their investment portfolios by purchasing ETFs that combine Bitcoin with gold, leveraging the hedging properties of gold during Bitcoin market fluctuations.

Strategy-based Bitcoin ETFs will also gradually rise. These ETFs will adopt more complex investment strategies, such as quantitative investment, arbitrage trading, etc., to obtain excess returns. Quantitative investment strategies can use big data analysis and mathematical models to monitor and analyze market data in real time, capturing short-term market fluctuations and investment opportunities. Arbitrage trading strategies can leverage price differences between different markets for risk-free arbitrage operations. These strategy-based Bitcoin ETFs will provide more options for investors with certain investment experience and risk tolerance.

To meet the risk preferences and investment goals of different investors, Bitcoin ETFs will also introduce products with different risk levels. Bitcoin ETF products with low risk can provide relatively stable returns for investors with lower risk preferences by adopting more robust investment strategies and risk control measures. Bitcoin ETF products with high risk and high returns can provide opportunities for investors with higher risk preferences to achieve higher returns through leverage investment, derivative trading, and other means.

7.1.2 Global Market Expansion

The expansion potential of Bitcoin ETF in the global market is huge, and it is expected to show an accelerating development trend in the future. In North America, the United States, as the world’s largest financial market, the approval and listing of Bitcoin ETF have laid a solid foundation for the market development in this region. With further improvement in regulatory policies and increasing market acceptance, the US Bitcoin ETF market is expected to continue its growth trend. Other North American countries, such as Canada, are also actively promoting the development of Bitcoin ETFs and are expected to approve more Bitcoin ETF products for listing in the future.

The acceptance of Bitcoin ETF in the European region is gradually increasing. Countries such as Germany and Switzerland have already approved the listing of Bitcoin ETF, setting an example for the development of the European market. With the gradual improvement of the EU’s cryptocurrency regulatory framework, other European countries may also expedite the approval process for Bitcoin ETF, promoting its popularity in the European market. After Brexit, the independence of the UK’s financial market has been enhanced, which may also lead to more exploration and innovation in the field of Bitcoin ETF.

The Bitcoin ETF market in the Asian region also has huge development potential. Hong Kong approved the first Bitcoin spot ETF in April 2024, providing a new channel for Asian investors to participate in the Bitcoin market. With the stable development of the Bitcoin ETF market in Hong Kong, neighboring countries and regions may learn from Hong Kong’s experience and promote the listing of Bitcoin ETFs. Asian countries such as Japan and Singapore, with relatively open attitudes towards cryptocurrencies, are expected to become important regions for the expansion of the Bitcoin ETF market in the future.

Conclusion

This study comprehensively and thoroughly explores the emerging financial product of Bitcoin ETF, covering its definition, principles, types, current development, opportunities, challenges, and its impact on the market. As an innovative investment tool, Bitcoin ETF provides investors with a convenient way to participate in the Bitcoin market, while also having a profound impact on the cryptocurrency market and traditional financial markets.