What is a Spot Bitcoin ETF?

Introduction

Spot Bitcoin ETFs were the hot topic for much of 2023, before the Securities and Exchange Commission (SEC) finally sanctioned the investment vehicle product in January 2024. Following, a wave of Spot BItcoin ETFs were launched by some of the world's largest financial institutions, which in turn stoked demand for the most valuable cryptocurrency by market cap. Given this pivotal moment for Bitcoin, it’s worth knowingt what exactly is a Spot Bitcoin ETF, and what are the potential benefits and risks of investing in one.

In this blog post, we will take a comprehensive look at (spot) Bitcoin ETFs, what their approval meant for the both crypto market and Bitcoin’s price.

What is an ETF?

An exchange-traded fund (ETF) is a type of investment vehicle that tracks a basket of assets, such as stocks, bonds, or commodities. ETFs are traded on securities exchanges like stocks, meaning that investors can buy and sell them throughout the day.

The world's three largest ETFs track the S&P 500 and boast over $1 trillion of AUM between them.

ETFs are a popular investment vehicle because they offer a number of advantages, including:

• Diversification: ETFs allow investors to diversify their portfolios by investing in a basket of assets in a single trade.
• Low cost: ETFs typically have lower fees than mutual funds.
• Liquidity: ETFs are traded on stock exchanges, so they can be easily bought and sold.
• Transparency: ETFs track a specific index or basket of assets, so investors know exactly what they are investing in.

Recommended reading: Bitcoin’s Market Cycle

What is a Spot Bitcoin ETF?

A Spot Bitcoin ETF is an exchange-traded fund that tracks the price of Bitcoin. ETFs are a type of investment vehicle that allows investors to gain exposure to a particular asset class, selection of assets or even a single asset without having to directly purchase and store the underlying asset.

This means that investors would be able to invest in Bitcoin through a Bitcoin ETF without having to worry about the security of their Bitcoin holdings or the technical aspects of cryptocurrency trading.

Bitcoin ETF Custodians

Several institutions now offer Bitcoin ETFs, including established names like BlackRock’s iShares (IBIT) and Fidelity (FBTC), along with ARK Invest (ARKB) and Grayscale (GBTC). These join other players like Bitwise (BITB), VanEck (HODL), Valkyrie (BRRR), and Franklin Templeton (EZBC).

The introduction of these financial products implies there was pent-up demand for Bitcoin amongst pockets of the investment community looking for more traditional and familiar means through which to gain exposure to the asset.

What might be the benefits of investing in Bitcoin with an ETF product?

There are a number of potential benefits to investing in a Bitcoin ETF, including:

• Increased accessibility: Bitcoin ETFs may make it easier for investors, especially those who are not familiar with cryptocurrency, to invest in Bitcoin.

• Reduced volatility: Bitcoin is a volatile asset, but Bitcoin ETFs could help to reduce volatility by pooling investor funds and investing in a basket of Bitcoin futures contracts.

• Increased liquidity: Bitcoin ETFs could help to increase liquidity in the Bitcoin market, making it easier for investors to buy and sell Bitcoin.

• Institutional adoption: Bitcoin ETFs in both legal and reputational senses legitimises the asset. Thiscould help to attract further institutional investors to Bitcoin, which could lead to increased demand and higher prices.

Spot Bitcoin ETF Approval

On January 10th the SEC cleared 11 Spot Bitcoin ETFs to list. While alternative products in the shape of Bitcoin Futures ETFs and trusts existed, the Spot ETF was long awaited given the popularity of this investment vehicle across the financial world. Bitcon now riding in it has been hailed as a watershed moment for the cryptocurrency industry, opening the door to a wider range of investors, particularly those wary of the complexities of directly buying and storing Bitcoin on/through crypto exchanges.

The path to approval was long. Longer than most know. The first ETF application hit the SEC’s in tray back in 2013. Since then the regulator has rejected over 20 applications. The movement regained momentum when financial giant Blackrock filed an application in June 2023.

The SEC has cited concerns about market manipulation and the underlying infrastructure of cryptocurrency exchanges, but with the ETFs now live these concerns have been attended to. Furthermore, a series of successful launches in Canada and Europe, may have softened the SEC's position.

The price impact of Bitcoin ETFs approval

The day after the approvals Bitcoin was priced just under $47,000. Just over 2 months later, the original cryptocurrency hit a new all-time-high of $73,000. It’s fair to say demand pressures triggered this run-up with close to $12 billion of net inflows into Bitcoin ETFs leading up to May 13th 2024. As of this date, the total value of Bitcoin under management in ETFs stands at $51 billion and over a quarter of a trillion dollars in volume has traded through Spot Bitcoin ETFs.

A study by CryptoQuant had estimated that the approval of Bitcoin ETFs could add up to $1 trillion to the cryptocurrency market cap over time. This would represent a significant increase in demand for Bitcoin, and it could lead to further increases in price over time.

Before the ETF launch, some analysts believed that the price impact of Bitcoin ETFs had already been priced into the market. However, the uptick in price that followed suggested otherwise, so the true price impact of ETFs could still well evolve. Long term, the approval of Bitcoin ETFs is expected to be a positive event for Bitcoin investors.

Conclusion

Bitcoin ETFs have brought a wave of new investors to Bitcoin investment, revolutionising the way that investors invest in the asset. The success of Bitcoin ETFs could pave the way for similar vehicles for other established cryptocurrencies like Ethereum. This could further legitimise the entire crypto market, attracting a broader range of investors and potentially fueling growth across the space.

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