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Spot Bitcoin ETF Explained: Definition, And How Do They Work?

Bitcoin is gradually gaining acknowledgment as a legitimate investment asset. However, not every individual or organization chooses to engage in BTC investments. The reasons for this may be rooted in the legal frameworks of individual countries, a lack of comprehension

Bitcoin is gradually gaining acknowledgment as a legitimate investment asset. However, not every individual or organization chooses to engage in BTC investments. The reasons for this may be rooted in the legal frameworks of individual countries, a lack of comprehension regarding the cryptocurrency market, or even a skepticism towards the intrinsic value of Bitcoin.

To address these concerns, the emergence of the Spot Bitcoin ETF serves as a solution to facilitate traditional investors and speculators in accessing BTC through a reliable medium with which they may already be acquainted. So, what exactly is Spot Bitcoin ETF, and what significance does it hold for BTC and the broader cryptocurrency market? These questions will be explored in the subsequent article in collaboration with Coinminutex.

What Is a Spot Bitcoin ETF?

A spot bitcoin exchange-traded fund (ETF) is an investment vehicle that allows ordinary investors exposure to the price moves of bitcoin in their regular brokerage accounts. In contrast to Bitcoin futures ETFs, a spot Bitcoin ETF directly invests in physical bitcoins as the underlying asset, rather than utilizing derivative contracts tied to their prices.

Spot Bitcoin ETFs provide a regulated and easily accessible avenue for mainstream investors to participate in the digital currency market. It’s important to note that despite this accessibility, investors are still subject to certain costs such as management fees and brokerage commissions. However, these expenses are counterbalanced by the elimination of the time and exchange fees associated with directly purchasing and holding bitcoins.

While numerous countries have embraced both types of ETFs, regulatory authorities in the United States initially expressed reservations, primarily concerning issues related to market manipulation and custodial risk. Nevertheless, in 2021, the U.S. Securities and Exchange Commission granted approval for the first Bitcoin futures ETFs, followed by the approval of the first Bitcoin spot ETFs in January 2024.

How Do Spot Bitcoin ETFs Work?

Spot Bitcoin ETFs securely store bitcoins in a digital vault managed by registered custodians, aiming to mirror the cryptocurrency’s market price. To initiate the process, the ETF acquires bitcoins from holders or authorized cryptocurrency exchanges. These tokens are safeguarded in a digital wallet, employing multiple security layers, including offline storage, to mitigate hacking risks.

The ETF then issues shares corresponding to its bitcoin holdings. The share price is intended to mirror the prevailing market price of the cryptocurrency, and these shares are publicly traded on traditional stock exchanges. As such, the ETF shares closely track bitcoin prices, and periodic adjustments to holdings are made through buying or selling tokens.

Authorized participants (APs), usually large financial institutions, facilitate the creation and redemption of ETF shares based on market demand. If ETF shares deviate from the actual bitcoin price, APs create or redeem shares in substantial blocks, exploiting the difference to align the ETF share price with the cost of bitcoins.

For investors and traders, acquiring a spot Bitcoin ETF resembles purchasing shares in any other ETF or security. Market makers play a crucial role in maintaining liquidity and efficiency by continuously offering to buy and sell ETF shares. This activity ensures a stable market, allowing investors to easily trade ETF shares when necessary.

In a broader context, spot Bitcoin ETFs open avenues for institutional and retail investors to speculate on bitcoin without grappling with the technical complexities of managing a cryptocurrency wallet or the security challenges of safeguarding private keys.

Pros And Cons of Spot Bitcoin ETFs

Pros of Spot Bitcoin ETFs:

  • Convenience:
    • Enhanced accessibility for a broader range of investors.
    • Simplifies entry into the crypto market by eliminating the need for managing wallets or dealing with private and public keys.
  • Liquidity:
    • Streamlines the buying and selling of bitcoins through familiar brokerage accounts.
    • Provides a user-friendly experience similar to trading traditional stocks or ETFs.
  • Regulatory Oversight:
    • Subject to clear regulations, ensuring transparency and investor protection.
    • Backed by regulatory frameworks that can instill confidence in investors.
  • Tax Implications:
    • Potential tax benefits in certain jurisdictions compared to holding cryptocurrencies directly.
    • Well-established tax treatment of ETFs provides clarity on investor obligations.

Cons of Spot Bitcoin ETFs:

  • Crypto Volatility:
    • Exposure to the inherent market volatility of Bitcoin, leading to potential financial losses.
    • While ETFs manage ownership and storage, they don’t eliminate market risks.
  • Regulatory Uncertainty:
    • Lack of a comprehensive regulatory framework poses uncertainties for investors.
    • Potential impacts on performance due to evolving cryptocurrency market regulations.
  • Security Risks:
    • Attractive targets for cybercriminals due to the significant number of coins held.
    • Reliance on digital keys and internet-based storage introduces security vulnerabilities.
  • Management Fees:
    • While saving time and costs associated with self-management, ETFs come with management fees.
    • Fees may be higher than traditional equity ETFs due to the added complexity of exchanging and securing bitcoins.
  • Tracking Error:
    • Despite aiming to mirror bitcoin performance closely, tracking errors can occur.
    • Differences between ETF share cost and actual bitcoin value may result from factors like market liquidity, delayed rebalancing, and management fees.

11 Spot Bitcoin ETFs

As of January 31, 2024, there are 11 Spot Bitcoin ETFs that have received approval from the U.S. Securities and Exchange Commission (SEC).

Spot Bitcoin ETF Expense Ratio Fee Waiver
ARK 21Shares Bitcoin ETF (ARKB) 0.21% 0% fee for six months (or until $1 billion in assets)
Bitwise Bitcoin ETF (BITB) 0.95% No fee waiver
Fidelity Wise Origin Bitcoin Trust (FBTC) 0.25% Fees waived until July 31, 2024
Franklin Bitcoin ETF (EZBC) 0.19% 0% fee until August 2, 2024 (or until $10 billion in assets)
Grayscale Bitcoin Trust (GBTC) 1.50% No fee waiver
Hashdex Bitcoin ETF (DEFI)* 0.90% No fee waiver
Invesco Galaxy Bitcoin ETF (BTCO) 0.25% 0% fee for six months (or until $5 billion in assets)
iShares Bitcoin Trust (IBIT) 0.25% 0.12% fee for 12 months (or until $5 billion in assets)
Valkyrie Bitcoin Fund (BRRR) 0.25% 0% fee for three months
VanEck Bitcoin Trust (HODL) 0.25% No fee waiver

What’s the Future of Spot Bitcoin ETFs?

The recent approval of 11 spot Bitcoin ETFs by the SEC on January 10 represents a notable shift in the regulatory approach towards cryptocurrencies. This decision marks a departure from the SEC’s historical trend of rejecting all spot Bitcoin ETF applications, which had seen over 20 rejections between 2018 and 2023.

The approval has sparked a surge in new applications submitted to the SEC, indicating a growing interest in the establishment of additional spot Bitcoin ETFs. However, it is crucial to recognize that the approval of spot Bitcoin ETFs does not automatically imply a certainty of approval for other types of crypto ETFs.

Gary Gensler, the SEC Chairman, emphasized in the announcement of the spot Bitcoin ETF approval that the Commission’s decision is specifically focused on exchange-traded products (ETPs) holding a non-security commodity, namely, bitcoin. Gensler clarified that this decision should not be interpreted as an indication of the Commission’s readiness to approve listing standards for crypto asset securities. As a result, the future of spot Bitcoin ETFs may see continued growth, but the approval landscape for broader crypto ETFs remains uncertain and subject to the SEC’s discretion.

Will Spot Bitcoin ETFs Affect the Price of Bitcoin?

The market price of a spot ETF may deviate from the genuine value of its underlying asset.

In order to realign the fund with the actual value of the asset, authorized participants (APs), commonly recognized as large financial institutions, have the authority to generate or redeem substantial blocks of shares. APs exploit arbitrage opportunities arising from differences between the ETF’s price and the true value of the underlying asset, thereby profiting when the ETF is trading either higher or lower than the actual value.

Alternatives to Spot Bitcoin ETFs

While opting for a spot bitcoin ETF provides a direct avenue for exposure to bitcoin’s price, it’s essential to recognize that it is not the sole method of investing in this cryptocurrency. Consider the following alternatives:

  • Direct Bitcoin Ownership:
    • Purchasing bitcoin directly from an online exchange allows you to personally own the asset. This approach grants you full custody of bitcoin or a fraction of it. However, there is a higher entry barrier, involving the creation of a crypto exchange account, setting up a digital wallet, and potentially transferring bitcoin keys to a hardware wallet for enhanced security.
  • Bitcoin Futures ETF:
    • Bitcoin futures ETFs have been available for a while, operating differently than spot ETFs. Unlike spot ETFs, they do not hold actual bitcoins. Instead, they exclusively maintain futures contracts based on the anticipated future price of bitcoin. This distinction can make them potentially more volatile than bitcoin itself.
  • Investing in Bitcoin Mining Stocks:
    • Bitcoin mining is an actual business involving companies that own and operate extensive data centers dedicated to mining bitcoin. Some of these companies are publicly traded, offering an opportunity to invest in the operational aspects of bitcoin mining and the profits generated by these mining enterprises.

Each of these alternatives comes with its own set of considerations, risks, and entry requirements. Choosing the most suitable method depends on individual preferences, risk tolerance, and investment goals.

 

FAQ: Buying Bitcoin Anonymously

What is the most anonymous way to buy Bitcoin?

The most anonymous way to buy Bitcoin is by using cash or a prepaid debit card at a Bitcoin ATM. Because there’s no third party involved—only the machine manufacturer and the user. Moreover, Bitcoin ATM verification processes are not overly strict; users only need to authenticate with any phone number to carry out transactions. However, Bitcoin ATMs are limited in number and availability across countries, with transaction fees ranging from 7% to 20%. 

The most anonymous way to buy Bitcoin is by using cash or a prepaid debit card at a Bitcoin ATM. Because there’s no third party involved—only the machine manufacturer and the user. Moreover, Bitcoin ATM verification processes are not overly strict; users only need to authenticate with any phone number to carry out transactions. However, Bitcoin ATMs are limited in number and availability across countries, with transaction fees ranging from 7% to 20%. 

The most anonymous way to buy Bitcoin is by using cash or a prepaid debit card at a Bitcoin ATM. Because there’s no third party involved—only the machine manufacturer and the user. Moreover, Bitcoin ATM verification processes are not overly strict; users only need to authenticate with any phone number to carry out transactions. However, Bitcoin ATMs are limited in number and availability across countries, with transaction fees ranging from 7% to 20%. 

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No, according to Seth Ginns, managing partner and head of liquid investments at CoinFund. “The new all-time high would have happened without the ETFs, but we’ve likely accelerated this cycle with the ETF flows,” he said.

Bitcoin (BTC) reached a highly anticipated new all-time high above $69,000 on Tuesday only two months after the approval and launch of the ten spot bitcoin ETFs. The fast timeline has left people wondering: would the new high have happened so soon if the ETFs hadn’t launched? No, according to Seth Ginns, managing partner and head of liquid investments at CoinFund. […]