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Spot Bitcoin ETFs Explained

by Sandip Das from
Spot Bitcoin ETFs Explained

In this post 'Spot Bitcoin ETFs explained', we talk about everything you need to know about Bitcoin ETFs. Also, in this Bitcoin ETFs guide, we explain why spot Bitcoin ETF approval is a watershed moment for not only Bitcoin but for the entire crypto industry.

You were probably living in a cave all this time if you have not heard of the recent spot Bitcoin ETF’s approval by the US Securities Exchange Commission (SEC). Multiple Asset Management Companies in the US have applied for Bitcoin ETFs since 2013. However, the SEC kept rejecting them because such ETFs can be subjected to market manipulation. However, on January 10, 2024, the US SEC, the regulatory body for the US capital market, approved 11 spot bitcoin exchange-traded funds (ETFs).

These ETFs are being offered by some of the biggest names in the US capital market - BlackRock, Vanguard, Franklin Templeton, Valkyrie, Fidelity, and Invesco. The crypto community is celebrating this event as one of the biggest happenings in crypto in recent years. So, what is Bitcoin ETF approval all about, how do ETFs work and why they are important? Let’s explore.

1. What is an Exchange-Traded Fund (ETF)?

Before delving into Bitcoin ETFs, let’s first understand what an exchange-traded fund (ETF) is about. An ETF is a marketable security, like a stock, that tracks an index, a commodity, or a basket of assets. For instance, you may have heard about Gold ETF, which is a marketable security that tracks gold prices. The prices of gold and the gold ETFs move in tandem. So, you can invest in gold ETF instead of physical gold to get similar returns.

Similarly, an S&P 500 ETF tracks the movement of the S&P 500 index which is made of the top 500 listed companies in the US. Someone investing in an S&P 500 ETF benefits from diversification and doesn’t need to buy individual stocks. Exchange-traded funds are named so because you can buy/sell those on stock exchanges. Alternatively, you can learn about other crypto guides and bonuses on our homepage.

2. What is spot Bitcoin ETF?

All ETFs track the price of an underlying asset or a basket of assets. In the case of Spot Bitcoin ETF, the underlying asset is the Bitcoin cryptocurrency. A spot Bitcoin ETF is an investment fund that directly tracks the price of Bitcoin in the spot market.

There is another type of Bitcoin ETF called Bitcoin futures ETF, which tracks the price of Bitcoin futures contracts. However, spot Bitcoin ETF holds the actual Bitcoin cryptocurrency. Therefore, spot Bitcoin ETFs allow investors to benefit from Bitcoin’s actual price movement in the market.

Note that back in 2021, the SEC approved Bitcoin futures ETF. However, Bitcoin futures ETFs fail to track BTC’s price movement precisely. Also, these futures ETFs are less attractive for investors because of the cost of rolling over futures contracts. Moreover, future contracts are more complex compared to trading securities in the spot market. Since spot Bitcoin ETF’s price is more closely linked to actual BTC price movement, it’s likely to attract many new investors to crypto.

3. How does spot Bitcoin ETF work?

Let's begin our explanation of how spot Bitcoin ETF works. First, the investment firms offering spot BTC ETFs buy Bitcoins and then hold the same in secure digital vaults managed by registered custodians. Next, the ETF issues shares based on the number of BTC it holds. These shares are available for the public on traditional stock exchanges, on which investors can buy/sell these ETFs.

Also, the market price of these ETFs mirrors the market price of Bitcoins. Therefore, anyone with a normal brokerage account can buy these ETFs without having to directly buy Bitcoin even through the best crypto exchange. Bitcoin ETFs provide an opportunity for institutional and retail investors to invest in BTC without much technical knowledge about crypto.

Note that spot Bitcoin ETFs are already available in jurisdictions like Canada, Germany, Jersey, and Brazil. However, since the US is the largest securities market in the world, the approval of spot BTC ETFs in the US has a special significance.

4. What does spot Bitcoin ETF approval mean for investors?

The single most important significance of the spot BTC ETF approval is it is likely to attract many retail and institutional investors to crypto. Earlier many investors shied away from Crypto investing because of its association with complex technologies like blockchains, decentralized ledger, and consensus protocol. Which is understandable. Because of this, our experts at JohnnyBitcoin, have prepared guides on these subjects, such as the one on blockchains for beginners.

Also, since traditional stockbrokers don’t offer crypto, investors need to register with crypto exchanges to invest in crypto assets (on how to invest in crypto assets for beginners follow through our link). Plus, there are added complexities because of crypto wallets or private and public keys. All these factors create a mental barrier for many traditional investors to bet on crypto assets. Spot Bitcoin ETFs change that.

Spot Bitcoin ETFs allow investors to bet on Bitcoin without owning Bitcoin or registering with a crypto exchange. These ETFs can be traded through a regular brokerage account on stock exchanges. Also, one doesn’t need knowledge about crypto wallets or keys to own these ETFs. According to Timo Lehes, co-founder of blockchain firm Swarm Markets, “The approval of a Bitcoin ETF has huge implications for US investors because they can now hold crypto in their brokerage account, which they couldn’t do before.”.

Moreover, crypto ETFs are being provided by the leading names in the industry such as Blackrock, Vanguard, and Franklin Templeton, which changes crypto’s perception from ‘shady or infamous’ to ‘reliable and mainstream’. Because of all these factors, spot BTC ETFs make Bitcoin investment accessible to millions of new investors. According to Vijay Ayyar of CoinDCX, “The ETF approval also provides a credible stamp of approval for large institutions and market participants that were waiting for an easier way to access the asset class rather than buying crypto directly, which always has inherent price and custody risks.”

5. Advantages of spot Bitcoin ETFs

The first major advantage of Bitcoin ETFs is that they provide millions of new investors a direct exposure to Bitcoins without worrying about buying BTC or storing them in wallets. Secondly, investors looking for diversification into emerging assets like crypto can invest in Bitcoin ETFs to manage risks and optimize returns. Of course, you can always read our article on what is Bitcoin and how to invest in it to make an informed decision.

The third important advantage is convenience. Exchange-traded funds have been a preferred choice for many investors for decades. Bitcoin ETFs provide a hassle-free medium for many investors to invest in cryptos through a traditional investment tool like ETFs.

Fourthly, Bitcoin ETFs lower the perceived risks of investors as they are backed by large investment companies. Even though the Bitcoin ETFs depend on market forces, they lower the risks of fraud committed by crypto exchanges or theft of crypto through hacking. Fifthly, Bitcoin ETFs are likely to improve market liquidity because of the participation of large institutional investors. Higher liquidity leads to more stable price changes and better price discovery of an asset. Lastly, Bitcoin ETFs are going to give a major push to the mainstream integration of crypto. More mainstream adoption is a positive factor for existing and new investors.

6. Spot Bitcoin ETFs Limitations

Despite many advantages like diversification, lower risks, and convenience, Bitcoin ETFs involve certain drawbacks. For instance, Bitcoin ETF investors need to incur certain management fees, which lowers their overall return. Secondly, the crypto market is open 24/7. So, when you want to directly buy and sell Bitcoins from a crypto exchange, you can do it round the clock. However, Bitcoin ETFs can be traded only within the operational hours of the stock market. Thirdly, Bitcoin ETFs track the price of only Bitcoins. However, the crypto market is much more than just Bitcoins. So, if an investor wants exposure in altcoins (cryptos other than Bitcoin), they cannot do it through Bitcoin ETFs. Lastly, when you invest in Bitcoin ETFs, you don't directly own any Bitcoin but only a share in the ETFs. This contradicts the decentralization characteristics of blockchain. For alternatives check our article on how to invest in cryptocurrency in 2024 or visit one of the best crypto exchanges available below!

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7. Spot Bitcoin ETFs Explained 2024 - FAQs

7.1 ❓ Is Bitcoin ETF safe?

Bitcoin ETFs are much safer investment options than directly investing in BTC through a crypto exchange. Bitcoin ETFs are offered by some of the most reputed investment management firms like BlackRock and Vanguard.

7.2 ❓ Are Bitcoin ETFs approved?

On January 10, 2024, the US SEC approved spot Bitcoin ETFs in the US. Bitcoin ETFs are already approved in many other countries like Canada and Germany.

7.3 ❓ Do I need to register with a crypto exchange to buy Bitcoin ETFs?

No, you don’t need an account with a crypto exchange to invest in spot Bitcoin ETFs.

7.4 ❓ Are Bitcoin ETFs good investment options?

Bitcoin ETFs allow investors to get exposure to Bitcoin, which is the leading cryptocurrency. As crypto gains more legitimacy as an alternative asset class, it’s likely to experience higher demand and rapid price appreciation. This post ‘Spot Bitcoin ETFs Explained’ describes the major advantages of investing in spot BTC ETFs.

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Comments (2)
old_but_gold
old_but_gold 5 months ago
seems like an interesting way to get some extra profits
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