Spot Bitcoin ETFs: Understanding Spot Bitcoin ETFs and How to Invest
Trading Bitcoin and cryptocurrencies has always been a contentious topic. For that reason, plenty of investors, both big and small, felt uneasy about adding Bitcoin to their portfolio. But that could change with spot Bitcoin ETFs.
While offering additional protection compared to conventional Bitcoin investments, spot Bitcoin ETFs also allow investors to get exposure to the asset’s price in real-time, and without having to own it.
In this article, we will go through the basics of spot Bitcoin ETFs, their positives and negatives, how they compare to other Bitcoin ETFs, and how you can invest in them.
Sounds interesting? Let’s dive in.
Table of Contents
Spot Bitcoin ETFs: An Introduction
On January 12, 2024, Bitcoin - and cryptocurrencies as a whole - took a significant step towards the mainstream.
After years of debate and discussion, the US Securities and Exchange Commission (SEC) approved the first 11 spot Bitcoin exchange-traded funds (ETFs).
While cryptocurrency investments have been around for a while, these are the first SEC-regulated ones.
This way, investors have additional protection - something that traditional crypto exchange companies couldn’t offer before. This includes the Securities Investor Protection Corporation’s insurance as well, which can cover up to $500,000 in losses in case the company goes bankrupt.
Owning Bitcoin or any other cryptocurrency was always a major hurdle for investors, who were often wary of the potential risks.
With spot Bitcoin ETFs as an alternative, investors will have exposure to Bitcoin investments and price fluctuations in real time, without having to acquire the asset itself.
It should be said that spot Bitcoin ETFs were already available in other countries. But the SEC’s decision marks the first step for cryptocurrencies into Wall Street.
What is a Spot Bitcoin ETF?
A spot Bitcoin ETF is an exchange-traded fund like all others. In an ETF investment, the company offering the product owns the underlying asset - which can range from stocks to currencies and commodities.
The investors, on the other hand, do not have to own the asset, which offers them an alternative way to get exposure to these asset’s prices.
By investing in an ETF, you are entitled to the same interest and dividends as if you owned the assets themselves. Of course, the return will be proportional to your investment. Funds will also charge a small fee on top of it.
In a spot Bitcoin ETF, the fund acquires the cryptocurrency itself. Investors, therefore, will get exposure to the Bitcoin market, but without having to acquire Bitcoin themselves.
Buying and owning cryptocurrencies can be a tricky process, which includes setting up a wallet and finding a reliable exchange company.
Since the crypto exchange isn’t regulated by national agencies, it also means that investors have no protection in case the company goes bankrupt. With ETFs, on the other hand, investors can get exposure to the asset through regulated brokers.
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How Do Spot Bitcoin ETFs Work?
As mentioned earlier, in an ETF, investors get exposure to the fund’s underlying asset without owning it.
In the case of a Bitcoin ETF, it means that investors will have access to the Bitcoin market, but without having to worry about acquiring and owning the cryptocurrency itself.
There is, however, one extremely important aspect when it comes to spot Bitcoin ETFs. In this case, the ETF will replicate Bitcoin’s price fluctuations in real-time. Up until now, investors only had access to Bitcoin futures ETFs, which did not necessarily reflect the cryptocurrency’s market price.
After acquiring the asset, - in this case, Bitcoin - the fund will sell shares to investors, who will then acquire the shares in order to get exposure to the underlying asset.
As the underlying asset’s price changes, so does the shares’ price. Investors can sell their shares back to the fund, and profit from the difference. The fund will charge a small fee relative to the amount invested.
What’s the Difference Between Spot Bitcoin ETFs and Bitcoin ETFs?
While Bitcoin or cryptocurrency ETFs aren’t exactly new, spot Bitcoin ETFs may have an interesting impact on the overall financial markets. game-changer.
Up until now, investors only had access to Bitcoin futures ETFs. In this case, the ETF did not own Bitcoin, but rather future contracts based on the Bitcoin’s price.
Investors would then acquire shares of the futures contracts, trading based on the asset’s price fluctuation.
In a Bitcoin futures ETF, investors could choose between a short position, trading based on a drop in Bitcoin’s value, or a long position, trading based on a rise instead.
But while Bitcoin future ETFs offered some exposure to the cryptocurrency market, it could rarely properly replicate the asset’s price. While futures contracts can come close to the asset’s spot price, they aren’t always capable of replicating it 1:1.
A spot Bitcoin ETF, on the other hand, is capable of closely replicating Bitcoin’s price in real-time.
Since the fund owns the asset itself, rather than speculating on its price, it allows investors better exposure to Bitcoin’s high volatility. While they probably won’t completely eliminate the difference in price, it will be significantly smaller compared to other crypto ETFs.
Likewise, spot Bitcoin ETFs can also speed up day-trading operations, making buying or selling the ETF’s share easier when compared to futures.
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Spot Bitcoin ETFs: Advantages and Disadvantages
Just like any other investment, spot Bitcoin ETFs have their own pros and cons. We will now take a look at some of them.
Advantages of Spot Bitcoin ETFs
- Spot Bitcoin ETFs make investing in cryptocurrencies much easier, as it doesn’t require you to actually own the asset. This means that investors who were wary about acquiring cryptocurrencies, but still wanted exposure to this market, now have a way of adding crypto investments to their portfolios.
- Spot Bitcoin ETFs provide investors with access to the crypto market and Bitcoin prices in real time through regulated brokers. This way, investors have additional protection.
- Compared to traditional Bitcoin trading, spot Bitcoin ETFs make the whole process much easier and safer. Aside from eliminating some important hurdles, namely creating a wallet and acquiring Bitcoin, liquidity is also another major positive. Buying and selling ETF shares is easier for investors compared to buying and selling Bitcoin on a given crypto exchange.
Disadvantages of Spot Bitcoin ETFs
- Bitcoin, just like any other cryptocurrency, is highly volatile. While volatility can lead to large profits, it can also lead to major losses. Keep that in mind if you are considering spot Bitcoin ETFs for your investment portfolio.
- As mentioned earlier, ETFs will charge a fee on top of the investment. While these fees are usually quite small, ranging from 0.2% to 1%, there is still a significant difference from one broker to another.
- Spot Bitcoin ETFs must own the underlying asset. And because of that, they are still exposed to some of the security risks associated with cryptocurrencies, namely hacking. While these assets are usually stored in an extremely safe virtual wallet, they can still be susceptible to cyber-attacks.
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How Do Spot Bitcoin ETFs Affect the Price of Bitcoin?
One of the biggest talking points surrounding spot Bitcoin ETFs was their potential effect on Bitcoin’s price.
The day before the news about the SEC’s decision broke out, Bitcoin’s price soared to a two-year high. However, in the days following the announcement, the price went the other way, dropping close to 20%.
This was a natural market movement: as soon as it became clear that the SEC would eventually greenlight spot Bitcoin ETFs, plenty of investors took the opportunity to stock up on Bitcoin.
And, as the price went up, these investors were quick to sell their assets, leading to an influx in supply and, consequently, to a drop in prices.
As you can imagine, the activity of BTC's price continues to be volatile from day to day.
But, over the long run, investors expect this trend to shift again. Spot Bitcoin ETFs could lead to a rise in demand for Bitcoin investments, which, in turn, would drive the prices up again. There is also speculation that the new, regulated investments could raise Bitcoin’s legitimacy and bring more stability to its price.
Again, this is all speculation, so take it with a grain of salt.
While spot Bitcoin ETFs are expected to affect the cryptocurrency’s price, it’s difficult to gauge the actual impact. Even with these changes, Bitcoin’s volatility will still be significantly higher than other investments - which can be a positive or a negative, depending on your preferences.
How to Invest in Spot Bitcoin ETFs
If you want to invest in spot Bitcoin ETFs, then your best option is to do so through a regulated, safe and reliable broker, like Admiral Markets. At Admiral Markets, you can invest in multiple ETFs, adding variety to your portfolio.
Investing in ETFs is relatively simple, and you can start with smaller increments thanks to fractional investing.
You can also start with a risk-free demo account, which doesn’t use real assets. This way, you will be able to try out different strategies without having to worry about potential losses. Once you are fully confident, you can then deposit and start trading with a live account.
At Admiral Markets, you can trade with the highly advanced MetaTrader 5 platform.
This multi-asset trading tool offers, among other features, advanced charting, market data and news, educational tools, and automated trading, all packed in convenient and easy, user-friendly software.
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What is a spot based Bitcoin ETF?
A spot based Bitcoin ETF is an Exchange Traded Fund (ETF) which holds actual Bitcoin as an asset, whereas the Bitcoin futures ETFs fluctuate based on the future price movements of Bitcoin and do not have direct value derived from the asset.
Where can I buy spot Bitcoin ETFs?
You can buy spot Bitcoin ETFs from any regulated and trusted online broker, such as Admiral Markets.
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