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Cryptocurrencies offer some of the most versatile types of investing available. In addition to owning actual Bitcoin, investors can buy a variety of financial derivatives that allow them to earn money indirectly. Though the term “Bitcoin ETFs” might sound a bit complicated, they’re actually quite easy to use. Once you understand how different types of ETFs work, you’ll have a lot of fantastic investment opportunities available to you. This guide will explore Bitcoin spot and futures ETFs and show you how to use them as vehicles for your investment strategy.
Key Takeaways:
An ETF is an exchange-traded fund. This is a type of investment fund that pools together multiple assets into a single bundle. The bundle of assets is then bought and sold on an exchange, just like individual crypto tokens.
ETFs come in many shapes and sizes. They can hold stocks, cryptos, bonds and other commodities. No matter the funds within the ETF, its value fluctuates in response to the value of the underlying asset(s). Unlike some other types of investment funds, ETFs are continuously available for sale, and their prices can rise and fall as market conditions change.
A Bitcoin ETF is an exchange-traded fund that contains a variety of Bitcoin-related digital assets. Depending upon the ETF type, it can bundle things like Bitcoin futures, Bitcoin tokens and Bitcoin-related companies into a single package. The value will rise or fall in relation to Bitcoin prices.
A Bitcoin exchange-traded fund makes it possible to invest in Bitcoin without actually owning the cryptocurrency itself. For example, you could purchase a Bitcoin ETF through your brokerage, instead of buying Bitcoin tokens and placing them in your crypto wallet.
The concept of a Bitcoin ETF has been around for a while, although its actual existence is still fairly new. The U.S. Securities and Exchange Commission (SEC) has only just begun to approve certain types of crypto ETFs, while other Bitcoin ETFs are still waiting for approval.
A Bitcoin spot ETF is a fund that uses actual Bitcoin tokens as its underlying digital asset. The prices of a Bitcoin spot ETF are directly related to Bitcoin prices, so a share in a Bitcoin spot ETF is essentially like owning a representation of a real Bitcoin.
For example, consider a Bitcoin spot exchange-traded fund that contains 10,000 Bitcoin tokens. If the Bitcoin spot ETF issues 10,000 shares, each share is equal to 1 BTC. A user who owns a share will find that the value of their share remains equal to the market price of a Bitcoin as the market rises and falls.
A Bitcoin spot ETF starts with a group deciding to create an exchange-traded fund. They buy Bitcoin and then give it to an ETF sponsor. The Bitcoin spot ETF sponsor wraps the tokens into a fund, splits it into a predetermined amount of shares, and then gives it back to the group to list it on a publicly traded market. Since a Bitcoin spot ETF is a type of open-end fund, it can issue new shares and add more crypto as demand increases.
When an investor purchases one of these shares, they’re essentially buying a portion of the Bitcoin tokens within the spot ETF. However, as long as a buyer holds an ETF share, they don’t actually hold the cryptocurrency itself. You can think of buying an ETF share as basically paying someone $1 to hold a dollar for you in their wallet.
A Bitcoin spot ETF follows the current price of Bitcoin. The value of the fund and the shares are directly linked to Bitcoin on a one-to-one ratio. Sometimes, the price of spot ETFs can slightly diverge from the value of the underlying Bitcoin. When this happens, investors can take advantage of the price difference to profit. This mechanism encourages the ETF to regulate its price and maintain a close correlation to Bitcoin prices.
Here are some of the main reasons investors are excited about the idea of a Bitcoin spot ETF.
If you're new to the world of Bitcoin, but have been investing with the New York Stock Exchange (NYSE) for a while, a Bitcoin spot ETF is a great opportunity to experiment with crypto. Instead of having to learn how to buy Bitcoin, traders can follow the well-known steps for purchasing shares in an ETF. For those wary of working with crypto wallets and exchanges, a Bitcoin spot ETF can be an excellent way to gain money from Bitcoin price increases without needing to know much about crypto. This opens up crypto investing to a new audience and helps to generate more interest in Bitcoin.
Another big perk of an ETF is that you don't have to go through the trouble of owning Bitcoin, unless you want to redeem a share. The ETF will manage all of your tokens for you, while you profit from the price increases. When you choose to invest in a Bitcoin spot ETF, you don't need to bother with details like keeping track of a private crypto key. Furthermore, spot ETFs are heavily regulated and run by reputable companies, so you get the convenience of top-tier security without having to handle it yourself.
Though Bitcoin spot ETFs have some advantages, they aren't ideal for every trader. Here are some potential issues to be aware of.
With any Bitcoin spot ETF, some price slips are inevitable. Though the prices of the ETF closely follow those of actual Bitcoin tokens, there are small moments when the value of the ETF hasn't caught up to the crypto market. Some investors actually try to capitalize on these price slips through a technique called arbitrage. However, it can be tricky to manage, and Bitcoin's volatility can end up costing you money. Some people find it more straightforward to just purchase Bitcoin outright and avoid the risk of price slips.
ETFs often have higher trading fees as compared to trading the crypto itself on an exchange. In return for the extra convenience and protection of an ETF, you have to pay the provider a little more when you purchase your share. This can make ETFs especially pricey for day traders who make frequent transactions.
The other major problem with Bitcoin spot ETFs is that they still aren't approved by the U.S. Securities and Exchange Commission. There have been past attempts from investment firms to get approval for ETFs, but so far, none have passed the regulators. Experts believe it will be at least 2024 before a Bitcoin spot ETF is approved. Without this approval, it's difficult for any Bitcoin spot ETF to appeal to those who usually trade on the NYSE.
A Bitcoin futures ETF is a fund that holds Bitcoin futures contracts. These contracts allow the ETF to buy or sell Bitcoin at a set price on a later date. The price of a share in the fund will change, depending upon whether or not Bitcoin prices make the futures contract look lucrative.
When you buy a Bitcoin futures ETF, you’re essentially speculating on whether the Bitcoin market will rise or fall. For example, consider a Bitcoin futures ETF that has a contract to buy 2 BTC at a predetermined price of $30,000 in three months. If the current price of Bitcoin drops to $20,000, the value of the ETF will decline. However, if the current price rises to $40,000, the value of the ETF will increase. Your share's value changes based on how much of a profit the ETF is likely to make.
The creation of a Bitcoin futures ETF is fairly similar to that of a Bitcoin spot ETF. Authorized participants, who are U.S.-registered broker-dealers, purchase a range of Bitcoin futures contracts. These contracts state that a precise number of Bitcoin will be sold for a predetermined price at an agreed-upon date. The authorized participants send these futures to a Bitcoin futures ETF sponsor, who can bundle together the fund and split it into appropriately weighted shares. The authorized participants then place the fund shares for sale on the market.
Once a Bitcoin futures ETF hits the open market, the mechanics get a bit more complicated. Bitcoin futures ETFs essentially function like a pre-packaged mini-portfolio. Some ETFs may be designed to take advantage of downward market trends, while others have been created to profit if the market trends upward or remains stable.
The market price for a Bitcoin futures ETF is affected by a broad range of factors, including Bitcoin pricing trends, investor optimism and the specifics of the futures contract. Supply and demand for a Bitcoin futures ETF will impact value more than current market conditions do.
Working with Bitcoin futures ETFs provides you with many helpful advantages.
One of the main reasons people like to use a Bitcoin futures ETF is that it makes it very simple and straightforward to profit from Bitcoin’s price movements. As long as you can accurately tell whether Bitcoin's price is going to increase or decline, you can usually make money with a Bitcoin futures ETF. The creator of the ETF handles the details of purchasing the actual contract and choosing Bitcoin trading prices, while you just have to think about whether prices seem likely to rise or fall.
When you invest in a Bitcoin futures ETF, you can be confident that it’s been created by legitimate financial organizations operating under standard government regulations. There are already some Bitcoin futures ETFs approved by the SEC, making them a safe way to interact with the crypto market. You don’t have to worry about new regulations making it illegal, and you can also be confident the ETF is run by a reputable group that will treat you fairly.
Though Bitcoin futures ETFs are popular, they have some potential disadvantages you need to know about.
Bitcoin futures ETFs have a fairly indirect relationship with Bitcoin itself. Since there are several futures contracts involved, investors don't actually own a commodity backed by Bitcoin itself. Performance isn't always directly tied to the market, so price movements aren't always straightforward. Since the price of Bitcoin isn't directly linked to the value of the Bitcoin futures ETF, other market factors can greatly impact your potential profit.
Though Bitcoin futures ETFs are fairly simple to use, there’s a lot going on behind the scenes. The futures market involves a variety of mathematical and financial concepts that may be tricky for a beginner to grasp. Of course, you don't need to understand everything just to buy a basic Bitcoin futures ETF. However, if you want to put a lot of money into Bitcoin futures ETFs, making them a core part of your trading strategy, you'll need to do a lot of research. Even small misunderstandings can result in big losses.
There are some similarities between Bitcoin spot ETFs and Bitcoin futures ETFs. Both are types of funds whereby someone else manages the underlying assets for you, and each one is also traded on exchanges and affected by Bitcoin prices. However, there are some major differences between the two.
Underlying digital assets: Spot ETFs are backed by actual Bitcoin, while futures ETFs are backed by Bitcoin futures contracts, and hence don't revolve around the idea of actually owning Bitcoin.
Availability: Multiple futures ETFs are SEC-approved and publicly traded, while spot ETFs are still struggling to get approval for sale in U.S. markets.
Pricing variation: The value of spot ETF shares usually mimics Bitcoin’s price movements, with only small changes. Futures ETF prices can swing wildly based on contract expiration dates and market sentiment.
Length of investment: Futures contracts expire after a month, so futures ETFs are often short-term investments. In contrast, people tend to hold spot ETF shares for longer amounts of time.
Impact on Bitcoin prices: Since spot ETFs require a fund to actually purchase Bitcoin, the creation of large spot ETFs can have an impact on the Bitcoin market. Since futures don't trade as much Bitcoin directly, they don't affect the crypto market much.
Chance of profit: A smart investor can profit from Bitcoin's volatility with a futures ETF, whether the market moves up or down. Meanwhile, spot ETFs only provide profit if there’s an increase in Bitcoin's price. However, despite providing some unique profit opportunities, futures ETFs can be riskier because their movements are less predictable.
As of 2023, United States markets don’t allow Bitcoin spot ETFs. The SEC has been very reluctant to approve spot ETFs because they believe that these funds could be prone to manipulation. While the first spot Bitcoin ETF application was filed in 2013, the SEC has rejected applications from a variety of financial institutions.
However, recent news suggests that this ban on spot ETFs might finally be about to change. In August 2023, the Court of Appeals ruled that the SEC shouldn’t have rejected a spot ETF application from Grayscale Investments. This crypto asset manager argued that they had the same market manipulation safeguards as previously approved futures ETFs, yet the SEC still turned them down while citing market manipulation concerns. Fortunately for Grayscale, the Court of Appeals found that this SEC denial was "arbitrary and capricious."
The new ruling essentially suggests that spot ETFs shouldn’t be held to more rigid standards than futures ETFs unless the SEC can somehow prove that spot ETFs are riskier. While the SEC does have a chance to appeal the ruling, many legal experts believe the current ruling will pave the way for Bitcoin spot ETF approvals.
Alongside Grayscale, many other firms have filed for spot ETF approval this year. Pending applications include one for the largest asset manager in the world, Fidelity® Investments, along with other reputable institutes like BlackRock, WisdomTree, Bitwise® and VanEck®. If the SEC wishes to reject other pending applications, they'll need to use a more precise reason than the basic "market manipulation" complaints they've used in the past.
Following are some of the most popular publicly traded Bitcoin futures ETFs currently available to investors.
As the first Bitcoin futures ETF available in the United States, Proshares® Bitcoin Strategy ETF (BITO) is a very popular choice. It aims to track Bitcoin’s performance and provide a return that corresponds to its prices. Though technically a futures ETF, its design makes it ideal for investors who want to profit when Bitcoin prices rise.
The Proshares Bitcoin Short Strategy ETF (BITI) is an inverse exchange-traded fund designed to provide investors with a profit when Bitcoin prices drop. This is the second-largest Bitcoin futures ETF in the U.S., with a value of approximately $59 million. BITI is an excellent option for traders who expect Bitcoin’s market price to decline in the future.
The Valkyrie Bitcoin Strategy ETF (BTF) is a Bitcoin futures contract designed to mimic the price movements of Bitcoin. Futures contracts within the ETF increase in value as Bitcoin's prices increase. This Bitcoin futures fund has a value of around $25 million, and is popular for its reliable performance.
There's no definitive answer to which investment is better, because it mostly depends upon your investment strategy and how you feel about the underlying asset. Investors who prefer high-risk/high-reward investments with a lot of liquidity will often find that they prefer the Bitcoin futures ETF approach. Meanwhile, those who prefer long-term, moderate-growth investments might enjoy working with a Bitcoin spot ETF.
In general, spot ETFs do tend to be more popular than futures ETFs. For example, the majority of gold ETFs are gold spot ETFs, instead of gold futures ETFs. Many investors prefer spot ETFs because they have a little more stability and are based on an underlying asset with a clearly defined value. This is a big part of the reason why people have been clamoring for a Bitcoin spot ETF since the first Bitcoin futures ETF was announced. People often see spot ETFs as being more reliable and less likely to lose all their value.
However, it's worth noting that crypto investing can be a little different from stock exchange or forex investing. Futures are particularly popular with crypto traders, so the concept of a Bitcoin futures ETF may be popular with more investors than expected.
Either a Bitcoin spot ETF or a Bitcoin futures ETF can be a valuable investment. These types of investment vehicles allow people to participate in the crypto market while using traditional investment practices. In addition to making the Bitcoin market more accessible, spot ETFs and futures ETFs also provide some unique chances to profit.
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