2013 was the year when The Winklevoss Bitcoin Trust made the first Bitcoin ETF filing. However, the world’s first Bitcoin ETF application approval happened in 2020 and was listed on the Bermuda Stock Exchange.
Since 2020, the crypto industry has made some giant strides with the advent of Bitcoin ETFs. In Europe for example, a spot Bitcoin ETF was launched on August 15, 2023. However in the US, futures ETFs have been approved.
Regardless, it seems the interest of the crypto industry remains with the spot Bitcoin ETFs due to their more significant impact. This article helps you understand the meaning of Bitcoin ETFs, how it works, and the types of Bitcoin ETFs.
What Are Bitcoin ETFs and How Does It Work?
Bitcoin ETFs are financial products that allow traditional investors to gain access to and trade Bitcoin without having physical access to the product. You see, the original setting of trading cryptocurrencies is quite different. You need to have some funds in your crypto wallet and invest those funds in the market where you can profit or lose.
However, Bitcoin ETFs change the whole game of trading Bitcoin. It allows you to gain exposure to bitcoin price movements and trade it without owning the assets directly. The ETFs (exchange-traded funds) track the price performance of bitcoin as an underlying financial asset.
So, when you are an investor purchasing these ETFs in stock exchanges, it is just like buying the shares of a company. You don’t need a wallet and might not even need expert knowledge of the crypto industry. So long as you have been a stock trader and know the market, you can trade the ETFs.
There are two types of Bitcoin ETFs: futures and spot ETFs. Spot Bitcoin ETFs are the most preferred ETFs for many reasons. Furthermore, the firms that offer traders to invest in spot Bitcoin ETFs in stock exchanges are the ones who hold the actual Bitcoins. So, they peg the price of the actual Bitcoin to the ETF, which you (the trader) can now trade. In other words, assuming the price of one Bitcoin is $26k, you will see these ETFs as $26k in the stock exchanges.
What is the Difference Between Bitcoin futures and Spot ETFs
There are two types of Bitcoin ETFs: futures and spot ETFs — there are major differences between these two ETFs.
The Bitcoin spot ETF is where the actual Bitcoin is directly linked to the ETF — buying this ETF means you are essentially purchasing a representation of real Bitcoin. On the other hand, futures Bitcoin ETFs don’t really represent Bitcoin’s value directly. In fact, buying these ETFs means buying contracts related to Bitcoin. In these contracts, you bet and agree on certain price movements regarding Bitcoin set in future dates. You basically speculate the price movements and decide to sell or buy depending on the futures contract.
The first difference between these two ETFs lies in the underlying assets. The underlying assets for the spot Bitcoin ETFs are actually Bitcoins, while the futures ETFs are futures contracts.
Secondly, the value of the spot Bitcoin ETFs is tied directly to the price of BTC in real time. On the other hand, the futures Bitcoin ETFs are connected to the dynamics of the futures market.
Thirdly, the exposure and risks of the Bitcoin spot ETFs are directly tied to real-life fluctuations in the market. On the other hand, futures Bitcoin ETFs have indirect exposure to Bitcoin price fluctuations.
Opportunities Created by Bitcoin ETFs
There are many opportunities with the Bitcoin ETFs, especially spot ETFs.
- Access to Assets
One of the most significant advantages people gain from Bitcoin ETFs is that it gives you access to trade Bitcoin without actually having it in a crypto wallet.
- Regulation
For many people, one of the reasons they don’t invest in cryptocurrencies is due to the issue of regulation. Bitcoin ETFs allow you to trade crypto assets that are fully regulated.
- Diversification of Portfolio
Assuming you are an investor and you want to diversify your investment portfolio to the crypto industry without actually having a wallet, an ETF is a promising avenue. Especially spot Bitcoin ETFs, you can easily trade Bitcoin in real-time.
- Security
One of the benefits of Bitcoin ETFs is the security it provides investors. In most cases, regulatory bodies like the SEC have already scrutinised the firms that offer these ETFs.
- Income Opportunity
Ultimately, the biggest advantage the Bitcoin ETF will have is that it allows you access the crypto market. Whether the futures or spot Bitcoin ETF, it provides an opportunity to profit from investments.
The Downsides of Bitcoin ETFs
- Lack of Accuracy
Especially for the futures Bitcoin ETFs, there are a lot of price inaccuracies in their price charts. For instance, you might see the price of Bitcoin at $28k in the futures ETFs when it is actually $26k. The spot Bitcoin ETFs are much more accurate in maintaining the actual price of Bitcoin.
Top Firms Applying for Spot Bitcoin ETF Applications
- Blackrock
Blackrock filed their spot Bitcoin ETF application on June 15th, 2023.
- Valkyrie Investments
Valkyrie Investments made their first filing for an ETF in 2021. But in 2023, they are fully applying for a spot Bitcoin ETF.
- WisdomTree
WisdomTree is a New York-based asset manager who first applied for their Bitcoin ETF in March 2021. But it has joined the ranks of other investment firms seeking a spot Bitcoin ETF in 2023.
- Fidelity
Fidelity/Wise Origin was among the group of financial giants in 2021 that joined the rush of Bitcoin ETF applications. But it was rejected. They are back at it in 2023, seeking the approval of their spot Bitcoin ETF.
- Galaxy
Galaxy Digital and Invesco filed their first round of Bitcoin ETF on the 22nd of September 2021. They are back again after submitting their own spot Bitcoin ETF application immediately after that of Blackrock.
Final Thoughts
With its long history, Bitcoin ETFs made a step-by-step entry into the crypto industry with many rejections along the way. Nevertheless, Bitcoin ETFs are financial assets that support trading Bitcoin-related assets without having the Bitcoin in a crypto wallet.
Bitcoin ETFs are for traditional stock traders with their brokerage accounts. It has its pros and cons, although many in the crypto industry have some preference for the spot Bitcoin ETF.
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