Spot Bitcoin ETFs: What Are They, And How Do They Work?

Waivers are temporary; investors should focus on the long term and stick with one of the lowest-cost ETFs after the waiver periods end. My colleague, Madeline Hume, how to buy sushi crypto took a look at four valuation methodologies for pricing bitcoin. Each is flawed in its own way, and there doesn’t seem to be much appetite for improving them.

1. The author or authors do not own shares in any securities mentioned in this article.
2. Grantor trusts like Grayscale Bitcoin Trust GBTC benefited greatly from a lack of better options.
3. That first-mover advantage netted Grayscale billions in fees, in part thanks to the alarmingly high 2% fee.
4. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance.
5. However, Eberle also cautioned that bullish sentiment could be overblown, because the ETF approvals do not necessarily guarantee billions of dollars of inflows on the first day of trading.
6. Since the Bitcoin spot ETF follows the BItcoin price, there is a risk of extreme price fluctuations.

Securities and Exchange Commission finally approved a spot bitcoin exchange-traded fund. In fact, the SEC approved 11 spot bitcoin ETFs, giving investors options right off the bat. Spot bitcoin ETFs represent a significant evolution in cryptocurrency, offering a regulated and simplified way to gain exposure to bitcoin’s prices. This exposure is more intuitive for investors, making spot bitcoin ETFs more straightforward for those investing in bitcoin. Spot bitcoin ETFs can thus be more transparent since each share of the ETF corresponds to a specific number of bitcoins held.

Likewise, Bitcoin spot ETFs offer a convenient way to indirectly invest in Bitcoin. Bitcoin spot ETF or Bitcoin spot exchange-traded fund is a financial investment instrument that combines the traditional ETF concept with the sophisticated Bitcoin cryptocurrency. Investors gain exposure to the Bitcoin market by investing in Bitcoin spot ETFs, without directly buying BTC tokens. Bitcoin, the first and the largest cryptocurrency by market cap has disrupted the traditional financial industry to a great extent.

In this way, a spot bitcoin ETF allows investors to gain exposure to the current price of bitcoin without having to hold the asset itself. All else equal, investors should want the asset manager with a Bat-Phone into market makers and other liquidity providers, be that for their own ETFs or when trading in crypto markets. Investors should keep an eye on performance to see which issuer holds the edge. While several countries have embraced both types of ETFs, U.S. regulators were initially hesitant due to issues of market manipulation and custodial risk. The U.S. Securities and Exchange Commission approved the first bitcoin futures ETFs in 2021, and the first bitcoin spot ETFs in January 2024. Also, the regulated ETF provides extra protection for your Bitcoin investment.

Eight out of the 10 currently-trading spot Bitcoin ETFs use Coinbase (COIN) as their Bitcoin custodian. The only exceptions are the Fidelity Wise Origin Bitcoin Fund (FBTC), which uses Fidelity itself as a custodian, and the VanEck Bitcoin Trust (HODL), which uses Gemini. Our partners cannot pay us to guarantee favorable reviews of their products or services. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Your investment style can dictate which kind of fund is best for your portfolio. We attempt to answer that question by valuing bitcoin under the total addressable market approach.

How Spot Bitcoin ETFs Work

It is at the whims of supply and demand, making future prices hard to predict. There’s little precedent for the myriad dangers facing bitcoin investors, such as the manipulation and fraud that have been rampant in cryptocurrencies. A bitcoin ETF doesn’t directly inherit that past, but the price of bitcoin is connected to other potentially affected entities.

Futures are complex derivatives instruments that track potential future prices of the underlying asset. With the approval of 11 spot bitcoin ETFs in January 2024, traditional investors have an even easier way to invest in bitcoin. Spot bitcoin ETFs are particularly exposed to counterparty risk regarding cryptocurrency exchange Coinbase COIN, which spot bitcoin ETF issuers rely on heavily. However, the ripple effects of increased demand and speculative trading could also lead to worries about an overvaluation of the currency. In conclusion, a spot bitcoin ETF could bridge conventional investment avenues, allowing investors to add bitcoin to their portfolios and pensions. For an asset experiencing growing institutional interest, such an investment vehicle seems inevitable, though not without its challenges and potential downsides.

It’s important to note that just because spot bitcoin ETFs have been approved, that does not mean the SEC is certain to approve additional crypto ETFs. Spot bitcoin ETFs purchase a select amount of bitcoins that are held how to buy drip in a secure digital wallet by a custodian. Most of these vaults are—as crypto insiders call—air gapped in “cold storage,” which means the bitcoins’ keys are stored offline and cannot be accessed through the internet.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.

Introducing a spot bitcoin ETF could reshape the bitcoin and broader financial markets. SPDR Gold Shares, launched in 2004, rapidly accumulated over $1 billion in assets. While accounting for only a fraction of the global gold supply, Gold ETFs drastically impacted gold trading dynamics, offering enhanced market volume and liquidity. Drawing parallels, a spot bitcoin ETF could introduce a new era of bitcoin adoption and increase its market liquidity. There are two types of Bitcoin ETFs – Bitcoin Spot ETFs and Bitcoin Futures ETFs. While Bitcoin spot ETFs provide direct exposure to the Bitcoin price and market trends, Bitcoin futures ETFs use Bitcoin futures contracts to gain exposure to the Bitcoin market prices.

Investors seeking exposure to Bitcoin (BTC 3.34%) without directly holding the cryptocurrency have a new avenue. On Jan. 12, 2024, the Securities and Exchange Commission (SEC) approved 11 spot Bitcoin ETFs, adding a new asset class to the cryptocurrency market. Gold had a similar trajectory when spot gold ETFs were introduced.

Should You Invest in Spot Bitcoin ETFs?

Below are the advantages that investors are thought to have from spot bitcoin ETFs. Cryptocurrencies focus on eliminating single points of failures by using decentralized blockchain technology. By acquiring BTC funds and storing them in a vault may bring some security risks with it. ETFs bring back the same old risk of a single point of failure, attracting cybercriminals. There were already crypto-related ETFs and trusts out there, but there has never been a spot Bitcoin ETF on the market before the Jan. 2024 approval. Fee waived for first six months of trading or first $5 billion in fund assets, whichever comes first.

Even traditional investors can gain exposure to the Bitcoin market and leverage its price movements through Bitcoin spot ETFs. “We will see institutions wanting to invest in smaller, more liquid assets outside of BTC and ETH,” Lawrence said. Peter Eberle, the chief investment officer of California-based crypto investment firm Castle Funds, said in an email interview that the approval would have a positive impact on the price of bitcoin. The flood of SEC filings — which continued until hours before the SEC’s approval announcement, and may continue still — reflected an ongoing price war between issuers. Many Bitcoin ETFs — both spot Bitcoin ETFs and Bitcoin strategy ETFs — are slashing their fees and offering limited-time promotional fee waivers.

Investors should consider the ETF’s fees, which can affect returns, the trustworthiness of each fund issuer, and the idea of tying your investable dollars to cryptocurrency prices in the first place. These ETFs simplify the process of investing in Bitcoin, but the underlying asset still carries the volatility and risk inherent to cryptocurrency markets. Potential investors must work out how a spot Bitcoin ETF fits within their overall investment strategy and risk tolerance long before taking the plunge with a real-money investment. ETFs, or exchange-traded funds, are a type of security that tracks the underlying performance of a collection of assets or commodities.

Understanding spot Bitcoin ETFs

Issuers also made use of fee waivers to help attract assets out of the gates. Six bitcoin ETFs will launch with a 0.00% fee after waivers. bitcoin and crypto mining hardware Each waiver has its own limitations—most last for six months and only apply to the first $1 billion to $5 billion in assets.

But this is a rare occurrence where an issuer with two ETFs to its name (Valkyrie) is competing directly with the world’s largest asset manager (BlackRock). There could be an advantage for issuers with deeper resources and capital markets experience and expertise. Perhaps a deeper connection to the crypto community will benefit an issuer like Bitwise or VanEck. Bitwise Bitcoin ETF is tagged with the lowest ongoing fee of 0.20%. But fees on ETFs from ARK, Fidelity, VanEck, and iShares all fall within 5 basis points of Bitwise’s ETF.