How BTC ETF works? Can someone please explain in simple terms?

[a298b112]

I have couple of questions trying to understand how BTC ETF works. I kind of know what is ETF and how it works in traditional markets.

1. Where does IBIT price come from? Today it is around $53, however, BTC is about 97k already. I guess there is no direct correlation?
2. Why it is called iShares Bitcoin Trust? Does the word "Trust" mean anything in this case?
3. What is the idea behind the BTC ETF? My assumption is Blackrock will sell IBIT shares, and buy BTC from the market for the money they've earned. If this is correct, do we know how much BTC they have bought? Where they kept it? Is there correlation between the price of IBIT and number of BTC's they have?
 

[Sanitough]

I have couple of questions trying to understand how BTC ETF works. I kind of know what is ETF and how it works in traditional markets.

1. Where does IBIT price come from? Today it is around $53, however, BTC is about 97k already. I guess there is no direct correlation?

This is done through calculation of NAV (Net Asset Value)
https://www.blackrock.com/us/individual/products/333011/ishares-bitcoin-trust

Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the fund. Any applicable brokerage commissions will reduce returns. Beginning August 10, 2020, market price returns for BlackRock and iShares ETFs are calculated using the closing price and account for distributions from the fund. Prior to August 10, 2020, market price returns for BlackRock and iShares ETFs were calculated using the midpoint price and accounted for distributions from the fund. The midpoint is the average of the bid/ask prices at 4:00 PM ET (when NAV is normally determined for most ETFs). The returns shown do not represent the returns you would receive if you traded shares at other times.

See it here also.

https://stockanalysis.com/etf/ibit/

2. Why it is called iShares Bitcoin Trust? Does the word "Trust" mean anything in this case?

Because IBIT is holding holding bitcoin in behalf of its shareholders, that's why they call it "TRUST"...

3. What is the idea behind the BTC ETF? My assumption is Blackrock will sell IBIT shares, and buy BTC from the market for the money they've earned. If this is correct, do we know how much BTC they have bought? Where they kept it?
 

https://www.investopedia.com/microstrategy-stock-surges-further-as-big-bitcoin-buys-pay-off-8748799

Notably, MicroStrategy still holds far less than the 474,627 bitcoin held as of yesterday by BlackRock's iShares Bitcoin Trust (IBIT), which is the largest bitcoin exchange-traded fund (ETF).
2
BlackRock. "iShares Bitcoin Trust."

Is there correlation between the price of IBIT and number of BTC's they have?

As computed in the NAV, if the value of bitcoin rises the value of IBIT holdings also increases which you can see in the share price which at the moment its $53.64 .

[odolvlobo]

An Bitcoin ETF is effectively a company that does nothing but own bitcoins, so the value of a share depends solely of the value of the bitcoins owned by the ETF. For example, imagine that an ETF owns 1000 BTC worth a total of $97,000,000 and there are 1,830,200 shares. That means that each share is worth $53.

1. Where does IBIT price come from? Today it is around $53, however, BTC is about 97k already. I guess there is no direct correlation?

The value of a share is the value of the ETF / number of shares. The vale of an ETF is the value of the assets it owns.

2. Why it is called iShares Bitcoin Trust? Does the word "Trust" mean anything in this case?

A "trust" is a special legal entity.

3. What is the idea behind the BTC ETF? My assumption is Blackrock will sell IBIT shares, and buy BTC from the market for the money they've earned. If this is correct, do we know how much BTC they have bought? Where they kept it? Is there correlation between the price of IBIT and number of BTC's they have?

A ETF will take a deposit of money, buy bitcoins with it, and give the depositor the equivalent number of newly created shares. Or it will take a deposit of shares, sell the equivalent number of bitcoins, and give the proceeds to the depositor. The bitcoins owned by an ETF are held by a "custodian". CoinBase is the custodian for most ETFs.

[SquirrelJulietGarden]

If you can buy bitcoin by yourself, and store it by yourself, let's do it. It's your private key, it's your bitcoin, with a condition that you use a non custodial wallet to store your bitcoin. If you purchase your bitcoin on centralized exchange and store it there, it's not your private key, it's not your bitcoin.

It's nearly similar with Bitcoin Spot ETF, you don't buy bitcoin directly buy buy Bitcoin ETF shares. Some explanations on Bitcoin Spot ETFs and importance of having private keys.

Reminder: do not keep your money in online accounts.
Everything You Need to Know About Bitcoin ETFs.

[a298b112]

An Bitcoin ETF is effectively a company that does nothing but own bitcoins, so the value of a share depends solely of the value of the bitcoins owned by the ETF. For example, imagine that an ETF owns 1000 BTC worth a total of $97,000,000 and there are 1,830,200 shares. That means that each share is worth $53.

very good explanation/analogy, thanks a lot.

A ETF will take a deposit of money, buy bitcoins with it, and give the depositor the equivalent number of newly created shares. Or it will take a deposit of shares, sell the equivalent number of bitcoins, and give the proceeds to the depositor. The bitcoins owned by an ETF are held by a "custodian". CoinBase is the custodian for most ETFs.

Didn't know this. Was all the IBIT shares sold out to initial buyers?
I assume when someone buys IBIT from the market, he or she is buying it not from the Blackrock but from other retail investors?

[Alone055]

1. Where does IBIT price come from? Today it is around $53, however, BTC is about 97k already. I guess there is no direct correlation?

Here is how the price is calculated: BTCh x BTCp / SS

Where:
BTCh = Bitcoin holdings of the company
BTCp = Bitcoin's current price
SS = Total shares sold by the company

Currently, they hold 474,627.44890 Bitcoins. At the time of writing this post, Bitcoin's price was $96,872. They sold 834,400,000 shares. Hence, the price should be $55.10 (it might take some time to get updated).

You can get all these stats from: https://www.ishares.com/us/products/333011/ishares-bitcoin-trust-etf#/

do we know how much BTC they have bought? Where they kept it? Is there correlation between the price of IBIT and number of BTC's they have?

You can find their BTC holdings and all other stats from the link I provided above. I have also explained the correlation between the price of IBIT and the amount of bitcoins they hold.

[goldkingcoiner]

The Bitcoin ETF is a way to 'indirectly' invest into Bitcoin. It is basically an 'IOU' for Bitcoin price action instead of real Bitcoin. For people who do not want the responsibility of holding the actual Bitcoin, it is a preferred investing method. But it has its pros and cons.

[Ambatman]

Your questions have already been answered but would share my view based on the topic.
Investors buy shares from The ETF and the ETF uses the proceeds to buy Bitcoin.

Let's say you plan on investing in Bitcoin
but you don’t want the stress and complexity in storing The Bitcoin.
Instead, you buy shares of a Bitcoin ETF
which is a fund that holds Bitcoin
When the price of Bitcoin goes up, the value of your shares goes up too, and when the price of Bitcoin drops, so does the value of your shares.
It's correlated and almost similar changes exist in rare occasions.

Didn't know this. Was all the IBIT shares sold out to initial buyers?
I assume when someone buys IBIT from the market, he or she is buying it not from the Blackrock but from other retail investors?

Yeah in most cases they are buying from retail investors and institutional investors.
But they are Authorized participants typically institutions that have the privilege to create and redeem shares of an ETF.
They do this by depositing their Bitcoin holdings and they are giving the share equivalent and vice versa.

[_act_]

Here is how the price is calculated: BTCh x BTCp / SS

Where:
BTCh = Bitcoin holdings of the company
BTCp = Bitcoin's current price
SS = Total shares sold by the company

Which means they can use the shares sold to alter the price of the share. I was thinking that the price would be the same with bitcoin price in the spot market but it is not the same. I guess they will regulate the shares sold in a way that it might be the same in percentage like bitcoin price but I will not invest in such token like this. I will prefer to invest in bitcoin.

[a298b112]

Currently, they hold 474,627.44890 Bitcoins. At the time of writing this post, Bitcoin's price was $96,872. They sold 834,400,000 shares. Hence, the price should be $55.10 (it might take some time to get updated).

I wonder if they disclose how much money they make from offering IBIT.

Overall, I now understand how Bitcoin ETFs work. However, it appears to me that Bitcoin is becoming a conventional financial instrument, subject to all the regulations and rules that govern market players. I’m not sure whether this is a positive or negative development.

[freedomgo]

I wonder if they disclose how much money they make from offering IBIT.

Overall, I now understand how Bitcoin ETFs work. However, it appears to me that Bitcoin is becoming a conventional financial instrument, subject to all the regulations and rules that govern market players. I’m not sure whether this is a positive or negative development.

Here's the data you need.
https://www.blackrock.com/us/individual/products/333011/ishares-bitcoin-trust

BlackRock will waive a portion of the Sponsor’s Fee for the first 12 months commencing on January 11, 2024, so that the fee will be 0.12% of the net asset value of the Trust for the first $5.0 billion of the Trust’s assets. If the fund exceeds $5.0 billion of the Trust’s assets prior to the end of the 12-month period, the Sponsor’s Fee charged on assets over $5.0 billion will be 0.25%. All investors will incur the same Sponsor’s Fee which is the weighted average of those fee rates. After the 12-month waiver period is over, the Sponsor’s Fee will be 0.25%.

We will start with the formula on how they'll make money. So assuming the Blackrock will earn 0.12% for the first $5 billion and 0.25% sponsor fee on the excess, here's the computation.

First $5 billion at 0.12%: $5,000,000,000 × 0.0012 = $6,000,000
Remaining $39.76 billion at 0.25%: $36,760,000,000 × 0.0025 = $99,400,000

Total estimated annual revenue: $6,000,000 + $99,400,000 = $105,400,000

https://ycharts.com/companies/IBIT/total_assets_under_management

IBIT Total Assets Under Management:
44.76B for Nov. 20, 2024

[odolvlobo]

A ETF will take a deposit of money, buy bitcoins with it, and give the depositor the equivalent number of newly created shares. Or it will take a deposit of shares, sell the equivalent number of bitcoins, and give the proceeds to the depositor. The bitcoins owned by an ETF are held by a "custodian". CoinBase is the custodian for most ETFs.

Didn't know this. Was all the IBIT shares sold out to initial buyers?
I assume when someone buys IBIT from the market, he or she is buying it not from the Blackrock but from other retail investors?

The "depositor" mentioned above is called an "Authorized Participant". They have a special arrangement with the ETF. The authorized participants constantly trade shares directly with the ETF. They make money off the slight differences between the price of a share and its value. Their trades are the primary mechanism for keeping the share price close to its value.

Everyone else trades shares on a stock market just like any other company.

[Alone055]

Which means they can use the shares sold to alter the price of the share. I was thinking that the price would be the same with bitcoin price in the spot market but it is not the same. I guess they will regulate the shares sold in a way that it might be the same in percentage like bitcoin price but I will not invest in such token like this. I will prefer to invest in bitcoin.

Yeah. Investors buy their shares; they use the money from the sales to buy more Bitcoin, I guess. If Bitcoin's price goes up, the shares will have a higher value, and if it drops, the price of the shares will also drop. I have never been into stocks much, so I don't understand how things really work, but I guess those who have been into traditional financial markets for years would find these things beneficial for them. Someone like me or you who is more into Bitcoin would definitely prefer buying Bitcoin instead of going through such a route.

I wonder if they disclose how much money they make from offering IBIT.

They do, @freedomgo already answered this for you.

Additionally, you can get all the details about the project, including its holdings, performance, policies, and everything else, from https://www.ishares.com/us/products/333011/ishares-bitcoin-trust-etf

Overall, I now understand how Bitcoin ETFs work. However, it appears to me that Bitcoin is becoming a conventional financial instrument, subject to all the regulations and rules that govern market players. I’m not sure whether this is a positive or negative development.

This is a positive development for some and a negative development for others; it's a subjective matter because different people would see this differently. Those who are against regulations and are already tired of the centralized financial markets and how they control their money and investments would never choose to invest in such things. Just buy Bitcoin and keep them in a non-custodial wallet and no one even needs to know about it. Sell it whenever you want without disclosing how much profit you have made.