What is Bitcoin ETF? Differences between Bitcoin Spot ETF vs Bitcoin Future ETF
These days, Bitcoin is gaining a lot of attention from people who are curious about cryptocurrencies. Lots of folks want to get their hands on some Bitcoin, but they find the process of buying it from a crypto exchange quite daunting and hard to understand.
It’s not surprising because things like crypto wallets, Bitcoin addresses, and private keys can be confusing, especially for new investors. In fact, they can even scare away potential investors. That’s why many people are now looking at Bitcoin ETFs, also known as exchange-traded funds, as a more appealing option.
What we are going to learn?
What is a Bitcoin Exchange-Traded Fund (ETF)?
A Bitcoin ETF is a type of investment fund that contains Bitcoin or assets associated with Bitcoin’s value, without actually needing to buy Bitcoin. These ETFs are traded on conventional exchanges, rather than cryptocurrency-specific platforms. The idea is that a company buys Bitcoin, turns it into a security, and then sells or trades it on an exchange.
Working function of Bitcoin ETFs
A firm is responsible for managing an ETF, and its role involves acquiring and holding the actual Bitcoin. The ETF’s price is directly tied to the value of the underlying asset held within the fund. This ETF is then listed on a conventional stock exchange, enabling you, the investor, to trade it just like any other stock.
Benefits of Bitcoin ETFs
A Bitcoin investment product known as an exchange-traded fund (ETF) mirrors the worth of Bitcoin.
Instead of using cryptocurrency trading platforms, ETFs can be easily purchased, sold, and traded on regular stock market exchanges. This provides an accessible opportunity for both ordinary investors and individuals interested in Bitcoin’s value to engage with a familiar and trustworthy investment option.
The primary purpose of these Bitcoin ETFs is to offer retail investors and those who may be hesitant to invest directly in cryptocurrencies a chance to participate indirectly.
Now let us understand, what are the types of Bitcoin ETFs.
Types of Bitcoin ETFs: Bitcoin Spot ETFs vs Bitcoin Future ETFs
Bitcoin ETFs are mainly two types: Bitcoin Spot ETFs and Bitcoin Future ETFs.
Bitcoin Spot ETFs
Bitcoin Spot ETFs are investment vehicles that closely track the real-time price of Bitcoin. The value of these ETFs is directly linked to the actual price of Bitcoin in the market, providing investors with a transparent and direct way to participate in the cryptocurrency’s performance.
Those who invest in a Bitcoin Spot ETF actually own Bitcoin within the fund, akin to owning shares of a stock. This ownership structure grants investors immediate exposure to the current price of Bitcoin, allowing them to benefit from its potential growth.
Although Spot ETFs are currently not available in the US market, there is a growing demand for their introduction, as they are perceived as a more straightforward and convenient method to invest in Bitcoin’s price movements.
BlackRock has already filed for Bitcoin Spot ETF approval with the SEC. With BlackRock’s filing, investors eagerly anticipate the arrival of Bitcoin Spot ETFs to further enhance accessibility and diversification within the cryptocurrency market.
Bitcoin Future ETFs
Bitcoin Future ETFs are investment vehicles that focus on investing in Bitcoin futures contracts.
A Bitcoin futures contract is a contractual agreement to buy or sell Bitcoin at a predetermined price on a specific date in the future. With Bitcoin Future ETFs, the value of the ETF is derived from the expected future price of Bitcoin, rather than the current market price.
Investors who opt for Bitcoin Future ETFs do not directly own Bitcoin itself. Instead, they speculate on the future price of Bitcoin by investing in these futures contracts. The success or profitability of these ETFs depends on the accuracy of the investors’ predictions regarding Bitcoin’s future price movements.
Bitcoin Future ETFs are commonly available in the market, providing investors with an opportunity to engage in speculative investment based on their expectations of Bitcoin’s future price. These ETFs offer a way to indirectly invest in Bitcoin without having to own and manage the cryptocurrency directly. It’s important to note that investing in Bitcoin Future ETFs involves risks and requires careful analysis of market trends and future price expectations.
Bitcoin Spot ETFs vs Bitcoin Future ETFs: Which is a better option?
- Spot ETFs provide exposure to the current price of Bitcoin, while Future ETFs are based on expected future prices.
- Spot ETFs involve holding actual Bitcoin, while Future ETFs do not.
- Spot ETFs are currently not available, while Future ETFs are commonly offered.
- Spot ETFs are seen as a more straightforward and immediate investment option, while Future ETFs involve speculation.
- Spot ETFs are considered by some as a more legitimate form of investment due to holding actual Bitcoin.
|Characteristics||Bitcoin Spot ETFs||Bitcoin Future ETFs|
|Type of Investment||Invest in Bitcoin at
its current price
|Invest in Bitcoin
|Value||Directly tied to
current Bitcoin price
expected future price
|Ownership||Hold actual Bitcoin
within the fund
|No direct ownership
|Investment Approach||Immediate exposure to
current price of Bitcoin
based on future price
|Availability||Currently not available||Commonly available|
|Market Perception||Considered more legitimate
|Considered a legitimate
Bitcoin ETFs vs Buying Bitcoin Directly: What is the Difference?
Now, you might be wondering, why wouldn’t investors simply go ahead and buy Bitcoin?
Well, for the majority of regular retail investors, Bitcoin and other cryptocurrencies may still seem like a risky venture. Not only are there uncertainties surrounding the regulations in this domain, but owning Bitcoin also entails the responsibility of managing a Bitcoin wallet and relying on crypto exchanges.
For those who are new to this realm, it can be unfamiliar territory that requires a certain level of self-education. Let’s not forget that wallets and exchanges can be vulnerable to hacking attempts, leaving your keys and, ultimately, your cryptocurrency at risk of being stolen. While there are ways to safeguard your keys by storing them offline through various methods, it’s important to note that none of these approaches can offer complete and guaranteed security.
On top of that, there’s the whole matter of figuring out how to report taxes for the profits you make from selling Bitcoin. It can get quite complicated, especially when it comes to capital gains. But here’s the thing: with an ETF, you don’t need to worry about owning any actual cryptocurrency, keeping your keys safe, or constantly shuffling them between different storage options.
Instead, what you do is own shares of the fund itself. This means that all the risks associated with storing keys are taken care of for you.
Bitcoin ETFs vs Other (traditional) ETFs: What are the differences?
It’s important to note that there are notable distinctions between a Bitcoin ETF and other types of ETFs.
Firstly, certain ETFs represent ownership of equity shares, which means that as a shareholder, you may receive a portion of the dividends distributed by the companies within the ETF. In the case of Bitcoin, since it operates in a decentralized manner, this dividend mechanism does not apply to a Bitcoin ETF.
Secondly, similar to other ETFs, there are fees involved that need to be paid to the company offering the ETF. However, in the case of a Bitcoin ETF, a portion of these fees would be allocated to cover the costs associated with the custody and management of the purchased Bitcoin that serves as the foundation of the ETF. This includes expenses related to securely storing the Bitcoin and managing the overall operations of the fund.
Until very recently, the Securities and Exchange Commission (SEC) in the United States had not given its approval to any Bitcoin ETFs that directly hold Bitcoin. However, it did approve Bitcoin ETFs that are linked to Bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME). Now, let me explain what a futures contract is. It’s a standardized agreement between two parties where they agree to exchange a specific amount of assets on a specific date for a predetermined price.
In the case of a Bitcoin futures contract, it’s an agreement between two parties to exchange a set unit of Bitcoin. Specifically, in this scenario, one contract unit equals 5 BTC.
In which countries can you buy Bitcoin ETFs?
It’s worth noting that Bitcoin ETFs have been established in many countries now.
These nations have embraced the growing popularity of the cryptocurrency industry and have allowed various providers to offer Bitcoin exchange-traded funds.
Here is a list of some countries where you can find Bitcoin ETFs and the platforms through which they can be accessed:
- Canada: 3IQ Coinshares, Purpose Bitcoin, and CI Galaxy Bitcoin
- Brazil: QR Capital’s Bitcoin ETF
- Europe: 21Shares Bitcoin ETP, BTCetc – ETC Group Physical Bitcoin, VanEck Bitcoin ETN
- Jersey: WisdomTree Bitcoin
- United States of America (for Bitcoin futures ETFs): New York Stock Exchange ARCA and Nasdaq
What are the most popular Bitcoin ETFs?
Investors have a range of Bitcoin ETF options to choose from when it comes to trading. It’s important to note that these Bitcoin ETFs are primarily based on the prices of Bitcoin futures contracts. As with any investment decision, it’s advisable to seek guidance from a professional advisor before making a purchase. Here are a few popular Bitcoin ETFs that you may come across:
- Proshares Bitcoin Strategy ETF (BITO)
- Valkyrie Bitcoin Strategy ETF (BTF)
- VanEck Bitcoin Strategy ETF (XBTF)
- Global X Blockchain & Bitcoin Strategy ETF (BITS)
Drawbacks of Bitcoin ETFs
While it is true that anyone can purchase Bitcoin from a cryptocurrency exchange or a Bitcoin ATM, there are several advantages that an ETF can offer. These benefits include convenience, security, and portfolio diversification, among others.
However, it’s important to acknowledge that a Bitcoin ETF also has its limitations and potential drawbacks. Here are some factors that one might perceive as disadvantages:
Not having actual ownership of Bitcoin
When it comes to a Bitcoin ETF, it’s important to understand that the investors do not possess the actual Bitcoin itself.
Limited trading hours
While cryptocurrencies can be traded around the clock, financial exchanges like the New York Stock Exchange (NYSE) operate within specific trading hours. This means that if there are significant price movements in BTC during non-trading hours, you won’t be able to take immediate action until the market opens again.
Potential pricing discrepancies
It’s crucial to consider that the value of a bitcoin ETF may not accurately reflect real-time changes in the price of bitcoin, especially if the ETF holds multiple assets.
Future prospects of Bitcoin ETFs in the US
A considerable amount of attention is directed towards the United States when it comes to the possibility of a Bitcoin exchange-traded fund (ETF). The excitement stems from the potential opportunities it could offer in the market. However, obtaining approval from the U.S. Securities and Exchange Commission (SEC) for a Bitcoin ETF has proven to be a challenging endeavour.
Over the past few years, numerous applications and proposals for such ETFs have been rejected by the SEC, adding to the complexity and uncertainty surrounding the regulatory landscape.
SkyBridge is a firm that currently offers a Bitcoin fund to its clients, although it is not classified as an ETF. However, the company has expressed its intention to convert this fund into an ETF in the future, provided that it receives approval from the U.S. Securities and Exchange Commission (SEC) for a Bitcoin ETF.
Similarly, in April 2021, Grayscale, a company affiliated with CoinDesk, stated its plans to convert its Bitcoin Trust into a Bitcoin ETF once authorized by the SEC.
It’s worth noting that the SEC has been rejecting applications for Bitcoin ETFs, including those from Grayscale and Bitwise. In fact, on June 29, 2022, the SEC rejected applications from both Grayscale and Bitwise for a spot bitcoin ETF.
Various companies like Invesco have taken the initiative to re-submit applications to the U.S. Securities and Exchange Commission (SEC) seeking approval for Bitcoin ETFs. Exciting news came recently when the SEC granted approval for the very first leveraged Bitcoin futures exchange-traded fund (ETF) on a Friday. This ETF, known as Volatility Shares 2x Bitcoin Strategy ETF (BITX), is scheduled for launch on the Chicago Board Options (CBOE) BZX Exchange on Tuesday, June 27. This development brings added diversity and trading opportunities to the cryptocurrency market.