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Bitcoin Spot ETF: Exploring Its Meaning and Impact

Bitcoin Spot ETF: Exploring Its Meaning and Impact

By Oreld Hadilberg
Reviewed by Tony Spilotro

Table of Contents

Introduction

In recent times, the crypto market has been under the scrutiny of traditional finance and mainstream media, often portrayed negatively. However, the emergence of Bitcoin Exchange-Traded Funds (ETFs) is poised to reshape the narrative and potentially elevate the standing of blockchain technology.

Understanding Bitcoin ETFs

A Bitcoin ETF, or Exchange Traded Fund, functions as an investment vehicle that tracks and trades the performance of BTC and related assets. Unlike managing a portfolio of individual stocks, ETFs simplify the investment process by offering exposure to a diversified basket of assets. Two main types of Bitcoin ETFs exist: Spot Bitcoin ETFs and Futures Bitcoin ETFs.

Spot Bitcoin ETFs, deemed as a financial Trojan Horse, are making waves with their fully compliant and regulated nature. These funds are anticipated to usher in an era where Bitcoin becomes more accessible to major financial players, presenting a significant departure from the original vision of self-custody and decentralization conceptualized by Satoshi Nakamoto.

-Spot Bitcoin ETF

A Bitcoin Exchange-Traded Fund (ETF) is a stock exchange-listed investment fund that closely tracks the price of Bitcoin. There are two main types of Bitcoin ETFs: those based on futures and those based on spot prices. Futures-based ETFs invest in contracts that commit to buying or selling Bitcoin on a future date at a predetermined price. Spot-based ETFs, on the other hand, invest directly in Bitcoin by purchasing and securely storing the cryptocurrency in a vault.

-Bitcoin Futures ETF

In Bitcoin futures Exchange-Traded Funds (ETFs), funds are invested in futures contracts tied to the future price of Bitcoin, establishing a predetermined price in advance. These ETFs operate through a mechanism based on predictions. This means that they do not necessarily adhere to the current price of Bitcoin; instead, they propose an anticipated Bitcoin price for a future date.

The Need for a Bitcoin ETF


A Bitcoin spot ETF would provide a new avenue for investors in the United States to gain exposure to this asset. Exposure to Bitcoin has historically been desirable, as noted by Mirva Anttila, Director of Digital Assets Research at WisdomTree: "Since December 2019, Bitcoin has produced a compound annual growth rate of 54%, surging from $7,710 to $43,915." Digital assets, as a relatively new asset class, have demonstrated a historical and asymmetric surge akin to early-stage technology stocks, a trend challenging to capture without direct investment in early-stage tech.

Furthermore, Bitcoin and digital assets, in general, have shown a historically low correlation with other significant asset classes, making them unique. This implies that even a small allocation within a diversified investment portfolio could yield diversification benefits. WisdomTree addressed these issues in a White Paper published in June 2022.

Will the approval of a Bitcoin ETF lead to an increase in BTC?

Cryptocurrency enthusiasts argue that the timely approval of a Bitcoin ETF could signal the start of a significant upswing in the cryptocurrency market. This perspective is based on the notion that a Bitcoin ETF would pave the way for the entry of billions of dollars into the crypto space, enabling previously excluded investors to participate safely.

While this is a possibility, it is crucial to remember that nothing in the cryptocurrency market is guaranteed. The approval of a Bitcoin ETF does not ensure that traditional investors will choose to invest in Bitcoin through this vehicle.

Horeover, a substantial portion of the anticipated demand associated with the launch of Bitcoin ETFs may have already taken place. It would not be surprising to assume that key financial institutions, such as BlackRock and Valkyrie, have accumulated significant amounts of Bitcoin in preparation for the launch of their funds.Additionally, the approval of a Bitcoin ETF could potentially open the door to other physically-backed cryptocurrency ETFs, including funds designed to trade altcoins .

Which financial institutions have submitted a physically-backed Bitcoin ETF?

While numerous Bitcoin futures ETFs are currently trading on U.S. markets, the Securities and Exchange Commission (SEC) has yet to grant approval for financial institutions to hold physical BTC. Nevertheless, some of Wall Street's prominent names have put forth proposals for physically-backed Bitcoin ETFs.

These companies include:

  1. Bitwise
  2. Fidelity
  3. Invesco/Galaxy
  4. Grayscale
  5. BlackRock
  6. WisdomTree
  7. Valkyrie
  8. VanEck

The SEC has previously denied submissions from Global X, Krypton, and First Trust. Despite these rejections, Bitcoin enthusiasts remain optimistic that approval for physically-backed Bitcoin ETFs is imminent, marking the beginning of new waves of capital into the cryptocurrency markets.

Potential Impact on the Crypto Market

The approval of Spot Bitcoin ETFs by the U.S. Securities and Exchange Commission (SEC) could mark a pivotal shift in public perception. This approval could signify:

  1. Accessibility: Traditional investors gain easier access to BTC without the complexities of self-custody.
  2. Regulatory Clarity: Greater regulatory oversight enhances transparency and compliance with local laws.
  3. Improved Image: Endorsement by powerful asset managers could boost the credibility of the entire crypto industry.

Spot Bitcoin ETF Pros:

  1. Convenience: Improved accessibility for investors by removing technical barriers and simplifying asset management.
  2. Liquidity: Facilitates the buying and selling of bitcoins through familiar brokerage accounts, similar to stock trading.
  3. Regulatory Oversight: Subject to rules ensuring transparency and investor protection.
  4. Tax Implications: Potential tax benefits compared to direct cryptocurrency holding in certain jurisdictions.

Spot Bitcoin ETF Cons:

  1. Crypto Volatility: Risk associated with the volatility of the Bitcoin market, potentially leading to significant financial losses.
  2. Regulatory Uncertainty: Lack of a clear regulatory framework, generating uncertainty about how risks like fraud and asset loss will be treated.
  3. Security Risks: Vulnerability to cybercriminals due to the significant amount of coins that need to be held.
  4. Management Fees: Operational charges that may be higher than traditional ETFs, diminishing returns.
  5. Tracking Error: Possibility of differences between ETF share cost and Bitcoin value due to factors like liquidity and management fees.

Speculation Surrounding ETF Approval

Enthusiasts anticipate that the approval of a Spot Bitcoin ETF could trigger a substantial crypto bull run, attracting trillions of dollars from previously hesitant investors. However, market dynamics are unpredictable, and the actual impact remains uncertain.

Financial Institutions in the Spotlight: Key financial institutions, including BlackRock, Fidelity, Valkyrie, VanEck, WisdomTree, Invesco/Galaxy, Wise Origin, and BitWise, have filed for Spot Bitcoin ETFs. Despite previous denials, optimism persists within the crypto community regarding imminent approval.

Future of Spot Bitcoin ETFs

As of October 2023, regulatory approval for a spot bitcoin ETF has yet to materialize. The U.S. Securities and Exchange Commission (SEC) has displayed hesitancy in greenlighting spot bitcoin ETF applications, expressing concerns related to market manipulation, fraud, custody, and investor protection.

Nevertheless, a noteworthy development occurred when the SEC opted not to challenge a court decision that deemed the rejection of a spot bitcoin ETF proposal from Grayscale, a prominent digital asset manager, as erroneous. This decision has sparked optimism that the SEC may revisit Grayscale's application and other pending applications from industry giants like Bitwise, BlackRock, iShares, Valkyrie, WisdomTree, ARK Invest, and 21Shares, among others.

Analysts posit a heightened likelihood of spot bitcoin ETF approvals in 2024, citing recent alterations to the prospectuses submitted by ARK Invest and 21Shares. These modifications suggest active discussions and negotiations between the SEC and the fund sponsors, a positive signal for potential future approvals.

FAQs

-Are there cryptocurrency ETFs? Yes, there are numerous cryptocurrency ETFs that track baskets of assets and stocks related to cryptocurrencies.

-Is the Bitcoin ETF approved? Bitcoin spot ETFs are currently awaiting approval in the United States. A decision is anticipated in the first quarter of 2024.

-Is the Bitcoin ETF risky? Investing in a Bitcoin ETF carries the risk of price action, similar to investing in BTC directly. However, investors in a Bitcoin ETF can mitigate risks associated with self-custody.

-Where can I purchase bitcoins? You can acquire Bitcoin (BTC) through the best cryptocurrency exchange Margex.