Spot Bitcoin ETF is a value representation of the world’s largest cryptocurrency, allowing people to invest in Bitcoin without engaging in complex market transactions. Holders of Bitcoin ETFs do not directly invest in BTC, so they don’t need to worry about the complex storage and security procedures associated with cryptocurrency assets.
For these benefits, Spot Bitcoin ETFs can attract a strong stream of investment capital into the cryptocurrency market once approved.
Key Takeaways
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What Is Spot Bitcoin ETF?
A Bitcoin spot ETF, also known as a Bitcoin Physical ETF, is a fund certificate from an investment fund that owns Bitcoin and trades on traditional stock exchanges. Fund management companies will buy BTC, and investors can participate by purchasing shares in the ETF. These shares represent ownership rights to BTC, meaning investors indirectly own BTC without being exposed to the risks associated with the crypto market. This also means that the value of these types of Bitcoin ETFs closely tracks the actual value of BTC traded on the market.
How Does a Spot Bitcoin ETF Work?
A Spot Bitcoin ETF operates similarly to other traditional ETFs. The fund management company will purchase actual Bitcoin and create shares in the fund representing the value of Bitcoin that the fund owns. Investors can buy shares in the fund through stock exchanges such as Nasdaq, NYSE, and CBOE, and their share value will correspond to the value of Bitcoin held by the fund.
These funds are also guaranteed by Bitcoin purchased from cryptocurrency exchanges, under the supervision of specialized entities, such as Coinbase Global. As a result, market surveillance mechanisms will be established to help prevent the risk of Bitcoin price manipulation.
History of Spot Bitcoin ETF Approval
Spot Bitcoin ETFs have had a turbulent history before being approved by countries like Canada, Brazil, Germany, and Australia. In this article, CoinMinutes will focus on the history of Spot Bitcoin ETF approvals in the United States.
In 2013, several companies applied to list Spot Bitcoin ETFs, but all were rejected by the U.S. Securities and Exchange Commission (SEC) due to concerns about potential market manipulation.
Until 2021, many Bitcoin-related ETFs were approved by the SEC, but they were mainly Bitcoin Futures ETFs. There still hasn’t been any Bitcoin Physical ETF approved for trading on U.S. stock exchanges.[1]
In June 2022, Grayscale Investments, LLC (a cryptocurrency asset management company based in New York, USA) was denied by the SEC to convert Grayscale Bitcoin Trust (GBTC) into an ETF due to concerns about lack of supervision over crypto assets and market manipulation risks.[2] At that time, GBTC was the world’s largest Bitcoin trust fund traded publicly, allowing investors to buy and sell shares backed by Bitcoin. Subsequently, Grayscale sued the SEC over this rejection.[3] One of Grayscale’s arguments was why Future Bitcoin ETFs were approved while Spot Bitcoin ETFs were not.
In August 2023, the U.S. District Court for the District of Columbia ruled that Grayscale had won in its lengthy legal battle with the SEC regarding the proposal to convert GBTC into a Bitcoin spot ETF.[4] The court also declared that the SEC must carefully consider Grayscale’s Bitcoin ETF proposal and nullify its previous rejection decision. The court’s decision that the SEC was wrong in rejecting Grayscale Investments’ ETF registration application also forced the agency to change its stance. This gives the community hope that major Wall Street players will score big wins against the SEC.
On January 11, 2024, the SEC approved 11 Bitcoin spot funds from major financial players.[5] This is considered a significant development in financial instrument development, especially in recognizing the potential of Bitcoin-based exchange-traded products (ETPs). However, the SEC still maintains the view that Bitcoin and cryptocurrencies are risky and volatile assets.
These events are expected to drive Bitcoin prices up and open up opportunities to expand the cryptocurrency market through the listing of new products on traditional stock exchanges.
What Are 11 Spot Bitcoin ETFs?
Approved Bitcoin ETFs include Grayscale Bitcoin Trust, Bitwise Bitcoin ETF, Hashdex Bitcoin ETF, iShares Bitcoin Trust, Valkyrie Bitcoin Fund, ARK 21Shares Bitcoin ETF, Invesco Galaxy Bitcoin ETF, VanEck Bitcoin Trust, WisdomTree Bitcoin Fund, Fidelity Wise Origin Bitcoin Fund, and Franklin Bitcoin ETF.
On the first day of trading with Bitcoin spot ETF units, approximately 700,000 transactions were conducted, with a trading volume of $4.33 billion. Half of this volume, equivalent to $2.1 billion, came from Grayscale’s Bitcoin ETF and another $1 billion came from a fund established by BlackRock. In the first few hours after trading began, the price of bitcoin reached nearly $49,000.
Does Spot Bitcoin ETF Affect the Price of Bitcoin?
Financial observers have long seen Bitcoin spot ETFs as a tool to bridge the traditional financial sector with the crypto field, attracting new capital from Wall Street into the market.
In theory, the approval of ETFs will also allow investors and investment funds to enter Bitcoin in a simpler way, something that supporters once again believe will accelerate the path to wider cryptocurrency adoption. This has created a wave of investors pouring money into ETFs, which is expected to further drive up the price of this asset shortly.
Pros and Cons of Investing in Spot Bitcoin ETFs
Pros
- Easy participation: Bitcoin Spot ETF allows investors to participate in the Bitcoin market easily and conveniently through traditional exchange platforms. Holders of Bitcoin ETF do not directly invest in BTC, so they don’t need to worry about the complex storage and security procedures associated with cryptocurrency assets.
- Safety and security: Investors don’t need to worry about the security and storage of digital assets, as the ETF is responsible for this.
- Management standards: ETFs typically have to adhere to management and reporting standards, which can bring transparency and reliability to investors. Moreover, if ETFs are approved, they will be managed by state-authorized agencies, so investors can invest with peace of mind without worrying about legal risks.
- Investment portfolio diversification: Bitcoin Spot ETFs can allow investors to diversify their investment portfolios by adding Bitcoin to their portfolios, along with other traditional assets.
Cons
In addition to the advantages mentioned above, Spot Bitcoin ETF also has some disadvantages:
- Management fees: ETFs typically charge annual management fees for the services they provide. Compared to bearing a one-time fee (even 0%) when trading on some cryptocurrency exchanges, owning shares in a Bitcoin ETF can lead to high management fees over time.
- Trading hours: The crypto market operates 24/7, allowing investors to participate anytime. However, Bitcoin ETFs will only trade according to the opening and closing times of the stock market.
- Loss of payment functionality: Bitcoin can be used as a means of payment in some countries, but Bitcoin ETFs cannot be directly used for payments, which eliminates immediate payment functionality.
- ETF prices differ from Bitcoin’s actual value: ETFs track the prices of a group of underlying assets they manage, so sometimes the ETF price does not always match the net asset value of the fund’s assets.
Are Spot Bitcoin ETFs Safe to Invest in?
According to CoinMinutes, Spot Bitcoin ETFs are a safe investment because:
- Spot Bitcoin ETFs are listed on stock exchanges closely regulated by authorities. This helps investors of all sizes access them but also limits cases of scandals like the FTX crisis or, more recently, money laundering and price manipulation by Binance.
- For a Spot Bitcoin ETF to be approved by the SEC, fund managers need to adhere to strict management and reporting standards. This can bring transparency and reliability to investors.
- Buying Bitcoin ETFs in spot form allows investors to access Bitcoin trading while avoiding many risks compared to owning Bitcoin directly. Unlike traditional cryptocurrency trading, steps like setting up a wallet, creating an account on an exchange, and setting up personal profiles often lack strong security and are vulnerable to hacking.
The Bottom Line
Spot Bitcoin ETF is a major step forward in bringing Bitcoin to traditional investors and promoting the legitimization of crypto worldwide.
Through this article, CoinMinutes hopes that readers have gained new knowledge about Spot Bitcoin ETFs as well as their benefits and roles for Bitcoin in particular and the cryptocurrency market in general. Wishing you successful investments!
