The U.S. Securities and Exchange Commission (SEC) made history on Jan. 10, 2024, when it approved 11 new spot Bitcoin exchange-traded funds (ETFs). These ETFs are the first of their kind to offer investors direct exposure to the price of Bitcoin, the leading cryptocurrency by market capitalization.
Unlike Bitcoin futures ETFs, which track the price of Bitcoin through derivatives contracts, spot Bitcoin ETFs hold actual Bitcoins as their underlying asset. This means that investors can benefit from the price movements of Bitcoin without having to buy, store, or sell the digital currency themselves.
Spot Bitcoin ETFs are expected to have several advantages over Bitcoin futures ETFs, such as lower fees, lower tracking error, and more accurate price discovery. They also offer a more accessible and regulated way for mainstream investors to participate in the crypto market, which could boost the adoption and liquidity of Bitcoin.
However, spot Bitcoin ETFs also face some challenges and risks, such as the security and custody of the Bitcoins, the volatility and unpredictability of the crypto market, and the regulatory uncertainty and scrutiny of the SEC and other authorities.
In this article, we will explore the background, features, benefits, and drawbacks of spot Bitcoin ETFs, and provide a list of the 11 new ETFs that are available for trading.
What Is a Spot Bitcoin ETF?
A spot Bitcoin ETF is an investment vehicle that allows investors to gain exposure to the price of Bitcoin in their regular brokerage accounts. A spot Bitcoin ETF invests directly in Bitcoins, which are stored in a secure digital vault managed by a registered custodian.
The purpose of a spot Bitcoin ETF is to mirror the price of Bitcoins in the crypto market as closely as possible. To do this, the ETF buys and sells Bitcoins from other holders or through authorized cryptocurrency exchanges. The ETF then issues shares corresponding to a set number of Bitcoins it holds.
The ETF shares are available for public trading on traditional stock exchanges, such as the New York Stock Exchange (NYSE) or the Nasdaq. The ETF share price should reflect the prevailing market price of the cryptocurrency, and the ETF occasionally rebalances its holdings by buying or selling Bitcoins.
This process of creation and redemption is done by authorized participants (APs), which are typically large financial institutions that have access to the ETF and the crypto market. APs create or redeem shares of the ETF based on market demand and arbitrage opportunities.
Why Are Spot Bitcoin ETFs Important?
Spot Bitcoin ETFs are important for several reasons. First, they offer a more direct and transparent way for investors to access the price of Bitcoin. Unlike Bitcoin futures ETFs, which rely on derivatives contracts that expire and roll over periodically, spot Bitcoin ETFs hold actual Bitcoins that do not have expiration dates or rollover costs.
This means that spot Bitcoin ETFs should have lower fees and lower tracking error than Bitcoin futures ETFs. Tracking error is the difference between the performance of the ETF and the performance of the underlying asset. A lower tracking error means that the ETF is more efficient and faithful in replicating the price of Bitcoin.
Second, spot Bitcoin ETFs offer a more accessible and regulated way for mainstream investors to invest in Bitcoin. Many investors may be interested in Bitcoin, but may not have the technical knowledge, time, or resources to buy, store, or sell the digital currency themselves.
Spot Bitcoin ETFs simplify the process of investing in Bitcoin by allowing investors to buy and sell ETF shares through their regular brokerage accounts, without having to deal with the complexities and risks of the crypto market. Spot Bitcoin ETFs also provide investors with the assurance and protection of the SEC and other regulators, which oversee the ETFs and their custodians.
Third, spot Bitcoin ETFs could boost the adoption and liquidity of Bitcoin. By attracting more investors and capital to the crypto market, spot Bitcoin ETFs could increase the demand and supply of Bitcoin, which could lead to more stable prices and easier price discovery. Spot Bitcoin ETFs could also enhance the legitimacy and credibility of Bitcoin, as they signal the recognition and acceptance of the cryptocurrency by the SEC and other authorities.
What Are the Challenges and Risks of Spot Bitcoin ETFs?
Spot Bitcoin ETFs are not without challenges and risks. One of the main challenges is the security and custody of the Bitcoins. Unlike traditional assets, such as stocks or bonds, Bitcoins are not issued or backed by any central authority or intermediary. Instead, they are stored and transferred on a decentralized network of computers, using cryptographic keys and protocols.
This means that the Bitcoins held by the ETFs are vulnerable to hacking, theft, or loss, if the custodians or the ETFs do not have adequate security measures and safeguards in place. For example, in 2014, Mt. Gox, a major Bitcoin exchange, lost 850,000 Bitcoins, worth about $450 million at the time, due to a cyberattack. In 2019, QuadrigaCX, a Canadian crypto exchange, lost access to 190 million Canadian dollars' worth of crypto assets, after its founder and sole controller of the private keys died unexpectedly.
Another challenge is the volatility and unpredictability of the crypto market. Bitcoin is known for its high price fluctuations and swings, which are driven by various factors, such as supply and demand, news and events, speculation and sentiment, regulation and innovation, and more. For example, in 2021, Bitcoin reached an all-time high of over $64,000 in April, only to drop to below $30,000 in June, before recovering to above $40,000 in July.
This means that investing in spot Bitcoin ETFs could entail significant risks and uncertainties, as the price of Bitcoin could change rapidly and unexpectedly, resulting in large gains or losses for the investors. Moreover, the crypto market is open 24/7, which means that the price of Bitcoin could change even when the stock market is closed, creating gaps and discrepancies between the ETF share price and the Bitcoin price.
A third challenge is the regulatory uncertainty and scrutiny of the SEC and other authorities. While the SEC has approved the first 11 spot Bitcoin ETFs, it has also imposed strict conditions and requirements on the ETFs and their custodians, such as reporting, disclosure, compliance, and surveillance. The SEC has also stated that it will continue to monitor the crypto market and the ETFs, and that it may take further actions or impose additional rules if necessary.
This means that the spot Bitcoin ETFs could face regulatory challenges and changes in the future, which could affect their operations and performance. For example, the SEC could suspend or revoke the approval of the ETFs, or impose new restrictions or limitations on the ETFs or the crypto market. The SEC could also face legal challenges or opposition from other parties, such as Congress, courts, or industry groups, which could delay or derail the approval or implementation of the ETFs.
What Are the 11 New Spot Bitcoin ETFs?
The 11 new spot Bitcoin ETFs that are available for trading are:
Grayscale Bitcoin Trust ETF (ticker: GBTC): This is the largest and oldest spot Bitcoin ETF, with over $20 billion in assets under management (AUM) as of Jan. 18, 2024. It was launched in 2013 as a private trust, and converted to an ETF in 2024, after a long and successful legal battle with the SEC. It charges a 1.5% annual fee, and trades on the NYSE Arca.
Hashdex Bitcoin Futures ETF (ticker: DEFI): This is a hybrid ETF that invests in both spot and futures Bitcoin, with a target allocation of 80% spot and 20% futures. It aims to provide a more diversified and balanced exposure to Bitcoin, while reducing the tracking error and rollover costs. It charges a 0.9% annual fee, and trades on the Nasdaq.
Franklin Bitcoin ETF (ticker: EZBC): This is a low-cost ETF that charges no fee for the first $10 billion in AUM, or until Aug. 2, 2024, whichever comes first. After that, it will charge a 0.19% annual fee. It trades on the NYSE Arca, and is sponsored by Franklin Templeton, a global investment firm with over $1.5 trillion in AUM.
VanEck Bitcoin Trust (ticker: HODL): This is a simple and straightforward ETF that invests solely in spot Bitcoin, with no exposure to futures or other derivatives. It charges a 0.25% annual fee, and trades on the Cboe BZX Exchange. It is sponsored by VanEck, a leading ETF provider with over $80 billion in AUM.
iShares Bitcoin Trust (ticker: IBIT): This is another low-cost ETF that charges no fee for the first $5 billion in AUM, or for the first 12 months, whichever comes first. After that, it will charge a 0.25% annual fee. It trades on the NYSE Arca, and is sponsored by iShares, the world's largest ETF provider with over $3 trillion in AUM.
Valkyrie Bitcoin Fund (ticker: BRRR): This is a fee-waived ETF that charges no fee for the first three months, or until April 10, 2024. After that, it will charge a 0.25% annual fee. It trades on the NYSE Arca, and is sponsored by Valkyrie Investments, a crypto-focused investment firm with over $1 billion in AUM.
Invesco Galaxy Bitcoin ETF (ticker: BTCO): This is another fee-waived ETF that charges no fee for the first six months, or for the first $5 billion in AUM, whichever comes first. After that, it will charge a 0.25% annual fee. It trades on the NYSE Arca, and is sponsored by Invesco, a global asset manager with over $1.5 trillion in AUM, and Galaxy Digital, a leading crypto investment firm with over $2 billion in AUM.
WisdomTree Bitcoin Trust (ticker: WBIT): This is another fee-waived ETF that charges no fee for the first six months, or for the first $5 billion in AUM, whichever comes first. After that, it will charge a 0.25% annual fee. It trades on the Cboe BZX Exchange, and is sponsored by WisdomTree, a pioneer in smart beta ETFs with over $70 billion in AUM.
Bitwise Bitcoin ETF (ticker: BITW): This is a fee-reduced ETF that charges a 0.5% annual fee, which is lower than its previous fee of 1.5% as a private trust. It trades on the NYSE Arca, and is sponsored by Bitwise, a crypto index fund provider with over $1 billion in AUM.
NYDIG Bitcoin ETF (ticker: BTCN): This is a fee-reduced ETF that charges a 0.4% annual fee, which is lower than its previous fee of 0.5% as a private trust. It trades on the NYSE Arca, and is sponsored by NYDIG, a crypto asset manager with over $10 billion in AUM.
SkyBridge Bitcoin ETF (ticker: SBIT): This is a fee-reduced ETF that charges a 0.35% annual fee, which is lower than its previous fee of 0.75% as a private fund. It trades on the NYSE Arca, and is sponsored by SkyBridge, a global alternative investment firm with over $7 billion in AUM.
Conclusion
Spot Bitcoin ETFs are a game-changer for crypto investing, as they offer a more direct, transparent, accessible, and regulated way for investors to gain exposure to the price of Bitcoin. Spot Bitcoin ETFs could also boost the adoption and liquidity of Bitcoin, as they attract more investors and capital to the crypto market.
However, spot Bitcoin ETFs also face some challenges and risks, such as the security and custody of the Bitcoins, the volatility and unpredictability of the crypto market, and the regulatory uncertainty and scrutiny of the SEC and other authorities.
Investors who are interested in spot Bitcoin ETFs should do their own research and due diligence, and understand the potential rewards and risks of investing in this emerging and innovative asset class.
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