What Is A Spot Bitcoin ETF?

As of the writing, Bitcoin is up for 125% YTD. This huge increase in price is indicative of large hype and interest pouring back into crypto, and specifically Bitcoin. One of the main drivers of this hype is the speculation of a spot Bitcoin ETF. This ETF would allow investors to directly invest in Bitcoin through equity investments, allowing millions of new investors to invest in Bitcoin.

However, the SEC is still deciding on whether or not to approve these spot Bitcoin ETFs. Many companies currently have applications submitted, but the SEC has not provided a final determination. A decision on these ETFs is expected by early 2024, with experts believing that several ETFs could get approved simultaneously. 

Now that you have a basic understanding of the situation, let’s take a deeper look at Spot Bitcoin ETFs, as well as some current alternatives. 

Spot Bitcoin ETFs vs. Bitcoin Futures ETFs

To understand the difference between the different types of Bitcoin ETFs, it is first necessary to understand how an ETF works. An exchange traded fund (ETF) is a pool of assets that track a certain market. Some examples are index ETFs (SPY, QQQ, DIA), commodity ETFs (GLD, SLV, USO), etc. If it can be traded, there is likely an ETF for it. 

ETFs work by allowing investors to gain exposure to the underlying asset. They use investors' money to buy the underlying asset and then package it into shares, which can be bought and sold on an exchange. 

With that out of the way, we can take a closer look at Bitcoin ETFs. The current Bitcoin ETFs (e.g. BITO, BTF, etc.) use futures contracts to closely track the price of Bitcoin. A futures contract is a financial instrument that allows the investor to buy/sell an underlying asset at a specified price and at a specified date. These contracts have value that fluctuates with the underlying asset. However, these fluctuations are not directly related to the price of the underlying in all cases. Additionally, the contracts simply offer the ability to buy/sell and does not give direct ownership to the holder unless it is exercised.

These ETFs use investors’ money to buy Bitcoin futures contracts, which closely track the price of Bitcoin. The investors can then buy and sell the shares on an exchange. However, the investors do not directly own Bitcoins. They simply own an ETF that tracks the price of Bitcoin futures contracts. 

Spot Bitcoin ETFs are similar to futures ETFs, but they provide exact price exposure to Bitcoin. This is because spot ETFs invest directly in Bitcoin and package it into an ETF for investors to buy and sell. 

Why are Spot Bitcoin ETFs Better Than Futures ETFs?

Spot Bitcoin ETFs are generally seen as better than futures ETFs for two main reasons: price accuracy and lower management fees.

First, spot Bitcoin ETFs would directly invest in bitcoins. This means that there will be one-to-one price movements between Bitcoin and the ETF. This is desirable as it removes the added volatility from futures contracts not completely aligning with the underlying asset. 

Additionally, the Spot ETFs would have lower management fees than futures ETFs. Futures contacts continually expire, so active management is required to ensure that the ETF is tracking the correct asset. This requires more work on the end of the issuer and results in higher fees. For example, BITO, the leading Bitcoin futures ETF, has an expense ratio of 0.95%, whereas the proposed Spot Bitcoin ETFs would have expense ratios of 0.80 and below. 

Spot Bitcoin ETFs are also better for the crypto market, as it drives real demand for actual bitcoins. Unlike futures ETFs, spot ETFs will actually be backed by Bitcoin.

Spot BTC ETFs and Spot Gold ETFs: Could History Repeat?

GLD, the first gold ETF, opened for trading in November 2004.. Before, investors would either have to buy physical gold or futures contracts. In the several years following the inception of GLD, the price of gold rose nearly 350%. While there were other factors that influenced this rise in price (e.g. the great recession), many view the GLD ETF as a turning point for gold investing, as it gave a much wider audience access to the product. 

Some believe that the spot Bitcoin ETFs could do the same for Bitcoin. They argue that Bitcoin is difficult to obtain, so providing Spot ETFs would make it much more easy to purchase and expand the investor base. There is some evidence that this could be true. When BlackRock filed for a spot ETF in June 2023, the price of Bitcoin rose nearly 20% within a week. 

When Will Spot BTC ETFs Get Approval?

While there is likely heavy demand for Spot Bitcoin ETFs, they have to receive approval before they can be offered to the public. The Securities and Exchange Commission (SEC) is responsible for granting this approval.

With roughly 12 applications submitted, the SEC is currently reviewing and attempting to make a final decision on the applications. However, many experts believe that approval will come in early 2024. Specifically, JPMorgan predicts that approval will come on or before January 10, 2024. This is the final deadline for multiple applications. However, a decision could be made before then or even extended again. 

How to Buy Bitcoin Before Spot ETF Approval

If you are looking to buy Bitcoin now, there are several options available. However, the easiest is to directly purchase Bitcoin through a crypto exchange. Some of the best brokerages are Coinbase, WeBull, eToro, and Robuinhood. These options provide an easy and secure platform to purchase several cryptocurrencies. 

Will Spot Bitcoin ETFs be Good for the Crypto Markets?

Many experts and financial planners are excited about the possibility of Spot Bitcoin ETFs. They believe that the ETFs will bring in more investors to Bitcoin and ultimately drive up the price. Conversely, some believe that the ETFs are already priced into Bitcoin. They cite the large price increases and high volume of Bitcoin. Either way, someone has to be correct. Only time will tell who.