Spot Bitcoin ETF Risk Factors

Over the past several months, talks of spot Bitcoin exchange-traded funds (ETFs) have become more serious. Though they started as an idea with large hurdles to overcome from the U.S. Securities and Exchange Commission (SEC), several large asset managers have made considerable moves towards making spot Bitcoin ETFs a reality. These new ETFs are hyped because of their price accuracy, lower expense ratios, accessibility and novelty. 

While many believe that these ETFs will provide a net positive for the crypto community, it is still important to consider the risk factors that come with spot Bitcoin ETFs. 

Risks of Spot Bitcoin ETFs Getting Delayed

ETF applications undergo scrutiny from the SEC before they can be released because it is responsible for making sure that the ETF is safe for investors and will not cause regulatory or legal issues. While most ETFs have somewhat of a streamlined process for approval, the case is not the same for the spot Bitcoin ETFs. Spot ETFs do not currently exist for cryptocurrencies. 

This novelty creates issues for the SEC because it doesn’t have standards in place for gauging the safety, efficiency and marketability of these ETFs. Decisions take longer than traditional ETFs. 

Another significant hurdle has been in the creation and redemption process, in which investors gather the components of the ETF and exchange them for shares of the ETF. While this practice primarily only exists on Wall Street, it still has implications for the ETF. 

With this in mind, ETF applications may continue to be delayed. Applicants have continued to make changes to their applications, and SEC has been in ongoing talks with the applicants, so there is room for more delays in the complex process. 

Risks of Spot Bitcoin ETFs Getting Denied

A strong debate has existed for the past few years over whether or not cryptocurrencies should be considered securities. Legal cases swirl around this topic, but no final decision has been made. This makes the issue of creating Bitcoin ETFs even more complex, as the SEC’s legal standard for the ETFs is not set in stone.

This situation creates another risk for applicants and potential investors. If the SEC creates a new legal precedent around the idea of Bitcoin and securities, current applications could be denied. As of December 2023, the SEC does not believe that Bitcoin should be considered a security. However, a change of heart could alter the requirements for a spot Bitcoin ETF. If this were to happen, current ETF applications could be denied.

Another possibility is that the applications are denied for another reason altogether. If the applicants fail to prove that the ETF can handle price fluctuations or if the backend systems are not up to the level that the SEC wants, the applications could be denied.

Likelihood of Spot Bitcoin ETF Approvals in 2024

Despite significant risks of delay in approval or even outright denial, many believe that spot Bitcoin ETFs will be approved in 2024. They believe that the talks between the SEC and applicants have progressed far enough that the ETFs will be approved soon.

One of these proponents of approval is JPMorgan. In particular, it believes that the ETFs will be approved on or before Jan. 10, 2024. This date is significant because it is the final deadline for the ARK 21Shares application. 

Others believe that the ETFs will not be approved because of the risk outlined above. They claim that the complexity and novelty combined with the SEC's commitment to ensuring safety make the ETFs unlikely to be approved.

Risks of Investing in Spot Bitcoin ETFs

If spot Bitcoin ETFs are approved and released, significant risks emerge. The largest of these risks is that of price volatility. While some believe that the release of the spot Bitcoin ETFs will result in a new wave of buyers who will drive the price up, others believe that it could be a sell-the-news event or could already be priced in. If this is the case, then investing in spot Bitcoin ETFs could result in investment losses. 

Another risk is that the ETF could halt trading if there's too much price volatility. While this is extremely rare, it has been seen with other equities, such as GameStop (GME) and AMC (AMC). It could happen with spot Bitcoin ETFs, meaning that you could not trade your position for a certain period of time. 

Other Avenues to Invest in Bitcoin

If you are interested in investing in Bitcoin before the release of spot ETFs, you can do so through a crypto trading platform to trade Bitcoin directly. Benzinga recommends Kraken and eToro. These sites are known for their low fees, security and ease of use. 

Should You Invest in Bitcoin ETFs?

Bears believe that the ETFs, facing imminent approval, are already priced in the market. They cite the recent run-up in price as evidence for this. Bulls see the ETFs opening up a new wave of investors who will drive up the price of Bitcoin even further. It is important to look at your financial situation and risk tolerance before making an investment decision.