Spot bitcoin ETFs have been in the news recently. This is because, despite initial hesitation, the US Securities and Exchange Commission (SEC) has approved spot bitcoin ETFs. Since the announcement, there have been speculations on the possible impacts of the approval.
If you have been wondering what spot bitcoin ETFs are, and what the fuss is about, this article provides answers.
What are Spot Bitcoin ETFs?
Spot Bitcoin Exchange-Traded Funds (ETFs) are investment assets that allow regular investors to gain direct exposure to the price of Bitcoin. However, unlike regular crypto holders, spot Bitcoin ETFs allow their holders to gain exposure to Bitcoin prices without actually holding Bitcoin.
This is because registered spot bitcoin ETFs hold bitcoin in secure wallets and vaults which are managed by custodians. Spot bitcoin ETFs operate like regular ETFs. They are designed by fund providers who own the underlying asset (bitcoin) and subsequently sell shares in the fund to investors.
Essentially, investors in spot bitcoin ETFs do not own the underlying bitcoin held by the provider. Spot bitcoin ETFs are a great way to improve the accessibility of crypto investment.
How Do Spot Bitcoin ETFs Work?
Spot bitcoin ETFs primarily operate to mirror the market price of bitcoin. As earlier stated, these ETFs are created by providers who purchase bitcoin from crypto exchanges and subsequently store the crypto in a vault.
The vault is secured with multiple layers of security to reduce the risk of hack attacks. Of course, if the coins were gone, the ETFs would be practically useless, as there is no underlying asset.
After the bitcoin is secured, the ETF issues shares that correspond to bitcoin’s market price. These shares are subsequently traded on stock exchanges. Earlier this month, the US SEC approved 10 spot bitcoin ETFs which have now been listed on the NYSE.
Are Spot Bitcoin ETFs Different from Bitcoin Futures ETFs?
Spot Bitcoin ETFs are not the same as Bitcoin Futures ETFs. The major difference between both forms of ETFs lies in their structure. While spot bitcoin ETFs directly hold bitcoins, bitcoin futures ETFs are based on bitcoin futures contracts.
Essentially, bitcoin futures ETFs do not actually hold bitcoin. Instead, investors purchase a share of bitcoin futures contracts. These contracts are legal agreements to purchase Bitcoin at a pre-determined price and a specified date. Investors are basically placing a bet on the price of Bitcoin.
Should You Invest in Spot Bitcoin ETFs?
One advantage of spot bitcoin ETFs is that investors can gain bitcoin price exposure without dealing with the hassle of joining numerous crypto exchanges or securing their crypto wallets.
Also, there is regulatory certainty. This is because investors trade spot bitcoin ETFs in the stock market, which is heavily regulated. Essentially, your investment is relatively safer with ETFs, than with the direct crypto market.
However, it is important to note that spot bitcoin ETFs do not protect you from the volatility of bitcoin prices. Thus, your decision to invest should be made after you have properly weighed the pros and cons of spot bitcoin ETFs.
Conclusion
There is no doubt that spot bitcoin ETFs are a great way to invest in crypto without dealing with the difficulties of maintaining a crypto wallet. However, like every other investment asset, your decision to invest in crypto ETFs should be based on extensive research.
