A Bitcoin ETF Is Here. What Does That Mean for Investors?

The companies don’t expect their proposals to be turned down, according to people familiar with them, though the SEC could approve, disapprove or defer any or all of the applications.

New ETF proposals are subject to a 75-day SEC review period. If regulators don’t object, the funds are considered cleared for trading.

Invesco was among the firms expected to launch a bitcoin futures fund this month. But the asset manager said it wouldn’t proceed at this time. Valkyrie and VanEck are still slated to launch this month, with the former as early as this week. Five other firms have applied with the SEC to list similar funds, and decisions on them will likely be made in coming months.

The asset-management industry has been pushing for years to sell a bitcoin ETF, seeking to cash in on a surge in the value of digital currencies. Some in the industry say investors should “allocate” to crypto, which means devoting some small amount of their portfolios to the asset class to boost returns and diversify holdings. A bitcoin ETF would make it easier to do so, according to people in the industry.

What are bitcoin ETFs?

An exchange-traded fund is an investment that tracks the price of a basket of underlying assets and is tradable on U.S. stock exchanges. In this case, the funds would track the price of bitcoin futures traded on the Chicago Mercantile Exchange, rather than bitcoin itself.

Why are these ETFs futures-based?

These funds won’t hold actual bitcoins. Instead they will deal in bitcoin futures, which trade separately on regulated U.S. exchanges such as CME.

Regulators prefer futures-based ETFs because the SEC lacks jurisdiction over crypto trading venues that aren’t registered as exchanges in the U.S. The SEC says that leaves investors vulnerable to fraud and manipulation because regulators have no insight into where bitcoins are coming from and how prices are being determined.

The SEC hasn’t approved exchange-traded funds that hold bitcoin or other cryptocurrencies directly, and the agency has suggested it wouldn’t back such a move at this time.

What else is in these funds?

ProShares said in its prospectus that the fund will primarily invest in bitcoin futures. Previously the firm planned to also buy shares of Canadian ETFs and pooled investment trusts that hold bitcoin as a way of gaining a more direct line of exposure to the actual coins.

Other asset managers, including Invesco and VanEck, have proposed holding similar assets beyond bitcoin futures.

The SEC has indicated that it prefers futures-based ETFs for crypto, thanks to the surveillance considerations noted above, so there is some expectation in the industry that all of the funds will end up as plain-vanilla bitcoin futures ETFs.

ETFs appeal to investors who want to buy a bundle of assets easily. Otherwise, investors would have to buy them directly.

Is there a trade-off with futures?

Some crypto enthusiasts complain that futures-based ETFs won’t track bitcoin perfectly because of the costs of buying and selling futures contracts and other concerns. They contend that investors in bitcoin futures ETFs could be saddled with substandard performance if crypto keeps rising.

Is this why bitcoin is going crazy again?

Yes. Bitcoin has surged in recent days, with fans contending that the launch of a bitcoin ETF would increase the cryptocurrency’s legitimacy and make it easier for institutional investors to get exposure.

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com