A Bitcoin ETF or exchange-traded fund mirrors the price of Bitcoin and provides exposure to Bitcoin through traditional stock exchanges.
The types of Bitcoin ETFs include spot ETFs and futures ETFs, which are currently favoured in the market. These investment tools offer a gateway for traditional investors to step into the realm of crypto. Additionally, they contribute to increased liquidity and capital influx.
Representing a new wave of substantial investments in the crypto domain, these ETFs have the potential to introduce Bitcoin to more investors because of the channels through which they are available. These ETFs also come under the purview of regulatory authorities who oversee the functioning of traditional stock markets. For eg: The Securities Exchange Commission (SEC) is responsible for overseeing all Spot Bitcoin ETFs that will be traded on NASDAQ, and New York Stock Exchange.
How Does A Spot Bitcoin ETF Work?
In a Spot Bitcoin ETF, the institutional entity which is running the ETF will be holding Bitcoins in a digital wallet. Several security protocols will be put in place such as offline and online storage so that the Bitcoins remain secure in these digital vaults.
The ETF then issues shares corresponding to the number of Bitcoins they hold to the retail market through traditional stock exchanges. The ETF mirrors the price of the Bitcoin as closely as possible ensuring that investors get exposure to the price swings in Bitcoin. The onus of custody of Bitcoins is on the institution running the ETF.
Read more: Exchange-Traded Funds (ETFs) and Their Types
Pros and Cons of Spot Bitcoin ETFs
Pros
Ease of Access: Spot Bitcoin ETFs simplify the purchase and sale of bitcoins via familiar brokerage accounts, mirroring the process of trading traditional stocks or ETFs. This seamless approach facilitates an intuitive transition for mainstream investors.
Custody: The onus of owning Bitcoins is on the institution which manages the ETF and not the end users. This is similar to how storage is secured on centralised exchanges like ZebPay, where users need to worry about the security of their assets.
Taxation: Since an ETF involves trading the price of Bitcoin and not actually trading the asset, tax rules of the traditional stock market might apply to Spot ETFs. More regulatory clarity is required on this front.
Cons
Diversification: A Spot Bitcoin ETF provides exposure only to Bitcoin and no other crypto token. Several crypto investors who actively look for various crypto assets have to use centralised exchanges for their trading purposes. Centralised exchanges like ZebPay provide a wide range of tokens with various trading pairs, all in one place.
Security: Since the custody of Bitcoin is on institutions which are running the ETF, it becomes essential for them to enable robust security protocols. Centralised crypto exchanges like ZebPay have been fine-tuning security mechanisms for over a decade now.
Errors in price mirroring: Unlike Crypto exchanges like ZebPay where Bitcoins are actually traded, ETFs require linking between the price of Bitcoin and the issued shares. This requires periodic rebalancing and ensuring that the price is accurately mirrored. Issues in liquidity and rebalancing can create discrepancies.
Additional taxes for Countries outside the USA: Spot Bitcoin ETFs which will be launched on exchanges in the United States could be available to investors in other countries through various service providers. However, the taxation laws pertaining to trading off-shore stocks will still apply. Capital gains tax could be a big pie of the profits generated and can diminish returns over time.
Spot Bitcoin ETF vs Derivatives based ETF
The fundamental difference between a Spot Bitcoin ETF and a Derivative based ETF is how the ETF is structured. In the case of Spot Bitcoin ETF, as discussed above the price is backed by real bitcoins stored in a digital wallet. In the case of Futures ETF, the price of the share is based on a derivatives contract. ( Derivatives are financial contracts whose value is dependant on the underlying asset)
| Factors | Spot ETF | Derivatives based ETF |
| Ownership of asset | By ETF issuing institution | No ownership required |
| Ease of understanding | Simple | Complex |
| Accuracy | Direct Price Tracking | Indirect Price Tracking |
| Underlying asset | Bitcoin | Bitcoin Futures Contract |
Spot Bitcoin ETFs approved by the SEC
In a pivotal moment for the crypto industry, the SEC has approved all 11 applications of the Spot Bitcoin ETF. This marks an important moment in Bitcoin’s history and the ETF should be available for trading from 11th Jan, Thursday. The majority institutions who have their ETFs approved have partnered with Coinbase for their Bitcoin custody.
It is also important to note that we are currently only a decade into Bitcoin’s journey, but the fundamental properties of Bitcoin have not changed since inception, and they will continue to remain the same, which makes Bitcoin an incredibly resilient asset. Bitcoin ranks 10th amongst the list of companies and commodities with the largest market capitalization. This is an unimaginable feat given that Bitcoin has only been around since 2009.
Read more: Bitcoin Price Prediction
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FAQs on Spot Bitcoin ETF
Can Spot Bitcoin ETF impact the price of Bitcoin?
Spot Bitcoin ETF could impact the price of Bitcoin given that it can increase the liquidity and trading activity of Bitcoin. It is yet to be seen in which direction the market is going to move.
What would be the fees of Spot Bitcoin ETFs?
The fees for each Spot Bitcoin ETF would vary depending on the issuing entity.
Can the Spot Bitcoin ETF be purchased in countries outside the US?
Spot Bitcoin ETFs may be purchased in countries outside the US if there are service providers who enable access to the US markets from your local jurisdiction. Taxation and other regulatory norms may apply.
What are the institutions that have filed for Spot Bitcoin ETF?
BlackRock (BLK), ARK Invest, Grayscale Investments, WisdomTree, VanEck, Valkyrie, Invesco and Fidelity are some of the notable names. A total of 11 institutions got their Spot ETFs approved.
