Not all Bitcoin ETFs are created equal. We break down the differences between spot and futures Bitcoin ETFs including how they track BTC price, fees, risks and more.
Exchange-traded funds, or ETFs, are popular investment vehicles that allow individuals, businesses and other entities to gain exposure to the price action of an asset, without ever actually holding said asset.
ETFs are typically traded on major stock exchanges like the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE). Stockbrokers and online brokerage platforms trade these ETFs on behalf of their users.
As their name suggests, Bitcoin ETFs allow users to bet on the value of Bitcoin (BTC) without the typical challenges associated with buying, securing and managing the digital currency.
What’s the Difference Between Bitcoin Spot and Futures ETFs?
Both Bitcoin spot ETFs and futures ETFs are financial instruments that allow investors to gain exposure to the price action of Bitcoin. But they accomplish this in different ways.
Bitcoin spot ETFs hold actual BTC in custody. When an investor buys shares in a Bitcoin ETF, the provider purchases an equivalent amount of BTC from the open market and adds it to its holdings. Likewise, when they sell their shares, the ETF provider sells the equivalent amount of BTC from its holdings. This buying and selling process occurs when the ETF is rebalanced.
This provides a reliable way to gain exposure to Bitcoin's price fluctuations since the ETF directly reflects Bitcoin's price.
Bitcoin futures ETFs, on the other hand, do not directly own Bitcoin. Instead, they allow users to invest in Bitcoin futures contracts, which are agreements to buy and sell Bitcoin at a specific price on a specific date. The value of these ETFs isn't just influenced by Bitcoin's spot price, but also by expectations of its future price — which can lead to the futures ETF price diverging from the spot price.
Futures ETFs are considered more flexible financial instruments and bring with them their own set of benefits and risks. Unlike Bitcoin spot ETFs, futures ETFs can be used to short BTC.
In the United States and most other countries, ETFs are a type of regulated financial product, which means providers must meet specific criteria and obtain regulatory approval before offering it to the public. This can provide a sense of security to investors unwilling to invest in unregulated financial products.
Click here to learn more about crypto exchange-traded funds (ETFs).
Advantages of a Bitcoin Spot ETF
Today, most Bitcoin holders purchase their BTC through a centralized exchange, a P2P marketplace, or via a broker.
Though this is now a relatively simple process, some would-be investors are put off by the challenge of holding, securing and transacting in digital currencies like Bitcoin.
Instead, many investors would rather take a hands-off approach to Bitcoin investment — using brokers to purchase, hold and sell the Bitcoin on their behalf. This would allow less technically savvy investors to gain exposure to Bitcoin’s price action and potentially open the floodgates to investments from mutual funds, pension funds, insurance companies and more.
Bitcoin spot ETFs offer a variety of benefits over Bitcoin Futures ETFs, which could make them a more desirable investment option.
Some of these advantages include:
- Simplified structure: Investors don't need to grapple with complex nuances like expiration dates, margin calls and leverage.
- Direct price tracking: Since a Bitcoin spot ETF is directly backed by Bitcoin, its price is likely to be closer to the actual BTC spot price. Unlike futures, which can deviate due to considerations like backwardation and contango.
- Reduced counterparty risk: Futures contracts require that parties involved fulfill their obligations. Counterparties can, in rare cases, refuse or be unable to fulfill their agreements. Which can impact the futures contract holder.
- Enhanced liquidity: Since Bitcoin spot ETFs require brokers to directly purchase Bitcoin to hold in custody, some believe the ETF will help to boost the overall liquidity of the Bitcoin spot market.
Why Are There No Bitcoin Spot ETFs Yet?
Despite numerous requests over the years, the US Securities and Exchange Commission (SEC) still has not yet approved a Bitcoin spot ETF. Since 2013, the SEC has rejected dozens of proposals.
Reasons for the rejections have varied over the years, with the SEC generally claiming that the Bitcoin market isn't big enough to sustain a Bitcoin spot ETF and that there are inadequate measures in place to prevent market manipulation and fraud.
Nonetheless, in August, Europe saw its first Bitcoin spot ETF approved in Amsterdam. The Bitcoin spot ETF, which trades under the ticker 'BCOIN' was introduced by Jacobi Asset Management and began trading on the Euronext Amsterdam stock exchange in August.
Some believe that this could help beat the path for other similar products elsewhere — potentially including those in the U.S.
Meanwhile, the SEC is currently evaluating eight different Bitcoin spot ETF applications as of writing, including one from the largest asset manager in the world, BlackRock. These vary slightly in their form and structure, differing in their custodian choice, fee structure, creation and redemption process, insurance offering and more.
Nonetheless, the SEC does not appear to be in any rush to approve a Bitcoin spot ETF.
With the next Bitcoin ETF decision date scheduled for Oct. 17, 2023, will we finally see the approval of a spot Bitcoin ETF in the US, or another extension of the deadline? Only time will tell.
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