The New Frontier of Spot Bitcoin ETFs

Get ready for spot bitcoin ETFs with our complete primer.

kent
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Research Lead
Reviewed by: etf.com Staff
,
Edited by: Ron Day

If the SEC approves a spot bitcoin ETF, it would be a major milestone for the cryptocurrency industry, and it would pave the way for other spot bitcoin ETFs to be approved. From an investor perspective, spotcoin ETFs would offer direct exposure to the price of bitcoin, but they would also come with the associated risks. 

In this article, we explain how spot bitcoin ETFs work, how they compare to the existing bitcoin futures ETFs, as well as the pros and cons of investing in spotcoin ETFs, should they be approved by the SEC. 

What Is a Spot Bitcoin ETF? 

A spot bitcoin ETF is an exchange-traded fund that tracks the price of bitcoin. The term "spot" refers to the actual immediate purchase and ownership of the underlying asset, which, in this case, is bitcoin. This means that the value of a spot bitcoin ETF will be directly correlated to the price of bitcoin.  

Like a physically backed gold ETF, when an investor buys shares of a spot bitcoin ETF, they are essentially buying a portion of the bitcoin held by the fund. This means that investors do not own bitcoin themselves, but instead own a share of the ETF that represents a certain amount of bitcoin.  

Spot Bitcoin ETFs vs. Bitcoin Futures ETFs 

Investors looking for a way to gain direct exposure to bitcoin without the hassle of setting up a cryptocurrency exchange account may prefer to invest in a spot bitcoin ETF after SEC approval. However, for investors looking for a low-cost way to trade bitcoin or are concerned about regulatory risk, a bitcoin futures ETF may be a better choice. 

Here's a brief comparison of spot bitcoin ETFs versus bitcoin futures ETFs: 

Spot Bitcoin ETF 

  • Typically holds bitcoin in a secure digital vault. 
  • Investors own ETF shares representing ownership of actual bitcoin held by the ETF. 
  • Offers a way to invest in bitcoin price movements without holding the cryptocurrency directly. 
  • Provides liquidity and easy access through stock exchanges. 

Bitcoin Futures-Based ETF 

  • Invests in bitcoin futures contracts rather than holding the asset. 
  • Price movements are tied to the performance of bitcoin futures, not the actual spot price. 
  • May have additional risks, such as contango and backwardation, which can impact returns. 

How Does a Spot Bitcoin ETF Work?

A spot bitcoin ETF tracks the price of bitcoin by holding bitcoin and by following the same creation/redemption process as other ETFs. This means that when an investor buys shares of a spot bitcoin ETF, they are essentially buying shares of a fund that owns bitcoin. This would allow investors to gain access to bitcoin without having to buy and store the cryptocurrency themselves.

It's possible that the SEC will require issuers of the new spot bitcoin ETFs to employ a cash redemption model, rather than the traditional in-kind redemption model for the funds, but to investors, the end result is the same.

Thus, spot bitcoin ETFs work in a similar way to other ETFs. When you buy shares of a spot bitcoin ETF, you are buying a piece of the fund's portfolio of bitcoin. The price of your shares will go up and down with the price of bitcoin, and you can sell your shares at any time without ever directly holding bitcoin.  

Pros & Cons of Spot Bitcoin ETFs 

Spot bitcoin ETFs offer multiple benefits to investors, including ease of access, direct exposure to the price of bitcoin and potential for price appreciation. However, there are potential drawbacks, such as price volatility, regulatory risk and higher fees. 

Here are the pros and cons of spot bitcoin ETFs: 

Pros 

  • Ease of access and direct exposure: Spot bitcoin ETFs will allow investors to buy and sell bitcoin through a traditional brokerage account, just like they would buy and sell any other stock or ETF. This will make it easier for investors to get direct exposure to bitcoin without having to set up a cryptocurrency exchange account. 
  • Liquidity: Spot bitcoin ETFs will increase the liquidity of the bitcoin market. This means that it will be easier for investors to buy and sell bitcoin, which could lead to more stable prices. 
  • Regulatory approval: SEC approval of a spot bitcoin ETF can be a sign that the regulator is becoming more comfortable with the cryptocurrency market. 
  • Potential for price appreciation: Bitcoin has been one of the best-performing assets in recent years, and there is potential for it to continue to appreciate in the future. 

Cons 

  • Volatility: Bitcoin is a volatile asset, and the price of a spot bitcoin ETF could fluctuate wildly. 
  • Regulatory risk: The regulatory landscape for cryptocurrencies is constantly changing, and there is a risk that the SEC could change its rules governing crypto and other digital currencies in the future. 
  • Higher fees: Spot bitcoin ETFs may have higher fees than other types of ETFs, such as index-based stock ETFs. This is because they are more complex to manage. Crypto ETFs also generally have higher fees compared to directly holding the cryptocurrency itself. 

What Is the ProShares Bitcoin Strategy ETF (BITO)? 

The ProShares Bitcoin Strategy ETF (BITO) is not a spot bitcoin ETF; it's an exchange-traded fund that tracks the price of bitcoin futures contracts. This means that the value of BITO trades like a stock on an exchange but will be directly correlated to the price of bitcoin futures contracts, which are traded on the Chicago Mercantile Exchange (CME). 

BITO was launched on October 19, 2021, and is the first bitcoin ETF to be approved by the Securities and Exchange Commission (SEC). It is currently the largest bitcoin ETF, with over $1.6 billion in assets under management. 

It's important to note that futures-based ETFs are subject to contango (future prices are higher than spot prices) and backwardation (future prices are lower than spot prices), which can impact returns and cause an ETF to inaccurately track the price of the underlying asset. Contango can lead to negative roll yield, and backwardation can result in positive roll yield. The market structure at the time of rolling can affect returns.

BITO is a popular choice for investors who want to get exposure to bitcoin without having to buy and store the cryptocurrency themselves. However, it is a risky investment and should only be considered by investors who understand the risks involved. 

Timeline of SEC Approval for a Spot Bitcoin ETF 

The timeline for spot bitcoin ETF approval begins when an ETF issuer applies to the SEC with a 19b-4 filing. The SEC will then review the application over a 45-day window. If the SEC approves the ETF, it will be listed and traded on a national securities exchange. Thus, the basic process for a spot bitcoin ETF approval consists of application, review and approval. The ETF can launch and be traded by investors after the SEC approves.

Here is the basic process of filing for a new spot bitcoin ETF: 

  1. Application: An ETF issuer, such as BlackRock or Fidelity, submits a 19b-4 filing to the SEC. This filing includes a detailed description of the ETF, including its investment objective, investment strategy and risk factors. The filing also includes a market analysis that demonstrates that there is sufficient interest in the ETF.  
  2. Review: The SEC will review the 19b-4 filing and decide whether to approve the ETF. The SEC has a 45-day window to review an application for a spot bitcoin ETF. If the SEC does not make a decision within 45 days, the applicant can request an extension. The SEC can grant extensions for up to 240 days. The SEC's decision will be based on a number of factors, including the merits of the ETF's investment objective and strategy, the level of demand for the ETF and the risks associated with bitcoin. The SEC has also indicated a preference for surveillance-sharing agreements, which are agreements between cryptocurrency exchanges and market surveillance providers or regulators. These agreements aim to enhance the integrity and transparency of the cryptocurrency market by sharing trading data and information.  
  3. Approval: If the SEC approves the ETF, it will be listed and traded on a national securities exchange. After the ETF issuer creates shares and offers them in the secondary market, investors can then buy and sell shares of the spot bitcoin ETF. 

Issuers Seeking SEC Approval of a Spot Bitcoin ETF

ETF issuers with applications for a spot bitcoin ETF pending review by the SEC include: 

  • BlackRock 
  • 21Shares & ARK Investment Management 
  • Fidelity 
  • VanEck 
  • Valkyrie Investments 
  • Invesco 
  • WisdomTree 
  • Bitwise 
  • Global X
  • Hashdex
  • Franklin
  • Pando
  • Grayscale (conversion)

How to Invest in Spot Bitcoin ETFs 

After SEC approval, investors will be able to buy and sell shares of a spot bitcoin ETF in the same way as they would any other ETF. To invest in ETFs, you will need an investment account. Like investing in stocks or mutual funds, your investment account may be an individual brokerage account, a joint brokerage account or any variety of individual retirement account (IRA).

Once you have the investment account open, you will need to fund it with cash, and you’ll be ready to invest in ETFs.  

The basic steps to invest in ETFs are:  

  1. Open an investment account.  
  2. Fund the investment account with cash.  
  3. Select the spot bitcoin ETF(s) to purchase.  
  4. Execute the trade(s) to buy shares. 

Bottom Line on Spot Bitcoin ETFs 

Spot bitcoin ETFs offer the potential to provide investors with easier access to bitcoin without directly holding the cryptocurrency themselves. However, spotcoin ETFs also come with some risks, such as price volatility and regulatory risk. Investors should carefully consider the benefits and risks, as well as their investment goals and risk tolerance, before investing in a spot bitcoin ETF. 

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 

 

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 

 

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.