What are Bitcoin Spot Exchange Traded Funds?
Professional traders who prefer to diversify their portfolios often invest in exchange-traded funds (ETFs). But what is an ETF? Exchange-traded funds are a collection of various assets whose shares are traded on the stock market. They combine the characteristics and potential benefits of different stocks and bonds. In this article, CryptoInside will talk about Bitcoin exchange-traded funds, their benefits, spot Bitcoin ETFs, futures ETFs and how to buy them.
What is a Bitcoin ETF and how does it work
Bitcoin ETF shares, like individual stocks, trade at different prices throughout the day based on supply and demand in the market. The same thing happens with Bitcoin ETFs, which track the value of BTC and are traded on traditional stock exchanges.
ETFs make it easier for investors to invest in Bitcoin without the hassle of using a cryptocurrency exchange. When trading ETFs, you can use margin leverage.
Types of Bitcoin ETFs
There are futures and spot ETF funds.
Bitcoin Futures ETF
Futures ETF – tracks the value of a cryptocurrency and allows you to buy or sell it depending on certain conditions. When buying or selling cryptocurrency futures, you do not actually own the underlying crypto asset, such as Bitcoin or another currency for which futures contracts exist. Instead, you purchase an exchange-traded fund (ETF) contract that guarantees the purchase or sale of cryptocurrency at a predetermined point in the future.
An ETF tracks the price of an underlying asset or index. For example, a Bitcoin ETF functions similarly.
If the value of Bitcoin rises, so will the ETF and vice versa, and it will be traded on a stock exchange such as the New York Stock Exchange. ETFs are now available for a variety of assets and industries, including commodities, currencies and cryptocurrencies such as Bitcoin.
Spot bitcoin ETF
Bitcoin spot ETFs rely on Bitcoin spot prices rather than futures prices. The key difference between a Bitcoin futures ETF and a spot ETF is that a futures ETF is backed by derivatives (in this case, Bitcoin futures contracts), whereas real BTC is backed by a spot ETF. Another reason why not all traders like futures is that they often trade at a higher price than the underlying asset.
More importantly, the price of Bitcoin futures contracts may deviate from the current market price due to investors’ emotions, and may also sometimes track the price incorrectly. However, in the case of a spot ETF, such risk does not exist.
How Bitcoin futures ETFs work
Investing in a Bitcoin futures ETF means you are agreeing to buy or sell BTC at a given price on a specific date, regardless of market conditions. The contract settlement date or expiration date is the agreed date by which both parties must fulfill their obligations.
The amount that the buyer must pay depends on the spot price and the value of the futures contracts that the buyer purchases. Moreover, investors could hypothetically use arbitrage to reduce the spread between an ETF and the underlying asset if it becomes too wide, so the price of the ETF will tend to maintain a high correlation with the price movement of the underlying asset.
Futures ETFs are more suitable for short- and medium-term investment strategies.
Disadvantages of Bitcoin Futures ETF
The most notable problem with Bitcoin futures ETFs is the lack of accuracy of their price trackers. A negative indicator for Bitcoin futures investors, called “contango,” occurs when the Bitcoin futures price exceeds the spot price, indicating that the ETF is not tracking the BTC price correctly.
When the price of the new contract is higher than the price of the Bitcoin futures contract, the proceeds from selling the expiring contracts will not be enough to buy the same number of contracts expiring later.
How does spot-bitcoin-ETF work
Spot exchange-traded funds (ETFs) directly own Bitcoin, and its value is directly linked to the current market price (or spot price) of Bitcoin. When investors buy shares of a spot Bitcoin ETF, they are buying a stake in the fund’s Bitcoin assets.
Investors can buy and sell ETF shares through traditional stock exchanges, just as they would with any other stock or ETF. This eliminates the need for investors to deal with the complexities of buying, storing and securing Bitcoin directly on a crypto exchange. Moreover, by being part of a regulated market, these ETFs provide investor protection that direct cryptocurrency investments may lack.
Bitcoin spot ETF is more suitable for medium- and long-term investment strategies.
Advantages of spot bitcoin ETF
Bitcoin spot exchange-traded funds have the following advantages:
Higher level of security and investor protection
Lower trading fees than on a crypto exchange
No need to store Bitcoins and less risk of losing them
Easier way to invest in Bitcoin (for US citizens)
Legalization of Bitcoin ETF in the USA
Spot BTC ETFs available in Canada. Three significant funds, Purpose Bitcoin, 3iQ CoinShares and CI Galaxy Bitcoin, have invested directly in Bitcoin. In addition, 21Shares exchange-traded Bitcoin products, which are 100% pegged to spot BTC, are listed on various German exchanges and the Swiss Exchange. The legalization of Bitcoin exchange-traded funds suggests that the governments of some countries are increasingly trusting their national fiat currencies.
The SEC gave the green light to 11 spot Bitcoin ETFs on January 11, 2024, marking a significant development in cryptocurrency investing. This historic decision comes after numerous unsuccessful attempts by ETF providers to gain approval for Bitcoin spot products.
The SEC previously had concerns about the largely unregulated bitcoin market and its susceptibility to manipulation, which it said posed risks to ordinary investors. The SEC has approved the following ETFs:
- Grayscale Bitcoin Trust;
- Bitwise Bitcoin ETF;
- Hashdex Bitcoin ETF;
- iShares Bitcoin Trust from BlackRock;
- Valkyrie Bitcoin Fund;
- Bitcoin ETF ARK 21Shares;
- Bitcoin ETF Invesco Galaxy;
- VanEck Bitcoin Trust;
- WisdomTree Bitcoin Fund;
- Fidelity Wise Origin Bitcoin Fund;
- Franklin’s Bitcoin ETF.
This approval opens up new opportunities for investors to interact with Bitcoin in a more regulated and potentially safer environment.
Investing in Bitcoin ETF
Investors seeking exposure to Bitcoin through an ETF in the United States may want to consider the Chicago Mercantile Exchange-listed Bitcoin Strategy ETF, commonly known by its ticker symbol BITO. This fund allows individuals to gain exposure to Bitcoin price movements without directly owning the cryptocurrency, offering more regulated investment opportunities.
Prospective investors can purchase BITO through various online brokerages such as Robinhood or Fidelity by opening a brokerage account. Once they create an account, they can select the number of shares they want and set the purchase price. Investors can navigate the acquisition process using either market orders, which are executed at the prevailing market price, or limit orders, which indicate the highest acceptable purchase price.
However, whether it is profitable to invest in a Bitcoin ETF depends on a person’s investment goals. For those with a long-term view of Bitcoin, futures ETFs may not be the best choice. Potential considerations include potential NAV variance, fund fees and ongoing expenses, which investors should carefully evaluate before investing in an ETF.
Pros and cons of Bitcoin ETF
Investing in a Bitcoin ETF allows you to gain access to the price of Bitcoin without dealing with a cryptocurrency exchange, learning how BTC works, or taking on the risks of directly owning Bitcoin. Without the fear of losing your wallet password, investing in Bitcoin becomes more accessible through Bitcoin futures or spot ETFs.
Additionally, since the ETF combines various securities such as Google shares, BTC and others, it allows investors to diversify their portfolios and reduce risk exposure. Because Bitcoin futures ETFs are regulated by the SEC because they trade on traditional exchanges, they are eligible for increased tax efficiency.
