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Exchange-Traded Products (ETPs) Providing Exposure to Bitcoin and Ether – Investor Bulletin

Sept. 9, 2024

The SEC’s Office of Investor Education and Advocacy (OIEA) urges investors to weigh carefully the potential risks and benefits if considering any investment product that provides exposure to the price of bitcoin or ether. Investors should understand that bitcoin and ether are highly speculative investments. This includes when exposure is gained through an exchange-traded product (ETP). Investors should consider the volatility of the price of bitcoin and ether.

Bitcoin and Ether. Bitcoin and ether are crypto assets. A crypto asset is an asset that is issued and/or transferred using distributed ledger or blockchain technology. Crypto assets have also been called “virtual currencies” or “cryptocurrencies,” although they are not widely accepted as a means of payment. Investors should know that the characteristics and design of crypto assets, and the distributed ledger or blockchain technology through which they are issued and/or transferred, can vary significantly. In other words, different crypto assets can present different risks.

What types of exchange-traded products provide exposure to bitcoin and ether?

The term exchange-traded product (ETP) refers to several types of investment products that are listed and traded on national securities exchanges. These investment products include exchange-traded funds (ETFs) and exchange-traded commodity trusts. 

Generally speaking, there are currently two ways in which ETPs provide exposure to the price of bitcoin and ether:

  • Bitcoin and Ether Futures ETPs provide exposure to the price of bitcoin and/or ether by holding futures contracts based on the crypto asset(s). These futures ETPs primarily are structured as ETFs.
  • Spot Bitcoin and Ether ETPs provide exposure to the price of bitcoin or ether by holding the crypto asset itself. Spot bitcoin and ether ETPs are structured as exchange-traded commodity trusts. They are not ETFs that are registered under the Investment Company Act of 1940.

This Investor Bulletin addresses spot bitcoin and ether ETPs. For more information about ETFs and mutual funds that provide exposure to bitcoin by holding bitcoin futures contracts, please read Funds Trading in Bitcoin Futures – Investor Bulletin.    

What are spot bitcoin and ether ETPs?

Spot bitcoin and ether ETPs are exchange-traded commodity trusts that hold either crypto asset. These products seek to provide an exchange-traded investment alternative for investors interested in exposure to the underlying asset without direct investment in the underlying asset. 

Spot bitcoin and ether ETPs seek to track the performance of the price of bitcoin or ether and may offer some potential benefits that are not available to investors who hold the crypto asset directly. For example, spot bitcoin and ether ETPs may provide exposure to those crypto assets without some of the direct risks to the investor of personally transacting on a crypto asset trading platform or using a crypto asset wallet and handling the public and private cryptographic keys. Keep in mind, the spot bitcoin or ether ETP itself is subject to these risks. 

How are spot bitcoin and ether ETPs regulated?

Spot bitcoin and ether ETPs must register their offerings and securities with the SEC under the Securities Act of 1933 and Securities Exchange Act of 1934, respectively. Issuers of these spot bitcoin and ether ETPs are also subject to the antifraud provisions of the federal securities laws. However, these spot bitcoin and ether ETPs are not registered as investment companies under the Investment Company Act of 1940. This means that spot bitcoin and ether ETPs are not subject to the requirements of the Investment Company Act of 1940, such as the legal requirements related to valuation and custody of fund assets, like ETFs and mutual funds are. This is true even though spot bitcoin and ether ETPs may have the term ETF in their name or refer to themselves, or be referred to by the media or general public, as ETFs.

What should I consider before investing in a spot bitcoin or ether ETP?

You should understand that bitcoin and ether are highly speculative. If you are thinking about investing in a spot bitcoin or ether ETP, you should carefully consider:

  • Your risk tolerance. You should focus on the level of risk you are taking compared to the level of risk you are comfortable taking. For more information, read Assessing Your Risk Tolerance. 
  • The ETP’s disclosure of the risks in investing. A spot bitcoin or ether ETP that offers its securities to the public and trades on a national securities exchange must register its offering and its securities with the SEC. As a result of these registrations, the spot ETP prepares an offering prospectus and becomes subject to periodic reporting. The spot bitcoin or ether ETP is required to disclose in its offering prospectus and periodic reports the material factors that make an investment in the trust or offering speculative or risky. Carefully review these risk factors and other disclosures to understand your investment. You can find the offering prospectus and the periodic reports for the spot bitcoin or ether ETPs on EDGAR.
  • Potential loss of the investment. All investments in ETPs involve risk of financial loss. This risk may be increased for spot bitcoin or ether ETPs because of the high volatility of those crypto assets (meaning prices can fluctuate widely). Transacting in bitcoin and ether has been, and may continue to be, substantially driven by speculation, which can lead to heightened volatility.
  • Tracking the price of a crypto asset.  Although spot bitcoin and ether ETPs are intended to track the price of those crypto assets, the price of your ETP shares may deviate from the price of the crypto asset. This is due to, among other things, changing investor demand for the shares of the spot bitcoin and ether ETP, issues affecting the issuer of the spot ETP shares, or events affecting the crypto asset markets more generally. For more information, you should review the risk factor discussions in the prospectus and periodic reports, as discussed above. 
  • Risk in the underlying market. Spot crypto asset trading platforms are not registered with the SEC, may be acting without compliance with existing regulatory requirements, and may lack the oversight of other intermediaries that are registered. As a result, there is an enhanced potential for fraud and manipulation in the underlying market.
  • Sponsor Fee. Spot bitcoin and ether ETPs generally pay a fee to the sponsor of the spot ETP trust that people who hold these crypto assets directly do not pay. As the spot bitcoin or ether ETP is a trust that does not generate income, the sponsor fee typically covers all the spot ETP’s operating expenses.  Even small fees can have a major impact on your investment over time. This is because each time the spot bitcoin or ether ETP pays the sponsor fee, the number of crypto assets represented by your share(s) of the ETP will decline. In other words, the value of your spot bitcoin or ether ETP shares will decrease over time due to the spot ETP’s payment of this fee.

Spot bitcoin or ether ETPs may have unique characteristics and heightened risks compared to other investments. It is important to consider how any investment fits into your overall investment plan before investing.

Additional Information

Crypto Assets
Funds Trading in Bitcoin Futures – Investor Bulletin

This Investor Bulletin represents the views of the staff of the Office of Investor Education and Advocacy.  It is not a rule, regulation, or statement of the Securities and Exchange Commission (“Commission”).  The Commission has neither approved nor disapproved its content.  This Bulletin, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.
 

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