What is a spot bitcoin ETF?

Theory
10.01.2024
7 28 2

ETF stands for exchange traded fund. It is an investment company whose shares can be bought on the traditional stock market. Usually, the fund discusses the instruments it invests in in advance.

These can be:

  1. Shares of certain companies (for example, from an American index).
  2. Bonds.
  3. Oil, gold, etc.

A spot bitcoin ETF invests exclusively in bitcoin. This is what distinguishes it from bitcoin futures ETFs, whose funds invest in derivatives rather than cryptocurrency.

And the term “spot” means that transactions are taking place here and now, and will not happen in the future.

A spot bitcoin ETF is a fund that invests in the first cryptocurrency, and its shares are traded on an exchange.

What are the advantages of BTC-ETFs?

There are at least four reasons why bitcoin spot ETFs have caused such a stir.

The influx of institutional capital

According to Standard Chartered, by the end of 2024, exchange-traded funds will hold between 437,000 BTC and 1.32 million BTC. This equates to an inflow of $50-100 billion into the market.

The company’s forecast assumes that bitcoin will grow about 4.3 times from its current level of $47,000. Analysts noted that gold-related products traded on the exchange showed similar dynamics, but only 7-8 years after the launch of the respective ETFs.

Legalization of crypto

Bitcoin still has a semi-legal right to exist. The legal framework for cryptocurrencies is not well established, hence the many stereotypes such as “crypto is not protected by anything”. Some countries, at their own discretion, introduce the use of cryptocurrencies into their legislation, while others simply ban digital assets. But for many users, legality and transparency are really important. And the government is trying to take control of the crypto industry in every way possible.

However, if the US Securities and Exchange Commission (SEC) approves a spot ETF on bitcoin, it will mean the approval of the entire asset class.

Accessibility

Another important aspect is the ease of access to BTC investments. For example, many investors simply do not trust exchanges after the FTX scandals. They are not able to understand public and private keys. And decentralized exchanges (DEX) seem even more complicated to average investors. An exchange-traded fund is another matter. Everything is simple: units/shares can be bought through any brokerage account.

Diversify your investments

Competent investors prefer not to keep all their eggs in one basket. Bitcoin can be a very interesting hedge against inflation. At least against inflation.

Investors also want to be confident in the products and platforms they use. When investing in BTC-ETFs, they know in advance with whom to resolve any disagreements.

Disadvantages of spot BTC ETFs

  • The main disadvantage is the difficulty for ETFs to follow the BTC price. Although bitcoin is not as volatile as 5-6 years ago, its price is still very changeable. Therefore, it is simply unrealistic to rebalance on time. Although high volatility is not a disadvantage for everyone, for those who want to get everything here and now, a 5-10% drawdown can be fatal.
  • Another disadvantage of bitcoin ETFs is the commission users will have to pay.
  • The lack of dividend payments is also a disadvantage. Bitcoin itself does not generate profit. It is just an asset whose price changes based on people’s expectations.

How will the BTC price change?

There is no direct correlation between the approval of a spot BTC-ETF and the price of the first crypto. It is safe to say that trading activity will increase. After all, new mechanisms for investing in crypto will appear. And all the large capital behind spot bitcoin ETFs will be invested in BTC, which may push its price up.

Conclusion

A spot bitcoin ETF is a fund that invests in the world’s first cryptocurrency directly, and its shares are traded on a stock exchange. The emergence of such a product will provide easy access to digital assets for a wide range of investors and increase the price of bitcoin itself. This is what all the excitement is about.

Download the App

Share

Related posts