Key Takeaways:
- Exchange-traded funds, known as ETFs, are popular investment vehicles that offer diversified exposure to various assets and sectors, and can be traded like stocks, as well.
- Bitcoin ETFs allow investors to gain exposure to Bitcoin without owning the actual cryptocurrency; there are two main types: spot ETFs and futures ETFs.
- Spot ETFs are designed to hold actual Bitcoin, providing direct exposure to its price movements, but are not yet approved by the US Securities and Exchange Commission (SEC) due to concerns about market manipulation and security risks.
- Futures ETFs track Bitcoin’s price through futures contracts, which offers flexibility, but they come with a contract expiry, rollover, and other risks associated with the futures markets.
- Currently, multiple futures ETFs have been approved for the US market, while a dozen applications for spot ETFs are still pending.
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What Are ETFs?
Exchange-traded funds (ETFs) have become increasingly popular investment vehicles in recent years. They are essentially investment funds traded on stock exchanges, offering investors exposure to a diversified portfolio of assets.
ETFs are designed to track the performance of a specific index, sector, or asset class, and they provide investors with the flexibility and convenience of trading like a stock, while also offering the benefits of diversification.
Some of the popular traditional finance (TradFi) ETFs include:
SPDR S&P 500 ETF (SPY): Tracks the performance of the S&P 500 Index, which includes 500 of the largest publicly traded companies in the US.
Invesco QQQ Trust (QQQ): Tracks the performance of the Nasdaq-100 Index, which includes 100 of the largest non-financial companies listed on the Nasdaq stock market.
iShares Russell 2000 ETF (IWM): Tracks the performance of the Russell 2000 Index, which includes 2,000 of the smallest US companies by market capitalisation.
Introduction to Bitcoin ETFs
With the rise of cryptocurrencies, Bitcoin ETFs have emerged as a popular investment option for those looking to gain exposure to the digital currency market. Bitcoin ETFs allow investors to trade Bitcoin without having to own the underlying asset.
For spot Bitcoin ETFs, instead of buying BTC directly, investors will be able to buy shares of the ETF, representing proportional ownership in the bitcoins held by the fund.
For futures ETFs, the fund does not hold any bitcoins, but gains synthetic exposure to Bitcoin through the futures markets.
Differences Between Bitcoin Spot and Futures ETFs
The main differences between these spot and futures ETFs lies in the way they track the price of Bitcoin and the underlying assets they hold. Here’s how:
Spot ETFs
Spot ETFs, also known as physical ETFs, aim to track the price of Bitcoin by holding the actual cryptocurrency. However, no spot ETF has been approved yet. The theoretical setup of these ETFs is to purchase Bitcoin and issue shares to traders based on the value of the Bitcoin held. In other words, spot ETFs are designed to provide investors with direct exposure to Bitcoin’s price movements.
Spot ETFs would offer several benefits to investors, as they could provide a simple and straightforward way to trade in Bitcoin without having to deal with the complexities of buying and storing the cryptocurrency. Additionally, spot ETFs are regulated investment vehicles, providing a level of transparency and oversight that may not be present in other forms of Bitcoin investments.
However, spot ETFs also come with their own set of risks. One of the main risks is the potential for theft or loss of the Bitcoin held by the ETF. As the underlying assets would be held in a crypto wallet, there is a risk of hacking or other security breaches. Additionally, spot ETFs would be subject to the volatility and price fluctuations of Bitcoin.
As of November 2023, there are no Bitcoin spot ETFs currently on the market, but several applications for them are pending. The only Bitcoin ETFs available are futures-based ETFs.
Futures ETFs
On the other hand, futures ETFs, also known as derivatives-based ETFs, do not hold the actual cryptocurrency. Instead, these ETFs track the price of Bitcoin through futures contracts, which allow traders to speculate on the future price of an asset without actually owning it. Futures ETFs enter into contracts to buy or sell Bitcoin at a predetermined price and date based on the price movements of Bitcoin futures contracts.
Futures ETFs offer several advantages over spot ETFs, as they can be particularly useful in volatile markets where traders anticipate a decline in Bitcoin’s price. Additionally, futures ETFs provide a more efficient way to gain exposure to Bitcoin.
However, futures ETFs also come with their own set of risks. One of the main risks is the potential for contract expiry and rollover. Futures contracts have expiration dates, and as they approach expiration, the ETF must sell the expiring contract and buy a new one. This process, known as rollover, can lead to increased costs and potential tracking errors.
Learn how futures work in this introductory article.
Bitcoin Futures ETFs Currently on the Market
The only Bitcoin ETFs currently available as of November 2023 are futures-based ETFs. These include:
ProShares Bitcoin Strategy ETF (BITO)
ProShares Short Bitcoin Strategy ETF (BITI)
VanEck Bitcoin Strategy ETF (XBTF)
Valkyrie Bitcoin Strategy ETF (BTF)
Simplify Bitcoin Strategy PLUS Inc ETF (MAXI)
Global X Blockchain & Bitcoin Strategy ETF (BITS)
It’s important to note that, while there have been attempts to introduce spot Bitcoin ETFs or convert some of these futures ETFs (above) into spot ETFs, they have not yet been approved by the US Securities and Exchange Commission (SEC).
Why Haven’t Spot ETFs Been Approved for Bitcoin?
Spot ETFs are currently under review by the SEC, which manages securities — a category of financial products — in the US. However, as of November 2023, spot Bitcoin ETFs have not yet been approved by the SEC.
The SEC has cited concerns about the lack of a regulated crypto market of sufficient size to prevent manipulation. However, there have been recent developments of rulings in favour of Grayscale, which increases the likelihood of a Bitcoin ETF being approved. US courts have criticised the SEC for approving futures-based Bitcoin products while denying spot Bitcoin ETFs.
The SEC now has to decide whether to approve one of the 12 applications for a spot Bitcoin ETF. Companies that have applied for Bitcoin spot ETFs include VanEck, ProShares, Invesco, Valkyrie Digital Assets, Galaxy Digital, Fidelity, WisdomTree, NYDIG Asset Management, and Grayscale Investments.
Comparing Spot vs Futures Bitcoin ETFs
When considering whether to invest in spot or futures Bitcoin ETFs, it is important to understand the key differences between the two. Spot ETFs aim to offer direct exposure to the price of Bitcoin, as they would hold the actual cryptocurrency. On the other hand, futures ETFs track the price of Bitcoin through futures contracts.
Another difference between spot and futures ETFs is the way they handle the buying and selling of Bitcoin. Spot ETFs would purchase and hold Bitcoin in a custodial wallet, while futures ETFs enter into futures contracts to track the price of Bitcoin.
Furthermore, spot ETFs would provide investors with ownership of the underlying Bitcoin, while futures ETFs provide exposure to Bitcoin through derivatives contracts.
Conclusion
Spot and futures Bitcoin ETFs offer different ways for investors to gain exposure to the digital currency market. Spot ETFs provide direct ownership of Bitcoin and are regulated investment vehicles, offering simplicity and transparency. Futures ETFs, on the other hand, track the price of Bitcoin through futures contracts.
When deciding between spot and futures Bitcoin ETFs, traders should consider personal goals, risk tolerance, and market outlook. Each type of ETF has its own benefits and risks, and the choice will ultimately depend on individual preferences and circumstances.
Regardless of which type of ETF, it is important to conduct thorough research and carefully evaluate the risks before making any investment decisions.
Due Diligence and Do Your Own Research
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