Spot Bitcoin ETFs: Your questions answered

It finally happened. After much speculation, the Securities and Exchange Commission (SEC) has approved the first spot Bitcoin ETF in the US, an exchange traded fund with bitcoin as the underlying asset. 

Let’s unpack this landmark event for crypto by answering the immediate questions surrounding the approval of this type of investment. 

What is a spot Bitcoin ETF? 

A spot Bitcoin ETF is a type of investment fund that allows people to buy shares representing actual bitcoin held by the fund. It’s traded on a stock exchange like a stock and aims to track the price movements of bitcoin itself, giving investors a way to invest in bitcoin without directly owning it. 

While there are many Bitcoin ETFs by various investment managers, each trading under its own name, or ticker, all these ETFs will be tracking the same underlying investment. Some may have higher fees than others, but just like T-shirts with different branding, they’re generally made of the same thing.

Why the need for a Bitcoin ETF? 

Why would investors buy an ETF rather than actual bitcoin? It comes down to what regulation allows investment managers to invest in on behalf of their clients, and what people are comfortable investing in. A Bitcoin ETF listed on a stock exchange may be more familiar to many investors than buying crypto through an app or crypto exchange. 

Some investors may also believe that owning BTC ETFs is safer than owning actual BTC as it removes a lot of the security risks involved in owning the actual asset. The drawdown of this is that there are usually fees attached to ETFs. It ultimately depends on what the investor is comfortable with. Some people choose to invest in ETFs rather than the underlying stocks that make up the ETF, the same will apply to Bitcoin ETFs versus actual bitcoin. 

This isn’t the first spot BTC ETF to be approved, though. Spot BTC ETFs are currently trading in eight countries, making the US the ninth after Wednesday’s approval. The strength of the US economy and the influence it carries in shaping global crypto regulation is what makes this such a significant development for bitcoin and crypto adoption around the world. 

What could this mean for crypto? 

Many analysts believe a spot Bitcoin ETF will lead to capital inflows into bitcoin from investors who have up until now only been allowed access to more traditional investments such as stocks, mutual funds and ETFs.

Standard Chartered predicts that a BTC ETF may lead to investment of more than $50 to $100 billion into bitcoin this year. 

What’s the comparison to the first gold ETFs in 2004? 

The introduction of the first gold ETF in 2004 had a significant impact on the gold markets, increasing accessibility, liquidity, and investment options. The SPDR Gold Shares ETF, the first spot gold ETF in the US, for example, saw $1.9 billion of investment in the first four weeks, rising to $4.8 billion by the end of 2004. 

What’s the difference between a spot ETF and a futures ETF? 

A spot ETF typically holds the actual asset it’s tracking and aims to mirror the real-time price movements of that asset.

On the other hand, a futures ETF doesn’t own the underlying asset directly. Instead, the fund invests in futures contracts linked to the asset’s price. Futures contracts are agreements to buy or sell an asset at a predetermined price on a specified future date. The futures ETF’s price is based on these contracts rather than the actual asset’s current price.

What could a BTC ETF mean for the crypto industry in future? 

Increased accessibility and liquidity

A US-regulated spot Bitcoin ETF could significantly increase the accessibility, liquidity and demand for bitcoin, as it would allow millions more investors – including institutional investors and financial advisors – to gain exposure to the crypto, potentially leading to a deeper pool of investors.

Reduced influence of whales and price volatility

Spot ETFs are expected to reduce the influence of large bitcoin holders, known as whales, by broadening the owner base, which could help make bitcoin less volatile. However, analysts are divided on whether the approval will subdue bitcoin’s notorious price volatility.

Regulatory and market dynamics 

The approval of a spot Bitcoin ETF in the US is potentially a pivotal event in the crypto industry, with the potential to revolutionise the crypto landscape and broaden access to bitcoin for retail investors. It could also lead to changes in market dynamics, such as increased price sensitivity among bitcoin buyers and competitive fee structures for ETFs.

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