By now you’ve likely heard that the SEC recently approved multiple spot bitcoin ETFs. You may be thinking, “Yes, but what are those, and what does it mean for me?” Let’s break it down.

What’s an ETF?

An ETF is a pooled investment that trades on stock exchanges like a stock or bond. ETFs track a specific index, sector, or asset class (like gold). Unlike traditional mutual funds, ETFs can be bought and sold throughout the trading day.

What Does “Spot” Mean?

“Spot” refers to the actual immediate purchase and ownership of an underlying asset (in this case bitcoin). This means the value of a spot bitcoin ETF is directly correlated to the current (i.e. “spot”) price of bitcoin. This differs from previously available “bitcoin futures ETFs,” which trade off of the perceived future price of bitcoin based on commodities futures contracts.

Ok, So What is a Spot Bitcoin ETF?

When an investor buys a share of a spot bitcoin ETF, they are essentially buying a portion of the bitcoin held by the fund. By doing so, investors do not own bitcoin themselves, they instead own a share of the ETF. A spot bitcoin ETF allows investors to obtain direct exposure to bitcoin without actually holding it. Unlike futures-based bitcoin ETFs where bitcoin futures contracts are the underlying asset, bitcoins are the underlying asset of a spot bitcoin ETF.

Spot ETFs vs. Futures-Based ETFs

Spot Bitcoin ETF

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

Futures-Based Bitcoin ETF

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

The 11 spot bitcoin ETFs approved by the SEC are:

1. BlackRock’s iShares Bitcoin Trust
2. Grayscale Bitcoin Trust
3. ARK 21Shares Bitcoin ETF
4. Bitwise Bitcoin ETP Trust
5. WisdomTree Bitcoin Fund
6. Fidelity Wise Origin Bitcoin Trust
7. VanEck Bitcoin Trust
8. Invesco Galaxy Bitcoin ETF
9. Valkyrie Bitcoin Fund
10. Hashdex Bitcoin ETF
11. Franklin Bitcoin ETF

Source: CBS News

Trading of the approved ETFs began on Thursday, January 11th, and according to Yahoo Finance, total inflows reached $1.4 billion in just the first two days of trading.

What’s the Difference Between Buying a Spot Bitcoin ETF and Buying Bitcoin?

1. Investors who put money into bitcoin ETFs do not own any bitcoin outright.
2. Financial firms charge fees for trading and managing a bitcoin ETF. Conversely, those who buy bitcoin directly pay a transaction fee, but there aren’t any costs for managing the investment.
3. Investors can hold and track their bitcoin ETF in the same brokerage account as their other investments in stocks and/or ETFs.

Potential Pros & Cons of Investing in a Spot Bitcoin ETF

Pros

• Ease of Access: spot bitcoin ETFs allow investors to buy and sell bitcoin through a traditional brokerage account.
• Direct Exposure: spot bitcoin ETFs make it easier for investors to get direct exposure to bitcoin without having to set up a digital asset exchange account.
• Liquidity: spot bitcoin ETFs may increase the liquidity of the bitcoin market. Since it may be easier for investors to buy and sell bitcoin, it could lead to more stable prices.

Cons

• Volatility: bitcoin (like all digital assets) is a volatile asset, and the price of a spot bitcoin ETF has the potential to fluctuate wildly.
• Regulatory Risk: the regulatory landscape for digital assets is constantly changing, and there is always the risk that the SEC could change its rules governing digital assets in the future.
• Higher Fees: spot bitcoin ETFs may have higher fees than other types of ETFs, such as index-based stock ETFs. Because they are more complex to manage, these ETFs generally have higher fees compared to directly holding the digital asset itself.

What are the Implications Moving Forward?

The approval of spot bitcoin ETFs is thought to be a watershed moment by many in the space, as it has the potential to pump billions of dollars into digital currency. According to CNBC, analysts at Standard Chartered anticipate fund inflows in the range of $50 billion to $100 billion in 2024.

The ETF approvals also made it easier and potentially less intimidating to gain exposure to bitcoin, and pushed bitcoin further into the mainstream as an investment class.

Finally, there is belief that SEC approval of spot bitcoin ETFs may be a sign that the regulator is becoming more comfortable with the digital asset market. Increased investment in bitcoin – paired with the introduction of new products from reputable financial players – has the potential to accelerate the passage of regulations aimed at eliminating fraud and normalizing investment in digital assets.

However, others continue to take a diametrically opposite viewpoint with respect to the SEC’s comfort level with digital assets, even after the approval of spot bitcoin ETFs.

Make Informed Decisions for Your Financial Future

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Investment advisory services offered through Crossover Capital Brands, LLC (dba Crossover Capital), a Registered Investment Advisor with the U.S. Securities and Exchange Commission.

This material is intended for informational purposes only. It should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities. The information contained may have been compiled from third party sources, and is believed to be reliable.

Alternative investments – such as hedge funds and private equity/venture capital funds – are speculative and involve a high degree of risk. Likewise, the emergence of digital assets comes with its own speculative characteristics and involves a high degree of risk. Various digital assets have unique features, and the regulatory risk environment continues to change as governance requirements, rules, and lawsuits emerge. There may be material differences in the type of marketplaces available for digital assets, and there could be significant restrictions or limitations on withdrawing from or transferring these types of investments. Digital assets may incur higher fees when compared to traditional assets, and these expenses may offset returns.

Crossover Capital may not be able to independently verify digital asset valuations provided by institutions that hold or offer digital asset services. As a result, Crossover Capital will generally rely on information reported to it by third parties. As such, the information contained herein is for informational purposes. Clients should recognize that they may bear digital asset-based fees and expenses at the manager-level, as well as indirect fees, expenses, and performance-based compensation for digital assets. Spot bitcoin exchange-traded products were recently approved for listing and trading by the SEC. However, such approvals do not indicate SEC approval to use or invest in bitcoin. Clients should remain cautious and aware of the various risks associated with digital assets that have a value tied to bitcoin or other crypto related products.