An ETF, or Exchange-Traded Fund, is a type of investment fund that is listed on an exchange, much like a stock. ETFs are designed to track the performance of a particular asset group, index or commodity.
They have gained immense popularity in the financial world and are now also attracting attention in the context of cryptocurrencies, including Bitcoin. But what exactly does the term ‘Spot ETF on Bitcoin’ mean and how will it work? Here is the full explanation.
Exchange-traded fund (ETF) – detailed explanation
An ETF is a type of investment that tracks a specific asset or commodity. In the case of a ETF on Bitcoin it will track BTC.
ETFs can be bought and sold on stock exchanges or brokerage accounts. In this case, it is worth remembering that the management of the underlying assets lies with the ETF fund manager. This gives investors price exposure to, for example, Bitcoin without having to worry about holding it.
A spot ETF on Bitcoin would give investors peace of mind, as they could buy its shares directly using their exchange accounts.
There are many ETF bitcoin funds on the market. However, it is the featurestype ones that have been the most successful and have been approved by the Securities and Exchange Commission (SEC). As for spot ETFs on Bitcoin, as of 19.10.2023 the commission has not yet approved any applications.
What is the difference between a Bitcoin Trust and a Spot ETF?
Both funds offer exposure to Bitcoin, without requiring investors to hold it. Both the Bitcoin Trust, and the Spot ETF have different structures, pricing mechanisms or levels of regulatory oversight.
Bitcoin Trust, is a private, closed-end fund that invests primarily in Bitcoins. Shares in the Bitcoin Trust are not redeemable, which in practice means that we cannot exchange them for the underlying BTC. The price of this trust can therefore deviate significantly from the value of the underlying assets it represents. The best-known examples of the Bitcoin Trust are the MicroStrategy Bitcoin Trust (MSTR) and the Grayscale Bitcoin Trust (GBTC). The trust shares themselves are very often sold at a premium or discount to the net asset value of the (NAV) underlying BTC.
The Spot Bitcoin ETF, on the other hand, is an open-ended fund that we can issue or redeem at our request. It is designed to track the price of spot Bitcoin. The ETF is also traded on major exchanges, just like shares. It can therefore be sold and bought during the trading day at prices consistent with the underlying assets. If the price of ETF deviates from the value of the underlying asset, participants in a given market can use arbitrage opportunities. Such a mechanism allows the price of the ETF to be kept in line with the NAV of the underlying asset. Also importantly, ETFs are regulated investment products under the Investment Company Act of 1940. This effectively provides a higher level of regulatory oversight and consumer protection.
Conceptualisation and validation of the Bitcoin Spot ETF
The very concept of a Bitcoin Spot ETF has been pursued for several years. However, to date, none of the proposals have been accepted by the SEC. According to the Commission, the reason for rejecting proposals is that the issuer does not enter into an oversight sharing agreement with a regulated market of significant size that is also linked to BTC. This increases the likelihood of market manipulation.
There is a new influx of applications for BTC Spot ETF in 2023. Leading the way is BlackRock with its application for iShares Bitcoin Trust, which includes new provisions for custody sharing agreements.
So when can we expect the first Bitcoin Spot ETF to be approved? Predictions are optimistic. In the case of the ARK 21 Shares Bitcoin ETF itself the decision is expected on 10 January 2024.
Interestingly, analysts at Bloombergs estimate that there is as much as a 65% chance that the Bitcoin Spot ETF will still appear in 2023.
Approval of Bitcoin Spot ETF – market impact
Potential benefits of endorsing the Bitcoin Spot ETF:
- Approval of a ETF on BTC would help further legitimise BTC as a world-class asset. This would increase its acceptance among traditional investors and other financial institutions.
- A spot Bitcoin ETF could increase liquidity in the cryptocurrency market. In an ideal world, the approval of ETF could reduce volatility and make BTC price movements more predictable.
- The creation of the fund itself could increase demand for Bitcoin and therefore increase its price. Why? Because a ETF provider would need to purchase BTC to support the ETF shares. Potentially, this could increase the price of this flagship asset.
- An ETF would increase transparency and security. Especially for those who are afraid of direct investment in BTC.
- On top of that, we would increase the ease of access. A Bitcoin Spot ETF would allow investors to gain exposure to BTC without having to buy it. This strongly lowers the barriers to entry for institutional investors.
- The Bitcoin ETF also provides market entry in a manner that complies with regulations that apply to securities, potentially reducing the risk of fraud and theft.
Disadvantages and risks of the Bitcoin Spot ETF include:
- Market manipulation. In this case, the multiples of BTC, or its large holders, could potentially manipulate the price of the asset and affect the value of the ETF. However, such risks exist even in the classic BTC market.
- The bitcoin spot ETF would affect the regulatory market for BTC. Negative regulatory policy actions could negatively impact the value of the ETF. Consequently, the price of BTC.
- Another disadvantage of the Bitcoin Spot ETF could be the impact on investment decisions. Many investors could buy Spots, instead of BTC. In turn, this would affect the dynamicsof the Bitcoinmarket.
- A huge disadvantage is also the lack of ownership. With the Bitcoin Spot ETF you do not own the underlying bitcoin. In practice, this means that you will not be able to use BTC for transactions and will not have the benefit of owning this asset.
Summary
Spot ETFs on Bitcoin are an innovative tool that can make investing in Bitcoin much easier. However, as with any investment, there are both benefits and risks associated with ETFs on Bitcoin. Investors should carefully research each fund and understand its structure before making investment decisions. As the cryptocurrency market continues to evolve, ETFs on Bitcoin could become an important tool for investors around the world.
What’s more, it is the Bitcoin Spot ETF that offers us a regulated and accessible market for investors and a way to gain exposure to Bitcoins, without having to navigate cryptocurrency exchanges.
Spot bitcoin ETF application history
- July 2013 – Winklevoss Bitcoin Trust: proposed by Cameron and Tyler Winklevoss. Rejected by the SEC in March 2017.
- July 2013 – SolidX Bitcoin Fund: proposed by SolidX. Withdrawn in July 2019.
- June 2018 – VanEck SolidX Bitcoin Trust: proposed by VanEck and SolidX. Withdrawn in September 2019.
- January 2019 – Bitwise Bitcoin ETF Trust: proposed by Bitwise. Rejected by the SEC in October 2019.
- January 2019 – United States Bitcoin and Treasury Investment Trust: proposed by Wilshire Phoenix. Rejected by the SEC in February 2020.
- January 2021 – Valkyrie Bitcoin Fund: proposed by Valkyrie.
- March 2021 – Wise Origin Bitcoin Trust: proposed by Fidelity.
- August 2021 – Global X Bitcoin Trust: proposed by the Chicago Board Options Exchange (CBOE).
- March 2022 – NYDIG Bitcoin ETF.
- March 2022 – Skybridge Capital submits application for Bitcoin Spot ETF.
- June 2022 – Grayscale Investments Partners With Jane Street, Virtu Financial For Spot Bitcoin ETF.
- August 2022 – BlackRock Spot approved by the SEC.
