The U.S. Securities and Exchange Commission's (SEC) approval of spot Bitcoin ETFs on Jan 10, 2024 not only marks a victory for Bitcoin, the king of cryptocurrencies, but also heralds a new era for the world of crypto. This fortuitous win lets you buy Bitcoin easily, as you can now get your hands on Bitcoin via the familiarity of stock exchanges — minus the headache of managing a digital wallet.
Curious to learn more about Bitcoin ETFs and their potential impact on your portfolio? Our deep dive into Bitcoin ETFs will help you to understand the two types of Bitcoin ETFs — spot and futures — and how they work.
Key Takeaways:
Bitcoin ETFs allow investors to gain exposure to Bitcoin without owning the actual cryptocurrency. They’re available in two forms: futures-based ETFs, which invest in Bitcoin futures, and spot-based ETFs, which hold actual Bitcoin.
Investing in Bitcoin ETFs provides accessibility for retail investors, who can easily trade these funds on traditional exchanges; opportunities for diversification; and potential tax benefits regarding uncertainty over taxable events.
Before investing in Bitcoin ETFs, it’s essential to consider factors such as market volatility, management fees, counterparty risk and liquidity risk.
What Is a Bitcoin ETF?
Bitcoin ETFs (exchange-traded funds) are investment products that track the value of Bitcoin and provide investors with exposure to it without the investors actually owning the cryptocurrency. These types of funds are similar to traditional market exchanges in bridging the gap between digital currencies, such as Bitcoin, and conventional financial systems.
It should be noted that while these ETFs aim to reflect fluctuations in Bitcoin’s price, they may not always align perfectly, due to factors such as other holdings within their portfolio, or structural elements unique to each fund. For instance, even if the price of Bitcoin increases by 50%, certain ETFs might only partially reflect that increase. However, they’ll still provide valuable investment opportunities in this digital asset class.
Types of Bitcoin ETFs: Futures vs. Spot
There are two main types of Bitcoin ETFs: futures-based and spot-based. Bitcoin futures ETFs invest in contracts that agree to buy or sell a specific amount of Bitcoin at a predetermined price on a future date, allowing investors to track the performance of the cryptocurrency without actually owning it. One example is ProShares Bitcoin Strategy ETF (BITO). (Previously to this past week’s approval, only Bitcoin futures ETFs had been approved by the SEC).
With the recent historic approval for spot Bitcoin ETFs, you can now purchase spot Bitcoin ETFs from financial firms such as Franklin Templeton and Fidelity Investments. In total, 11 spot Bitcoin ETFs have been approved by the SEC, including Grayscale Bitcoin Trust (GBTC), BlackRock's iShares Bitcoin Trust (IBIT) and VanEck Bitcoin Trust (HODL).
Spot Bitcoin ETFs such as Franklin Bitcoin ETF hold actual bitcoins as their underlying asset and directly follow its market value. These offer closer mirroring for investors interested in gaining more direct exposure to digital currency investment options via an ETF.
How Do Bitcoin ETFs Work?
Bitcoin ETFs allow investors to trade their shares on reputable market exchanges like NYSE and Nasdaq while tracking the price of Bitcoin. The value of a Bitcoin ETF is determined by fluctuations in the price of bitcoins, which reflect changes in their overall market value. This allows investors to speculate on the value of Bitcoin without having to buy the physical asset itself. Thus, an ETF fund provides easier access and risk management when it comes to investing in bitcoins, as well as other potential advantages related to traditional exchanges.
To buy or sell shares of a Bitcoin ETF, individuals can utilize online brokerages and set up brokerage accounts similar to those used for trading other types of ETFs. Before an ETF can be launched and traded on established stock markets, approval must first be obtained from regulatory bodies such as the SEC.
Advantages of Investing in Bitcoin ETFs
Investing in Bitcoin ETFs offers retail investors enhanced accessibility, allowing them to participate without the complexities of direct cryptocurrency ownership. This streamlined access ensures simplicity, cost efficiency and security, making it more affordable for individuals.
Bitcoin ETFs also provide investors the opportunity to diversify by spreading their investments across various assets. This approach minimizes risk associated with Bitcoin investment alone, potentially enhancing returns by combining cryptocurrencies with other assets such as stocks.
Additionally, Bitcoin ETFs may offer potential tax benefits. Unlike direct Bitcoin ownership, holding shares in a Bitcoin ETF allows you to avoid taxable events until you sell your ETF holdings. Depending upon the duration, investors may qualify for lower capital gains rates ranging from 0% to 20%, thus providing potential tax advantages.
Disadvantages of Investing in Bitcoin ETFs
Investing in a Bitcoin ETF won’t give you direct ownership of the cryptocurrency, thereby limiting its use, and it won’t offer the same level of anonymity as traditional crypto ownership. Additionally, investing in an ETF won’t eliminate the hyper-volatile nature of Bitcoin, so it’s best suited for investors with a high risk tolerance.
It’s also wise to factor in management fees and expenses when considering Bitcoin ETFs. These charges, imposed by financial firms, gradually decrease your returns over time. Even those that offer lower fees than the norm can still be costlier than traditional equity ETFs, due to additional expenses such as securing and exchanging bitcoins.
If you're considering investing in Bitcoin via an ETF, it’s crucial to be aware of these potential pitfalls. Being well-informed about the nature of Bitcoin funds and ETFs can help you make more informed decisions when entering this realm.
Impact of Bitcoin ETFs on the Financial Ecosystem
The impact of Bitcoin ETFs extends beyond their benefits and drawbacks for investors. These financial instruments play a crucial role in shaping not only the value of Bitcoin, but also driving institutional acceptance of crypto and influencing its future landscape. It’s clear now that Bitcoin ETFs hold significant power within the world of finance.
Institutional Adoption
The introduction and acceptance of Bitcoin ETFs have already contributed significantly to the institutional adoption of cryptocurrency. By offering a regulated and familiar investment option, these ETFs are able to attract traditional financial institutions and investors who may have previously been hesitant about entering the world of digital currency.
Investing in Bitcoin through an ETF has become increasingly popular among institutions, due to the streamlined exposure to fluctuations in Bitcoin prices. In fact, investing via a spot Bitcoin ETF can be more cost-effective for investors, since it often entails lower fees as compared to some centralized crypto exchanges.
Influence on Bitcoin Prices
The surge in the popularity of spot Bitcoin ETFs has the potential to impact Bitcoin’s price. With a growing number of investors choosing to enter the market through these funds, an increased demand for Bitcoin could drive its value upward. This has already been demonstrated in the two days leading up to the SEC’s spot Bitcoin ETF approvals, as BTC’s price pushed past $45,000.
This influx of liquidity and the larger pool of participants may also contribute to more stable prices over time, potentially reducing volatility. As a result, Bitcoin may attract even more investment interest, creating a positive cycle whereby its price stability further boosts investor confidence and subsequent growth.
Shaping the Future of Crypto
Beyond the direct consequences of BItcoin ETFs significantly affecting BItcoin’s price and encouraging institutional adoption, their development and regulation will also greatly influence the future growth and acceptance of cryptocurrencies in mainstream markets.
As several countries have approved Bitcoin ETFs, this advancement brings greater credibility to the crypto industry while increasing overall acceptance of Bitcoin. Such progress is expected to drive expansion within the blockchain technology sector as a whole.
Summary
With their recent successful approvals by the SEC, spot Bitcoin ETFs have emerged as a new form of investment in the ever-changing financial landscape. They combine traditional investment structures with the dynamic nature of cryptocurrency, allowing investors to tap into the potential that Bitcoin offers even as risks come with investment in these new funds.
As ETFs continue to develop and exert an impact on the financial industry, they’ll play a significant role in shaping the future of cryptocurrency and blockchain technology while driving innovation toward mainstream acceptance.
