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.
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
|Pros|Cons|
|-|-|
|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.