Overview of Bitcoin ETFs
Generally, Exchange Traded Funds, popularly called ETFs, are a basket of investments allowing investors to invest in several securities simultaneously. Their primary benefits include being easily tradable, less costly than other funds, and instant diversification.
Like ETFs in its broad sense, Bitcoin ETFs represent an investment vehicle that allows investors to access the crypto market without owning or managing the crypto asset itself directly. Many financial experts have been pushing for the increased adoption of Bitcoin ETFs, stating that they are safer investment options than volatile crypto.
To understand Bitcoin ETFs better, they are categorized into bitcoin future ETFs and bitcoin spot ETFs. Although the two are types of bitcoin ETFs, they differ in their approach to the market, exposure, liquidity needs, and performance drivers.
Key differences between Bitcoin Future ETFs and Bitcoin Spot ETFs
The first difference is in the underlying asset. A futures ETF allows investors to hold bitcoin futures contracts, allowing them to speculate on the future prices of bitcoin without owning it physically. Spot ETFs, on the other hand, provide direct exposure to the crypto market. Essentially, it involves holding crypto on the spot.
Secondly, their difference lies in ownership and access. While spot ETFs allow investors direct ownership of BTC, which can also be redeemed, futures ETFs do not have actual crypto ownership. All they have is indirect exposure to Bitcoin through futures contracts. In addition to this is the price correlation for both bitcoin ETFs. The prices of future ETFs can differ due to factors like futures contract pricing, while for spot ETFs, the prices are close to the current bitcoin price.
Another key difference is in their liquidity needs. For spot ETFs, the liquidity depends on the Bitcoin market’s liquidity, and sometimes, they may not trade frequently to ensure the ETFs reflect Bitcoin’s spot price. Futures ETFs tend to trade more regularly as they may need to roll over contracts as they approach expiration, making their liquidity management process more complex.
Furthermore, while for spot ETFs, the risks are tied solely to bitcoin’s volatility, futures ETFs are influenced by both bitcoin’s volatility and futures market dynamics, such as expiration dates.
Lastly, an example of a popular future ETF is the ProShares Bitcoin Strategy ETF (BITO). Grayscale Bitcoin Trust (GBTC) is one of the foremost spot ETFs providing direct exposure for investors to Bitcoin’s spot price.
Bitcoin ETFs provide a suitable bridge for wary investors to explore the crypto market. However, the SEC has allowed bitcoin futures ETFs since 2021, and it was only recently that spot ETFs seemed to rise after Grayscale successfully challenged the SEC’s stance.
Therefore, though it seems like the two types of ETFs will begin to gain mainstream adoption, crypto investors need to understand the significant points of divergence between the bitcoin ETF types. In addition, before choosing between the two, ensure it aligns with your risk appetite and investment objectives. The crypto market remains volatile, and every investment has the potential for rewards and risks.