At the very moment when it seems that all the crypto investors in the world are frozen in anticipation – when the US authorities will approve the launch of spot Bitcoin exchange-traded funds (ETFs) – it’s time to clarify: how these funds work, how to invest in them and how to use them earn.
What is a Spot Bitcoin ETF
ETF is an acronym that stands for exchange traded fund – “a fund that is traded on an exchange.”. In other words, it is an investment company whose shares/shares can be purchased on the most common traditional stock market.
Each fund usually stipulates in advance the instruments in which it invests.. These could be shares of certain companies (for example, the American S&P 100 rating), certain bonds, gold, and so on.. Spot Bitcoin ETF invests exclusively in Bitcoin itself. This makes it strikingly different from, for example, Bitcoin futures ETFs – such funds invest in derivatives rather than in the cryptocurrency itself. As for the term “spot”, it means that transactions are carried out here and now, and not sometime in the future.
Thus, a spot Bitcoin ETF is a fund that invests in the first cryptocurrency, and its shares/units are traded on an exchange.
What are the pros and cons of such ETFs? And what exactly is the hype about?
Reasons for Interest in Bitcoin Spot ETFs
Bitcoin remains semi-legal almost everywhere. The legal framework for cryptocurrencies remains crude in all jurisdictions, except perhaps those where the authorities have simply decided to ban digital assets (like Turkmenistan). If the US Securities and Exchange Commission (SEC) approves a spot Bitcoin ETF, it will mean approval for the entire asset class.
Another important aspect is the ease of access to investments in BTC. A number of investors may not mind buying a certain amount of cryptocurrency, but they do not have the desire or ability to understand all the intricacies associated with public and private keys, these seed phrases of yours. And cryptocurrency exchanges are not credible after the scandals with FTX or Binance.
Decentralized exchanges (DEX) even more so seem to the average investor to be a complex and not fully understood way of trading.. But with an exchange-traded fund, everything will be simple – shares can be purchased simply through any brokerage account.
Third important aspect: greater diversification. Investors prefer not to keep all their eggs in one basket. Bitcoin can be a rather interesting protective asset, at least against inflation.
The fourth point is greater transparency of government regulation. Although this was not what cryptocurrency was originally intended to be about, now for many users the legality and obviousness of the rules is really important. And the state is trying in every possible way to take control of the crypto industry. Individual investors want to be confident in the sites and products they use. In the case of investing in a Bitcoin ETF, investors will know in advance where to go (complain) and with what.
The reasons for interest in spot Bitcoin ETFs are also their advantages. What about the cons?
Cons of Bitcoin Spot ETFs
The first disadvantage is the difficulty for ETFs to follow the price of Bitcoin. Although BTC is not as volatile as it was five or six years ago, the price can change very quickly. Therefore, it is simply unrealistic to rebalance on time.
Actually, from the first disadvantage comes the second – high volatility. This is not a minus for everyone, but for the faint of heart it is definitely. For those who want to get everything here and now, a drawdown of 5-10% can be fatal.
And regarding commissions ( third nuance), there is definitely no doubt about the general negativity. Clients don’t want to pay, much less overpay. In the case of a spot Bitcoin ETF, there is no way without this, otherwise why would management even start the enterprise? It must make a profit.
The fourth disadvantage is insecurity. Whatever storage an ETF chooses to store BTC in, that storage can still be emptied. This applies to both custodial and non-custodial wallets.
The fifth obvious disadvantage is the lack of dividend payments. Bitcoins themselves do not create income, but are only an asset whose price changes based on people's expectations.
In addition to the approval of spot ETFs, a fairly high-profile story is the conversion of the Grayscale GBTC trust into an exchange-traded fund. Why is this necessary and what is the difference?
Difference between a trust and an ETF
The main difference between a Bitcoin trust and a Bitcoin spot ETF lies in the right margin. While both funds invest in BTC, the structure is different.
The nature of the trust is closed. By and large, it is quite similar to a regular company, where the number of shares is determined initially, and then the price of the securities changes depending on the relationship between supply and demand.
In turn, the number of ETF shares varies depending on what happens to the price of BTC. The market maker reduces or increases the number of securities outstanding to more clearly reflect the price of Bitcoin in the price of the ETF.
This last aspect also shows that there is a psychological difference between a trust and an exchange-traded fund.. Obviously, the unsophisticated investor will be pleased to invest in a product that follows the price of BTC, and not just an investment company that buys cryptocurrency – when, in fact, its securities are no longer associated with BTC. Essentially anyone can do this if they have appropriate access to purchase an asset through a broker. At the same time, the broker himself must have access to the exchange where the fund will be placed.
When will Bitcoin spot ETFs be approved?
In November 2023, the SEC once again delayed the approval of spot Bitcoin ETFs. The next cut-off is January 2024.
There are other funds on the market for the world's largest cryptocurrency by capitalization. For example, there is a fund for BTC futures – ProShares Bitcoin Strategy ETF, which is traded on the NYSE Arca exchange under the ticker BITO.
Ok, what will happen to the price of Bitcoin after the possible approval of a spot Bitcoin ETF?
What will happen to the price of Bitcoin?
It’s impossible to say for sure yet. There is actually no direct correlation between the approval of a Bitcoin spot ETF and the price of BTC. We can only assume that at some point trading activity will increase as new mechanisms for investing in cryptocurrency appear. In addition, the large capital behind spot Bitcoin ETFs (BlackRock, Fidelity and others) will be invested in BTC, which could push the price of the crypto asset up.
Conclusion
So, a Bitcoin spot ETF is a fund that invests exclusively in the world's largest cryptocurrency directly (not through futures or anything else), and its shares are traded on a stock exchange. The excitement surrounding approval is due to the fact that the emergence of such a product will provide easier access to digital assets for a wide range of investors.
This material and the information contained herein do not constitute individual or other investment advice. The opinion of the editors may not coincide with the opinions of the author, analytical portals and experts.