Coin Edition -
Introduction
Investing in cryptocurrencies like Bitcoin comes with the technical intricacies of managing a digital wallet and the responsibility of safeguarding the wallet’s private keys. However, exchange-traded funds (ETFs) abstract these challenges for intending crypto investors, particularly institutions, by granting them exposure to their desired asset class without management responsibilities.
Table of contents
- Introduction
- What is Bitcoin ETF?
- Types of Bitcoin ETF
- Spot Bitcoin ETF
- How Spot Bitcoin ETFs Work
- Bitcoin Futures ETF
- How Bitcoin Futures ETFs Work
- Spot Bitcoin ETF vs. Futures Bitcoin ETF
- Current Spot Bitcoin ETF Trend
- Can Bitcoin ETFs Impact Bitcoin Price?
- Increased Demand
- Market Validation
- Trading Activity
- Conclusion
What is Bitcoin ETF?
A Bitcoin ETF is a financial product or investment fund that tracks the price of Bitcoin. Bitcoin ETF enables investors to participate in the price fluctuations of Bitcoin without the necessity of directly owning the cryptocurrency.
Also, while Bitcoin tokens are traded on crypto exchanges, a Bitcoin ETF trades on the stock market, blending the attributes and potential advantages of mutual funds, stocks, and bonds.
Bitcoin ETFs have garnered considerable attention recently because they provide a more accessible and regulated avenue for investing in Bitcoin. They appeal to traditional investors cautious about directly acquiring and managing cryptocurrencies, given concerns about security and technical complexities.
Types of Bitcoin ETF
Notably, two main types of Bitcoin ETFs exist, which primarily hinge on their level of involvement with Bitcoin itself. These are spot and futures Bitcoin ETFs.
Spot Bitcoin ETF
A Bitcoin spot ETF is an investment fund designed to offer investors direct exposure to the real-time value of Bitcoin. In this context, the term “spot” denotes the present value or the market price of the underlying asset, Bitcoin, at that spot.
Furthermore, a spot Bitcoin ETF holds actual Bitcoin. It invests directly in Bitcoin as the underlying investment, not derivatives contracts based on Bitcoin prices.
How Spot Bitcoin ETFs Work
A spot Bitcoin ETF issuer acquires Bitcoins either from other holders or via authorized crypto exchanges. These acquired tokens are subsequently safeguarded in a cold storage digital wallet, employing multiple layers of security to mitigate risks like hacking. Additionally, the protected digital vault is overseen by the registered custodian.
Furthermore, the Bitcoin spot ETF issuer generates shares corresponding to a predetermined quantity of held BTC tokens. The share price of the ETF is designed to mirror the current market value of Bitcoin, and these shares are open for public trading on conventional stock exchanges. For traditional investors and traders, acquiring a spot Bitcoin ETF is akin to purchasing shares in any other ETF or security.
Market liquidity and efficiency are sustained by market makers who consistently provide opportunities to buy and sell ETF shares. The pivotal role played by these market makers is instrumental in upholding a stable market environment, guaranteeing that investors can readily trade shares of the ETF as and when required.
According to a study by prominent market tracker CoinGecko, Bitcoin ETFs for spot trading are established in only eight countries globally, including Canada, Germany, Brazil, and Australia.
Currently, Canada leads in spot Bitcoin ETFs, having approved six funds with a total asset value of $2.79 billion. Germany follows closely with two spot Bitcoin ETFs incorporated, accumulating a substantial total asset value of $1.13 billion.
Meanwhile, the United States has no Bitcoin spot ETF. This decision is attributed to concerns regarding investor protection, the potential for market manipulation, and other issues.
Bitcoin Futures ETF
Bitcoin Futures ETFs do not possess material Bitcoin, unlike spot Bitcoin ETFs. They are derivatives-based Bitcoin investment vehicles.
In particular, Bitcoin futures ETFs leverage financial instruments such as futures contracts to mimic the price movements of Bitcoin. The Bitcoin futures contracts enable investors to speculate and make predictions regarding the future price movements of the asset.
How Bitcoin Futures ETFs Work
Futures contracts are standardized, time-bound agreements that grant the right to buy or sell the underlying asset, Bitcoin, at a predetermined future date. Importantly, these contracts do not confer ownership of the asset itself.
Moreover, as the contracts expire, they require settlement or replacement with new contracts. Notably, these Bitcoin futures contracts are traded on the Chicago Mercantile Exchange (CME) in the United States.
Essentially, investors who invest in Bitcoin exchange-traded funds based on futures contracts commit to buying or selling BTC at a predetermined price on a specific date, irrespective of market conditions.
Where one party commits to buying BTC at expiry, the purchase must occur at a discount or a premium. The futures market is considered a “premium” when the future price trades higher than the spot price and a “discount” when lower.
Furthermore, the U.S. Securities and Exchange Commission (SEC) has approved Bitcoin futures ETFs such as the ProShares Bitcoin Strategy ETF (BITO). Bitcoin futures also exist in other countries, including Canada and Hong Kong.
Spot Bitcoin ETF vs. Futures Bitcoin ETF
The distinction between these two investment vehicles tracking the price of Bitcoin lies in their structure and degree of exposure to BTC.
| Attribute | Spot Bitcoin ETFs | Bitcoin Futures ETFs |
| Underlying Asset | Actual Bitcoin | Bitcoin futures contracts |
| Price | Direct | Indirect |
| Bitcoin Custody | Digital vault | No direct Bitcoin custody |
| Exposure | Direct exposure | Indirect exposure |
| Regulatory Framework (U.S.) | In evolving phase | Established |
Current Spot Bitcoin ETF Trend
As of December 2023, the U.S. SEC has not approved a spot Bitcoin ETF. However, the regulatory body has issued a final notice instructing asset managers with pending Bitcoin ETF applications to make any required adjustments to their filings.
Among the trillion-dollar asset managers seeking spot Bitcoin ETFs are BlackRock, Fidelity, Franklin Templeton, and Invesco Galaxy. Other multi-billion dollar management firms include WisdomTree, VanEck, GlobalX, ARK Invest, Bitwise, Valkyrie, and Hashdex.
Furthermore, the U.S. regulator is expected to deny or approve a spot Bitcoin ETF in early January 2024, although the overwhelming sentiment in the market tilts towards the positive side.
Meanwhile, regulatory bodies in Hong Kong have opened the floor for Bitcoin spot ETF applications. In a circular dated December 22, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) proclaimed their willingness to entertain crypto spot ETFs.
Can Bitcoin ETFs Impact Bitcoin Price?
Experts have argued that Bitcoin ETFs can exert a significant influence on Bitcoin’s market value both directly and indirectly. Some of the ways it could play out include:
Increased Demand
A spot Bitcoin ETF can potentially draw new participants and investors into the cryptocurrency market. These individuals include prominent investors who may not have purchased Bitcoin directly.
Concerning Bitcoin futures ETFs, even though they do not directly possess Bitcoin, they can influence the price by impacting the market sentiment surrounding Bitcoin.
Market Validation
Furthermore, the introduction of Bitcoin ETFs, particularly spot ETFs, can be interpreted as a signal of legitimacy for Bitcoin within the mainstream financial system. Such pivotal development enhances confidence in the Bitcoin market, attracting a larger pool of investors. This could ultimately contribute to a potential increase in its price.
Trading Activity
Moreover, Bitcoin ETFs open additional channels for active trading of Bitcoin exposure, appealing to hedge funds, day traders, and other speculators. This potentially results in increased trading volume and heightened volatility in the market.
Conclusion
Bitcoin ETFs, particularly spot, mark a substantial advancement in the crypto landscape, providing a regulated avenue for traditional investors to partake in the Bitcoin market. These ETFs have the potential to contribute to improved market liquidity and draw increased institutional engagement.
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