Bitcoin is the first cryptocurrency to exist. It was Bitcoin that drew widespread attention and spawned the cryptocurrency industry. Even after more than a decade of its inception, with thousands of competitors in the market, Bitcoin is still ranked as the best-performing cryptocurrency. A single bitcoin is valued at 89,386.03 USD right now with a market capitalization of 1.7 trillion USD.
On 10 January 2024, the Securities and Exchange Commission (SEC) approved 11 spot bitcoin ETFs (exchange-traded funds) for investors to invest in without needing to hold and have ownership. The Bitcoin ETF has also become the most popular ETF of all time, with billions of dollars flowing through it.
What is a spot bitcoin ETF?
Spot bitcoin ETF (Exchange Traded Fund) is a financial tool that monitors the price of bitcoin by holding the actual bitcoin in a reserve and providing backing for each share of the ETF with the real bitcoin. The traders with spot bitcoin will be provided with the exposure that the trader will be able to access without the need for ownership.
The trader will be provided with the actual price movement of bitcoin, and the trader doesn’t need to worry about the storage or management of the bitcoin by themselves. The working of the bitcoin ETF is similar to other ETFs, but spot bitcoin ETFs focus on the BTC, and there are 11 spot bitcoins available right now.
Just 10 months after its approval, on the 17th of October 2024, the bitcoin ETFs surpassed 30 billion dollars in total net flow. To give you an idea of the challenge, it took gold ETFs almost 5 years to achieve this goal of 30 billion dollars in net flow. This might be mostly due to the convenience that the Bitcoin ETF can provide.
To own a Bitcoin, you must exchange accounts, have a digital wallet, private keys, network transfers, and many more processes to go through along with active monitoring, but the Bitcoin ETF makes it all easier.
The working of spot Bitcoin ETF
The spot bitcoin ETFs are exchange-traded products (ETPs) that custodial firms oversee and hold the bitcoin in a secure digital wallet. The value of the bitcoin ETF would be the same as the market rate of bitcoin.
The ETF initiates the Bitcoin acquisition through secondary crypto market purchases or authorized trading platforms. These bitcoins collected would then be stored in a digital vault, consisting of layers of securities along with cold or offline storage, which will decrease the risk of being hacked. After securing the bitcoins they just purchased, ETFs release the share corresponding to the number of bitcoins that they have.
These shares can be bought by traders on traditional stock or exchanges with the market rate. These ETF bitcoins mirror the bitcoin price by rebalancing to match the CME CF bitcoin reference rate. Buying a Bitcoin ETF or a spot Ethereum ETF is similar to buying shares in any other ETF.
The market makers maintain the market liquidity and efficiency by buying and selling ETF shares. In a spot bitcoin ETF, the market makers are continuously active, ensuring stability and increasing liquidity, which will help the traders in the process of selling and buying more easily.
What keeps a spot bitcoin ETF price on track/
Sometimes the price of a spot EFT can deviate from the actual value of the bitcoin. To rebalance the fund to its asset’s true market value, APs, or authorized participants, who are mostly large financial organizations that benefit from the market inefficiencies presented when the price of the ETF is higher or lower, can issue or redeem large blocks of shares.
The SEC approved 11 spot bitcoin ETFs
| Spot Bitcoin ETF | Ticker | Expense Ratio | Fee waiver |
| ARK 21Shares Bitcoin ETF | ARKB | 0.21% | No fee waiver |
| Bitwise Bitcoin ETF | BITB | 0.20% | 0.2% |
| Fidelity Wise Origin Bitcoin Trust | FBTC | 0.25% | 025% |
| Franklin Bitcoin ETF | EZBC | 0.19% | 0.19% |
| Grayscale Bitcoin Trust | GBTC | 1.50% | No fee waiver |
| Hashdex Bitcoin ETF | DEFI | 0.90% | No fee waiver |
| Invesco Galaxy Bitcoin ETF | BTCO | 0.25% | 0.25% |
| iShares Bitcoin Trust | IBIT | 0.25% | 0.25% |
| Valkyrie Bitcoin Fund | BRRR | 0.25% | 0.25% |
| VanEck Bitcoin Trust | HODL | 0.20% | Yes. Waiver on first $1.5 billion in AUM through March 31, 2025, then 0.2% |
| WisdomTree Bitcoin Fund | BTCW | 0.25% | Yes. Waiver for first $1 billion in AUM, then 0.25% |
Advantages of spot Bitcoin ETFs
The approval of spot bitcoin ETFs has made bitcoin into a legitimate asset class, revolutionizing the investment industry. Investors from different backgrounds can now seamlessly integrate Bitcoin without having ownership and include it in their retirement plans.
The ETF’s constant buying and selling of large blocks of bitcoin due to the demand will increase the liquidity. This can help to stabilize the prizes for a long period of time.
Even though it is said that the spot bitcoin ETF doesn’t affect the bitcoin’s market value, the spot bitcoin can be a factor that could drive the demand and purchasing number of the bitcoin higher, which eventually leads to an increase in the price of bitcoin over time.
A spot ETF can help the trader get easy access to the crypto industry with a lower trading fee than that of some crypto exchanges.
Disadvantages of spot bitcoin ETFs
After the SEC regulates the spot bitcoin ETF, it is now under high regulation and security, which would be tied to the price of bitcoin. Any regulatory measure taken against Bitcoin will also influence the market value of both the spot Bitcoin ETFs and Bitcoin.
You can’t take custody of your bitcoin while you invest in spot bitcoin ETFs; you will be exposed to the price of the actual bitcoin, but you can’t take custody of it.
You should pay a sum of annual fees to the third party who is actively maintaining your bitcoin; owning a bitcoin might look better in the event you intend to invest in a spot bitcoin ETF for a long time.
Substitutes for spot bitcoin ETFs
Acquire bitcoin directly.
You can purchase your own Bitcoin from different platforms, like crypto exchanges and brokerage services, directly. You need to open a crypto exchange account to own a Bitcoin and add a digital wallet. In this way, you will actually own a Bitcoin rather than getting exposure to it without getting custody. If you are planning to keep Bitcoin for a long period of time, not just the short term, this might be a good option.
bitcoin futures ETF
The bitcoin futures ETF is popular now. The future ETF consists of futures contracts based on the future prices of bitcoins, and it doesn’t involve any actual holding of bitcoins.
Bitcoin mining stocks
There are several companies owning bitcoin mining. There are stocks of these companies available for you to invest in. By investing in these mining bitcoins, you will get a part of the profit.
Conclusion
The bringing of spot bitcoin ETFs is a major milestone in the crypto industry’s growth, which provides investors an opportunity to be exposed to bitcoin’s price without having the responsibility of holding it. By providing better liquidity and accurate price discovery, these factors draw institutional investors into the crypto industry.
These spot Bitcoin ETFs can also contribute a lot to Bitcoin’s stability and widespread acceptance. Nevertheless, the potential consequences of heightened demand and speculative activity warrant careful consideration, as they may lead to overvaluing of the currency.