How Do Spot Bitcoin ETFs Work?

Spot bitcoin ETFs purchase a select amount of bitcoins that are held in a secure digital wallet by a custodian. These custodians offer bitcoin storage in a secure vault. Most of these vaults are—as crypto insiders call—air gapped in “cold storage,” which means the bitcoins’ keys are stored offline and cannot be accessed through the internet.

The ETFs then issue shares that represent the bitcoins held by the fund. These shares are priced to reflect the current spot price of bitcoin and can be traded on traditional stock exchanges.

Spot bitcoin ETFs make it easier for retail investors and traders to buy and sell an asset tied to the current value of bitcoin without needing to hold bitcoin itself. They also allow investors seeking exposure to bitcoin in retirement accounts to have a much simpler option than opening a self-directed IRA that could hold bitcoin directly.
How Does a Spot ETF Maintain Its Price?

The price of a spot ETF can depart from the actual value of the underlying asset.

To bring the fund back in line with the asset’s actual value, authorized participants, otherwise known as APs, are allowed to create or redeem large blocks of shares. APs are typically large financial institutions that profit from the arbitrage opportunity presented when an ETF’s price is higher or lower than the underlying asset’s value.