What Is a Spot Bitcoin ETF and Why Is It so Important?

Will Bitcoin ETFs reimagine the crypto market?

Man tripping seeing BTC ETF.
Created by Kornelija Poderskytė from DailyCoin

Traditional finance and mainstream media have vilified the crypto market for years. Championed as a huge step forward for the cryptocurrency industry, Bitcoin ETFs promise to reimagine blockchain’s reputation.

A spot Bitcoin ETF is something of a Trojan Horse. Fully compliant and regulated, these funds are expected to make Bitcoin (BTC) more accessible to big financial players than ever before.

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While Bitcoin ETFs don’t reflect Satoshi Nakamoto’s original vision of self-custody and decentralization, the prospect of BTC on Wall Street is widely considered one of the biggest milestones in the digital asset’s history.

What is a Spot Bitcoin ETF, and what are the implications of such a dramatic change in how BTC is managed?

What Is a Bitcoin ETF?

A Bitcoin ETF, or Exchange Traded Fund, is an investment that monitors and trades the performance of BTC and Bitcoin-related assets. ETFs are commonly traded on some of the world’s financial markets, like the New York Stock Exchange or the NASDAQ.

Bitcoin logo.
Source: Bitcoin

ETFs are seen as a hands-free method of investing in different types of assets. For example, the S&P 500 is an ETF indexing the top 500 companies in the United States. Instead of managing a portfolio of 500 different stocks, investors can simply deposit their funds into an ETF, gaining simplified exposure to a basket of assets.

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In the case of Bitcoin, there are two main kinds of Bitcoin ETFs: Spot Bitcoin ETFs and Futures Bitcoin ETFs.

Spot Bitcoin ETF

As the name suggests, a spot Bitcoin ETF tracks and trades the price of BTC. It aims to expose investors to the price fluctuations of the world’s largest digital currency without all the additional headaches that come with Bitcoin custody.

Within this context, spot Bitcoin means that native Bitcoin itself backs the fund. The institution providing the fund holds the underlying asset and tracks its price in real-time while also providing a means for their investors to trade the crypto asset as they would a regular stock.

Bitcoin Futures ETF

Bitcoin Futures ETFs, on the other hand, work slightly differently. Instead of holding native Bitcoin itself, they rely on Bitcoin futures contracts, wherein investors speculate on the future price of the crypto asset.

This allows traders to expand their risk tolerance by adding leverage to their positions, multiplying their profits and losses. Most importantly, Bitcoin futures contracts are not backed by underlying assets. 

Why Is a Bitcoin ETF Needed?

Despite Bitcoin having existed for over a decade, most people still regard cryptocurrency as a wildly volatile and unsafe asset class. Given BTC’s price history, it’s hard to blame them.

Beyond the violent price swings, many investors still find blockchain technology complicated and intimidating. Discouraged by the complexity of self-custody and the ever-present danger of cryptocurrency hacks, scams, and exploits, traditional markets have given Bitcoin a wide berth.

ETFs give investors a sense of security. The tragic tales of negligence and lost Bitcoins have discouraged potential investors for years. However, with Bitcoin ETFs, there’s a layer of protection, ensuring that your investment isn’t doomed to rest in a locked, inaccessible wallet.

Large financial institutions like BlackRock, Fidelity, or Valkyrie typically manage Bitcoin ETFs. These juggernauts are responsible for holding Bitcoin while providing a fund that reflects the price of BTC in real-time. 

Having trusted financial entities provide spot Bitcoin ETF mitigates these risks and responsibilities. Asset managers like BlackRock will take full responsibility for the assets themselves, meaning the average investor won’t need to fret over private key management, cybersecurity concerns, and crypto exchange insolvencies. 

What Does a Spot Bitcoin ETF Mean for the Crypto Market?

If the U.S. Securities and Exchange Commission (SEC) approves the creation of Spot Bitcoin ETFs, it would likely signal a dramatic shift in how the general public perceives Bitcoin. Here’s why:

  • Accessibility – A Spot Bitcoin ETF will make it easier than ever for traditional investors to gain exposure to BTC. Big players can finally invest in the crypto market without worrying about the complexities and dangers of self-custody.
  • Regulatory Clarity – Approving a Spot Bitcoin ETF will bring greater regulatory oversight to the crypto asset. This gives investors greater transparency and security, helping them comply with local laws while navigating the crypto space.
  • Improved Image – Let’s be honest, cryptocurrency has a bad reputation. A spot Bitcoin ETF will be approved by the SEC and endorsed by the most powerful asset managers on the planet, giving the industry a much-needed boost of credibility in the eyes of the general public.

Will a Bitcoin ETF Approval Mean that BTC Goes Up?

Crypto enthusiasts believe that a spot Bitcoin ETF approval heralds the beginning of a crypto bull run of unprecedented magnitude. The idea is supported by the notion that a Bitcoin ETF will facilitate the influx of trillions of dollars into the crypto space, with previously sidelined investors finally able to get their hands on a piece of the pie safely.

While this is a possibility, it’s important to remember that nothing in the crypto market is guaranteed. Just because traditional investors will be able to invest in Bitcoin through an ETF doesn’t mean they’re actually going to.

What’s more, much of the buying pressure from the rollout of Bitcoin ETFs has already happened. It’s not crazy to assume that top financial institutions like BlackRock and Valkyrie have already been accumulating large amounts of Bitcoin in preparation for launching their fund. 

Additionally, the approval of a Bitcoin ETF potentially opens the door to other spot crypto ETFs, like funds designed to trade altcoins like Ethereum (ETH) or Solana (SOL).

Which Financial Institutions Have Filed a Spot Bitcoin ETF?

While dozens of Futures Bitcoin ETFs are currently being traded in US markets, the SEC has yet to give clearance for financial institutions to hold spot BTC. Despite this, some of the biggest names on Wall Street have filed spot Bitcoin ETFs.

These firms include:

  • BlackRock
  • Fidelity
  • Valkyrie
  • VanEck
  • WisdomTree
  • Invesco/Galaxy
  • Wise Origin
  • BitWise

The SEC has previously denied filings lodged by Global X, Krypton, and First Trust. Despite these denials, the Bitcoin faithful remain optimistic that spot Bitcoin ETFs will be approved soon, ushering new waves of capital into the crypto markets.

Spot Bitcoin ETF: Pros and Cons

Bitcoin ETFs are one of the most hotly discussed topics in the crypto market. The positives are obvious, but are there any drawbacks worth knowing about?

Pros

  • Bringing Bitcoin to the World – Bitcoin ETFs will make it easier for traditional investors to gain exposure to BTC, bringing more capital into the crypto market.
  • Safer Bitcoin Investments – Spot Bitcoin ETFs provide regulatory clarity and security previously lacking in crypto.
  • Increased Credibility – The approval of Bitcoin ETFs and its endorsement by financial institutions improves Bitcoin’s public image.
  • Reduced Volatility – Bringing greater capital and liquidity into Bitcoin markets may help to stabilize crypto prices in the long term.

Cons

  • The End of the Wild Ride? – Crypto’s volatility is one of the reasons some investors are so attracted to the market. Reduced market volatility could result in diminishing returns in the long term.
  • Buying Wall Street’s Bags – The world’s most influential financial players have been preparing for Spot Bitcoin ETFs for a long time. Just because they provide Bitcoin ETF trading doesn’t mean they won’t be realizing their own profits along the way.

On the Flipside

  • Bitcoin Spot ETFs are traded without fanfare in several other nations, including Canada, Australia, and Germany.

Why This Matters

A Spot Bitcoin ETF approval is one of the biggest events in crypto history. It’s important to understand the gravity of the decision and its impact on the cryptocurrency industry.

FAQs

Where do I buy Bitcoin?

You can buy Bitcoin (BTC) through cryptocurrency exchanges like Binance and Coinbase.

Is Bitcoin ETF approved?

Spot Bitcoin ETFs are awaiting approval in the United States. The decision is expected to be made in Q1 2024.

Is Bitcoin ETF risky?

A Bitcoin ETF bears price action risk as investing in BTC itself. However, Bitcoin ETF investors can bypass the risks associated with self-custody.

Are there any crypto ETFs?

Yes, there are dozens of crypto ETFs that index baskets of cryptocurrency-related assets and stocks.

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
Finn Miller

Finn Miller is a New Zealand-based blockchain writer for DailyCoin who specializes in simplifying complex blockchain topics. He is experienced in crafting whitepapers, researching on-chain data, and advising emerging crypto projects, and uses his unconventional approach to learning and passion for knowledge to provide cornerstone educational content for readers of all levels. When not exploring the depths of DeFi, Finn can be found exploring his other passion, the great outdoors.