- Bitcoin spot ETFs have Bitcoin as an underlying asset and allow investors to take advantage of the price changes of Bitcoin indirectly.
- Bitcoin spot ETF platform offer several benefits such as accessibility, convenience, diversification. Also, have certain risks in terms of regulations, security, and volatility.
Bitcoin, the first and the largest cryptocurrency by market cap, has disrupted the traditional financial industry to a great extent. While its underlying technology, blockchain’s use cases multiplied with the advent of decentralized finance (DeFi) via Ethereum, Bitcoin has found innovative methods of investment, such as exchange traded funds (ETFs).
Exchange-traded funds allow investors to gain exposure to an underlying asset without directly investing in it. Thus, Bitcoin spot ETFs also help investors to take advantage of the price movements of Bitcoin, without actually holding BTC. If you are new to this space and have no idea of Bitcoin spot ETFs, you are at the right place. Let us explore the territory of Bitcoin spot ETFs together in this article!
What is a Bitcoin Spot ETF?
Bitcoin spot ETF or Bitcoin spot exchange-traded fund is a financial investment instrument that combines the traditional ETF concept with the sophisticated Bitcoin cryptocurrency. Investors gain exposure to the Bitcoin market by investing in Bitcoin spot ETFs, without directly buying BTC tokens.
Instead of going to the crypto exchange platforms and figuring out the complex world of crypto wallets, involving private keys and public keys, investors can buy Bitcoin spot ETFs on regulated and traditional brokerage platforms. This accessibility and convenience is a boon for traditional investors, who would like to leverage the upswings of Bitcoin by being on the sidelines.
The US government has not yet approved Bitcoin spot ETFs but some of them exist outside of the US. One of the Bitcoin spot ETFs, 21Shares Core ETP (CBTC) was launched in Switzerland, by the CEO and co-founder of 21Shares, Hany Rashwan.
How Does a Bitcoin Spot ETF Work?
There are two types of Bitcoin ETFs – Bitcoin Spot ETFs and Bitcoin Futures ETFs. While Bitcoin spot ETFs provide direct exposure to the Bitcoin price and market trends, Bitcoin futures ETFs use Bitcoin futures contracts to gain exposure to the Bitcoin market prices. In simple terms, the underlying asset of Bitcoin spot ETFs is Bitcoin itself. And, the underlying asset of Bitcoin futures ETFs is Bitcoin futures contracts.
Bitcoin spot ETFs refers to the current price of its underlying asset, Bitcoin, and tracks Bitcoin price as closely as possible. Bitcoin spot exchange-traded funds hold actual Bitcoin funds in a vault to mirror the exchange price changes. They go to cryptocurrency exchange platforms and buy Bitcoin funds to store in them using offline storage methods with multiple layers of security. Then, they offer shares of Bitcoin spot ETF, based on their BTC holdings, on traditional stock exchanges.
Investors buy Bitcoin spot ETF similar to how they buy shares of a company on traditional stock exchanges like Nasdaq. The authorized officials behind the ETF maintain liquidity and ensure that investors can easily buy and sell the asset. When the Bitcoin price is on uptrend, so do the Bitcoin spot ETF and vice-versa. Likewise, Bitcoin spot ETFs offer a convenient way to indirectly invest in Bitcoin.
Benefits of Bitcoin Spot ETFs
Accessibility and Convenience
Bitcoin spot ETFs offer convenience and accessibility to investors who are adamant to invest in Bitcoin directly. Even traditional investors can gain exposure to the Bitcoin market and leverage its price movements through Bitcoin spot ETFs.
By introducing a new financial investment instrument, Bitcoin spot ETFs allow investors to diversify their portfolio. They not only minimize the risk of investing in Bitcoin directly but also distribute their risk tolerance in their portfolio.
Investing in Bitcoin spot ETFs on traditional stock exchanges ensures that it follows regulatory compliance. Because, launching a Bitcoin spot ETF involves having an approval from government bodies. Spot ETFs are a much better way to invest in Bitcoin when compared to investing in crypto exchanges that are not compliant with regulations and policies.
Mainstream Adoption of Bitcoin
Bitcoin spot ETFs encourage traditional investors to participate in the market, which in turn helps in expediting the mainstream adoption of Bitcoin in traditional financial markets.
Risks of Bitcoin Spot ETFs
Even though Bitcoin spot ETFs get an approval from the government before launching, there are still some regulatory uncertainties. Since the crypto industry is relatively new compared to traditional finance, there is a risk of fraud and manipulation of funds.
Bitcoin spot ETFs track the real-time price movements of Bitcoin and work accordingly. There is a risk of tracking discrepancies and having differences between Bitcoin and its ETF. Illiquidity of shares and rebalancing of Bitcoin fund holdings in vaults can cause tracking errors.
Cryptocurrencies focus on eliminating single points of failures by using decentralized blockchain technology. By acquiring BTC funds and storing them in a vault may bring some security risks with it. ETFs bring back the same old risk of a single point of failure, attracting cybercriminals.
Volatility of Bitcoin
Since the Bitcoin spot ETF follows the BItcoin price, there is a risk of extreme price fluctuations. Thus, even though ETFs offer a convenient way to invest in BTC indirectly, they cannot eliminate the volatility risk of cryptocurrencies.
Bitcoin spot ETFs play an important role by bridging the gap between traditional investment methods and cryptocurrencies. They help traditional investors to gain exposure to the Bitcoin market without actually purchasing Bitcoins and holding them in a digital wallet.
While there are benefits like convenience, accessibility, and diversification, Bitcoin spot ETFs also have several risks such as volatility, regulatory uncertainty, and tracking errors, etc. So, it is important to do your own research and understand the terms and conditions thoroughly before investing in Bitcoin spot ETFs.
Frequently Asked Questions (FAQs)
While some Bitcoin futures ETFs such as ProShares, VanEck, and Valkyrie Bitcoin strategy ETFs are approved by the US government, Bitcoin spot ETFs are not yet approved in the US.
Switzerland, Canada, Brazil, Australia, and Germany are known to have Bitcoin spot ETFs.