The Rise of Bitcoin Spot ETFs: Money Managers' Shift to Crypto

What You Need to Know About Latest Bitcoin Spot ETF Approval

Bitcoin is becoming a popular way for people to invest their money. However, due to its decentralized nature, many people hesitate to put their hard-earned money into such an unregulated asset. Bitcoin ETF fulfills the purpose of those investors who want to participate in a highly regulated market and still want to invest in Bitcoins.

Bitcoin ETFs are pools of assets related to Bitcoin offered on the traditional exchange by brokerage traded as ETFs. The pool of assets is managed by a company that buys and sells on regular stock exchanges. The simple idea is to invest in this pool of assets without owing any Bitcoin yourself.

Currently, Canada and the US are the two countries that have made it possible for regular investors to use Bitcoin ETFs. This is making Bitcoin more popular and accessible for people who don't want to deal with the technicalities associated with the currency.

What Is a Spot Bitcoin ETF?

Bitcoin Spot ETF is an investment fund that tracks the price of Bitcoin. Unlike regular cryptocurrencies, these ETFs are controlled and traded on the traditional financial markets.

  • The main idea behind Bitcoin ETF is to make it easier for regular investors who don't want to trade in cryptocurrencies but want to diversify their portfolios.

  • Investing in Bitcoin is quite challenging for many people, but due to the Bitcoin ETF, it has now become much easier.

  • Bitcoin ETF can only have contracts related to the future of Bitcoin, not actual Bitcoin itself.

  • Bitcoin ETF provides opportunities for investors to invest in companies connected to Bitcoin and blockchain Technology. It is a simple way to get involved in Bitcoin without handling it directly.

Why Are Bitcoin ETFs Important?

For Retail investors

Investing in Bitcoin ETF is a good option for retail investors who traditionally want to invest in digital currencies.

Investing in Bitcoin is quite challenging and confusing, too, as for retail investors, the biggest question is about storage and choosing the correct exchange. ETF simplifies this process by converting crypto future contracts into a convenient ETF option.

For Institutional investors

The institutional players require a robust regulatory framework and infrastructure to participate in the cryptocurrency market. Due to the regularity and complexity associated with Bitcoin and other cryptocurrencies, large financial institutions do not opt to participate in this market. Due to the advent of Bitcoin exchange-traded funds, institutional players' scope has widened, providing price exposure in the traditional financial market without the need to manage the technical aspects of owning actual cryptocurrency. 

Apart from these, ETFs provide diversified portfolio assets beyond Bitcoin, like Ethereum, Tesla stocks, and gold, which offers this institution investors the benefit of diversification.

Are Bitcoin ETFs regulated?

The Security Exchange Commission regulates all the ETFs invested on the US exchange. But when it comes to Bitcoin ETFs, they are tracked by Bitcoin futures contracts, which the Commodity and Future Trading Commission regulates.

Some Bitcoin ETFs directly follow the price of Bitcoin and don't fall under the regulated category of either the Security Exchange  Commodity or the Future Trading Commission.

Companies like BlackRock, Fidelity, and Investo are hoping for approval from the SEC.

The Pros and Cons of Spot Bitcoin ETFs

Pros of Bitcoin ETF

  • Diversified Asset: Bitcoin ETFs are diversified investment assets holding Bitcoin and might include stocks of other companies and commodities. This diversification allows investors to manage their risk and spread their investment portfolio. 

  • Convenient and Simplified: Investing in Bitcoin through ETF provides exposure to the price of digital assets without requiring an in-depth understanding of the crypto market. There is no need to sign up on cryptocurrency exchange platforms with security risks and other issues like loss of wallet access. Bitcoin ETF simplifies the investment process in cryptocurrencies.

  • Tax Efficiency: Since Bitcoin is a decentralized currency, it lacks central regulatory authority, which makes it eligible for certain tax advantage accounts. However, Bitcoin ETFs are traded on traditional exchanges and may be subject to regulations. They qualify for tax-efficient investment options.

Cons of Bitcoin ETFs: 

  • Price discrepancy: Bitcoin ETF mimics the value of Bitcoin, but due to its diversification, it may not precisely reflect the price of Bitcoin. If the price of Bitcoin increases by 60%, the price of Bitcoin ETF might not mimic the same increase.

  • Lack of Direct Ownership: Bitcoin safeguards against factors like inflation, traditional currency system, etc. Due to its decentralized nature, they offer privacy through blockchain Technology. However, a Bitcoin ETF is subject to government regulation, which may deprive the privacy and advantages associated with direct ownership of the Bitcoin.

Why Bitcoin ETFs itself do not own Bitcoin?

It is true that Bitcoin ETFs do not own Bitcoin itself because of its unregulated nature. 

The United States Securities and Exchange Commission is concerned about the unregulated nature of the crypto exchange where Bitcoin is traded. This is why Bitcoin ETF holds futures contracts and shares of some companies and other crypto-related ETFs.

The Bitcoin ETFs work on strategy by buying one-month CMA  bitcoin futures contracts. As the contracts approach their expiration date, these ETFs gradually sell them and purchase longer-dated contracts.

If the price of Bitcoin rises, they use this profit to build up a pool of funds held in cash and treasuries, and if the price of Bitcoin falls, it dips into this pool to cover losses on the future contract.

It is also important to note that the Bitcoin futures contracts do not perfectly replicate the performance of the actual Bitcoin market.

Final Words

Bitcoin ETS is the bridge between the traditional finance system and the crypto market. They offer retail and institutional investors ample opportunities to invest in Bitcoin and other cryptocurrencies. Bitcoin ETFs offer diversification advantages and help investors hedge their assets against inflation. With ease of access and simplicity, they are the straightforward option for those investors who want to invest in digital assets but want to avoid the exposure of the risk associated with it.

It is also essential to understand that Bitcoin ETFs are made to mimic the price of Bitcoin, but as they are based on the Bitcoin future contracts, they do not track its price. It is also because Bitcoin ETFs, apart from Bitcoin and other cryptocurrencies, also hold the shares of the companies to reduce the crypto market risk.

FAQs

Is Bitcoin ETF the same as Bitcoin?

The Bitcoin ETF and Bitcoin are different. Bitcoin is a digital currency and a highly volatile asset, and its price dramatically fluctuates. It can be used to make purchases internationally. On the other hand, Bitcoin ETFs are regulated investment options that bet on the price of Bitcoin Futures contracts. 

Will the SEC approve the Spot Bitcoin ETF?

More than a dozen applications are pending, awaiting approval from the SEC. SEC has also rejected many applications because the crypto market is risky and prone to manipulation and fraud. Other Bitcoin ETFs are tied to the future contracts of Bitcoin, but until now, no Spot Bitcoin ETF has received approval from the SEC.
Grayscale's court victory and the subsequent rise in the price after the win also make it clear that many investors are hoping for approval from the SEC.

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Noah Willaims 20 Nov, 2023

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