What is a Spot Bitcoin ETF?

A spot bitcoin exchange-traded fund (ETF) is a fund that tracks the price of bitcoin directly by holding the digital currency. Unlike bitcoin futures ETFs, which invest in bitcoin derivatives contracts, a spot bitcoin ETF buys and holds the actual underlying asset – bitcoin.

How a Spot Bitcoin ETF Works

Here are some key things to know about how a spot bitcoin ETF works:

  • The ETF purchases and stores bitcoin to back the shares it issues to investors. The holdings are typically custodied by a third party for security.
  • The price of the ETF shares correlates directly to the price of bitcoin, moving up or down in value as bitcoin’s price fluctuates.
  • Investors can buy and sell shares of the ETF through a brokerage account like a regular stock. This provides exposure to bitcoin prices without having to hold the cryptocurrency directly.
  • As an exchange-traded product, the ETF’s shares can be traded any time during market hours, providing continuous liquidity.
  • Fund expenses like management fees are deducted, reducing returns slightly compared to owning the digital currency outright. But the expenses are usually minor (0.5-1%).
  • The ETF invests 100% of assets in bitcoin. There is no exposure to futures, other cryptos, or any other assets.
What Is A Spot Bitcoin Etf?

Key Benefits of a Spot Bitcoin ETF

Here are some of the potential advantages of gaining bitcoin exposure through a spot ETF rather than purchasing it directly:

Convenience and Accessibility

  • Can be traded through normal brokerage accounts without needing a crypto wallet or exchange account.
  • Simple to buy/sell shares any time the market is open, without dealing with clunky Bitcoin trading interfaces.
  • No need to handle crypto custody and security yourself. The ETF provider deals with storing the assets.

Diversification and Liquidity

  • Provides bitcoin exposure while minimizing concentration risk, since the ETF holds a basket of assets.
  • Very liquid intraday trading compared to actual Bitcoin markets, which can be thin at times.

Regulatory Oversight

  • As an SEC-registered investment product, ETFs provide regulated mainstream access to Bitcoin markets.
  • Strict rules and reporting requirements around investment practices, holdings, fees, etc.
  • Potentially reduced susceptibility to fraud or manipulation compared to unregulated crypto exchanges.

Cost Efficiency

  • Expense ratios are very low, usually between 0.5% to 1%. Much less than typical mutual funds.
  • Fund expenses are the only costs, avoiding large trading spreads, commissions, and storage/transfer fees associated with direct Bitcoin ownership.

Status of a Spot Bitcoin ETF in the U.S.

Despite over a dozen proposals, the SEC has not yet approved a spot bitcoin ETF in the United States. Here is a brief overview of the current status:

  • Multiple asset managers have filed proposals for spot bitcoin ETFs over the past few years, including VanEck, Valkyrie, WisdomTree, and SkyBridge.
  • The SEC has rejected these applications so far, citing concerns around insufficient regulation of Bitcoin markets and the potential for manipulation.
  • Most recently, the SEC rejected spot bitcoin ETFs from WisdomTree and SkyBridge in December 2022.
  • However, new spot bitcoin ETF applications continue to be filed, indicating ongoing interest.
  • Many industry observers expect a spot bitcoin ETF to ultimately be approved in the next 1-2 years. But the SEC has shown reluctance thus far.

Examples of Operational Spot Bitcoin ETFs

While no spot bitcoin ETFs have yet been approved in the U.S., there are a few that are currently trading in Europe:

Purpose Bitcoin ETF (BTCC)

  • Launched February 2021 in Canada by Purpose Investments.
  • Holds actual bitcoin in cold storage custody.
  • Trades on the Toronto Stock Exchange.
  • Has grown to over $1.3 billion USD in assets under management.

WisdomTree Bitcoin ETP

  • Launched June 2022 in Germany by WisdomTree.
  • Physically-backed bitcoin ETP similar to an ETF.
  • Trades on Deutsche Boerse Xetra exchange.
  • Has attracted over $27 million in assets so far.

VanEck Bitcoin ETN

  • Launched November 2020 in Germany by VanEck.
  • Holds bitcoin in cold storage to back the notes.
  • Trades on Deutsche Boerse Xetra exchange.
  • Manages over $54 million in assets currently.

How a Spot Bitcoin ETF Differs from a Futures ETF

The key difference between a spot bitcoin ETF and a bitcoin futures ETF is the underlying asset:

|Spot Bitcoin ETF|Bitcoin Futures ETF|
|Holds physical bitcoin as the asset|Holds bitcoin futures contracts as the asset|
|Directly tracks price of bitcoin|Tracks price of bitcoin futures|
|No contango decay effect|Susceptible to contango decay|
|No need to roll futures contracts|Must roll expiring futures contracts|
|No expiry dates to deal with|Holds front month futures contracts|

In essence, a spot bitcoin ETF offers a simpler, more direct way to invest in bitcoin prices. But futures-based ETFs were easier to get regulatory approval initially.

Pros and Cons of Investing in a Spot Bitcoin ETF

|Simple, mainstream access to bitcoin prices|Does not have SEC approval yet in US|
|Trades like regular stocks through brokerage account|Ongoing regulatory uncertainty|
|No need to directly handle BTC security/storage|Potential for premiums/discounts to NAV|
|Low management fees|No control over actual bitcoin (no withdrawals)|
|Intraday liquidity and real-time pricing|Subject to capital gains taxes|
|Regulated by the SEC|Does not encourage broader Bitcoin adoption|

The Outlook for a U.S. Spot Bitcoin ETF

Despite rejections thus far, there remains optimism that the SEC could approve a spot bitcoin ETF in the next year or two. Here are some key points on the outlook:

  • The new 2023 SEC leadership under Chair Gary Gensler may take a friendlier stance toward spot bitcoin ETFs.
  • As more institutional adoption occurs, it may assuage SEC concerns around potential manipulation.
  • Rising demand from investors may pressure the SEC to approve an easier spot bitcoin investment vehicle.
  • Spot bitcoin ETFs successfully launched in Canada and Europe may encourage the SEC.
  • However, the SEC remains wary of broader crypto industry risks. Approval is still uncertain.
  • Several asset managers stand ready with spot bitcoin ETFs should the SEC reverse course.
  • Once the first spot bitcoin ETF is approved, expect more competitors to quickly follow.

In summary, there is growing reason for optimism that a spot bitcoin ETF will eventually get SEC approval as broader Bitcoin adoption progresses. But the “when” remains uncertain. Investors anxiously await the SEC’s official green light.

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