How spot bitcoin and ether ETFs work

What a spot ETF is

An exchange-traded fund is a fund whose shares trade on a stock exchange like a company's shares. A spot crypto ETF holds the coin itself, rather than futures contracts linked to it. The fund's value therefore follows the market price of the coins it holds, minus its costs.

In the United States, the Securities and Exchange Commission approved the listing of the first spot bitcoin exchange-traded products on 10 January 2024, and they began trading the next day. Spot ether ETFs followed, starting to trade on 23 July 2024. Other countries have their own crypto exchange-traded products, with their own rules.

Who holds the coins

The coins are not held by the fund manager in an ordinary wallet. They are kept by a custodian, a specialised firm responsible for storing them securely. The fund's prospectus names the custodian and describes how the assets are held.

As a shareholder, you own shares in the fund, not the coins. Your broker records the shares in your account, just like any other listed security.

Creation and redemption

The number of shares is not fixed. Large financial firms called authorised participants (APs) create new shares when demand is high and redeem shares when demand falls. This process keeps the share price close to the value of the coins the fund holds.

• Creation — an AP delivers cash or coins to the fund and receives a block of new shares, which it can sell on the exchange.
• Redemption — an AP returns a block of shares to the fund and receives cash or coins back.

When US spot bitcoin and ether ETFs launched, creations and redemptions had to be done in cash, with the fund buying or selling the coins itself. On 29 July 2025 the SEC approved orders allowing authorised participants to create and redeem in kind, meaning with the coins directly. Ordinary investors do not take part in this process; they simply buy and sell shares on the exchange.

What "net inflows" means

Headlines often report that ETFs saw large inflows or outflows on a given day. A net inflow means more shares were created than redeemed, so the funds took in new money and, in most cases, increased their coin holdings. A net outflow means the opposite.

In a hypothetical illustration, if Fund A took in 300 million dollars, Fund B saw 100 million dollars leave and Fund C had no change, the group's net flow would be 300 − 100 + 0 = 200 million dollars of inflows.

Flows are a useful sign of demand through this one channel, but they are not the whole market. Coins also trade on exchanges around the world, and flow figures are often published a day later, after the price has already moved. Note too that ETF shares trade during stock-exchange hours, while the coins themselves trade every hour of every day.

Fees

Each fund charges an annual fee, usually called the expense ratio or sponsor fee, set out in its prospectus. It is taken from the fund's assets over time, so it shows up as a slightly lower value rather than a bill.

As a hypothetical illustration, a fee of 0.25% a year on a holding worth 10,000 dollars costs about 10,000 × 0.0025 = 25 dollars a year. Your broker may also charge trading commissions, and there is a small gap between the buying and selling price on the exchange.

What an ETF holder does not get

• No keys — you cannot withdraw coins to your own wallet. The custodian holds them for the fund.
• No on-chain use — you cannot send the coins, use them in applications on the network, or take part in network events such as forks or airdrops directly. Whatever the fund does in those cases is set by its own rules.
• No protection from the price — the fund follows the coin up and down. Crypto prices are volatile, and an ETF does not change that.

In return, holders get familiar account structures, regulated custody and no need to manage private keys. Whether that trade-off suits someone depends on their own situation and local rules.