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Bitcoin Spot ETF: Good or Bad for Cryptocurrency?

Now that Bitcoin ETF is finally out, will the launch of Bitcoin ETF become a force for good or bad? Let's find out more in this article!

Creditcoin Team

Oct 20, 2023 • 8 min read

The SEC's approval of the Bitcoin Spot ETF on January 11th, 2024, marks a pivotal moment in cryptocurrency history. This raises an important question: Is the Bitcoin Spot ETF beneficial or detrimental to the cryptocurrency sector as a whole?

As we've seen in the past, any news regarding the approval of a Bitcoin ETF tends to propel the cryptocurrency market upwards. A notable instance of this occurred on October 16th, when Cointelegraph's official account mistakenly announced the approval of the BlackRock ETF, causing a market surge even though the approval hadn't happened.

Interestingly, the SEC itself made a similar error on January 10th, 2024, just a day before the actual approval.

Now that the ETF is confirmed and listed on the open market, it might seem like the era of Bitcoin ETF memes and speculation has come to an end. But will this be the case, or will the cryptocurrency community find new aspects to create memes about?

Bitcoin Price Action During the Speculation Rally

With the speculation rally around the Bitcoin ETF now concluded, we're left to ponder whether this ETF will ultimately be beneficial or detrimental. Traders in Futures or Perpetual Contracts, however, have faced immediate challenges. The market experienced extreme volatility, leading to liquidations totaling up to $104 million in both long and short positions.

This volatility was further fueled by a false tweet from the SEC, which alone triggered more than $90 million in liquidations. This incident added to the pain of the speculative rally, though it might be considered the last of such extreme fluctuations.

Interestingly, the incident with the false tweet demonstrated the power of a Bitcoin ETF approval to drive the market upwards. This could potentially be a positive development for the average cryptocurrency holder, highlighting the significant influence of regulatory news on market dynamics.

What is a Bitcoin Spot ETF?

A Bitcoin Spot ETF is an exchange-traded fund that tracks the price of Bitcoin by holding actual bitcoins in its portfolio. It allows investors to gain exposure to Bitcoin without the need to buy and store the cryptocurrency themselves.

You can imagine Bitcoin Spot ETF as the inverse of real-world asset investment as money from the real world is channeled into cryptocurrency.

Rather than investing in Bitcoin futures contracts as other Bitcoin ETFs do, a spot Bitcoin ETF holds actual Bitcoin, providing a direct link to the underlying asset. As the price of Bitcoin moves, the value of the ETF's portfolio also fluctuates.

The US Securities and Exchange Commission (SEC) has filed lawsuits against several cryptocurrency companies allegedly engaged in fraudulent activities, including rug pulls.

One of the main benefits of a Bitcoin Spot ETF is that it allows investors to participate in the cryptocurrency market without the technical complexities of owning and managing digital wallets. Additionally, the ETF provides a regulated and transparent investment vehicle suitable for retail and institutional investors.

Because a Bitcoin Spot ETF holds actual bitcoins, it closely tracks the cryptocurrency's price movements. This offers investors exposure to the potential price appreciation of Bitcoin with reduced risks associated with market manipulation or the use of futures contracts.

How Does a Bitcoin Spot ETF Work?

A Bitcoin Spot ETF offers investors a convenient and straightforward way to gain exposure to the price movements of Bitcoin without the complexities of owning and managing the cryptocurrency directly. Unlike other Bitcoin ETFs that invest in Bitcoin futures contracts, a spot Bitcoin ETF holds bitcoins as part of its portfolio.

By holding actual Bitcoin, the ETF closely tracks the cryptocurrency's price. As the price of Bitcoin rises or falls, the value of the ETF's portfolio also fluctuates. This direct link to the underlying asset provides investors with a transparent and regulated investment vehicle.

Investors can buy shares of a Bitcoin Spot ETF through stock exchanges, just as they would with any other exchange-traded fund. The ETF is purchased akin to stocks, not crypto, in the stock market rather than its centralized exchanges—most likely trading in the NYSE market.

The US Securities and Exchange Commission (SEC) has filed lawsuits against several cryptocurrency companies allegedly engaged in fraudulent activities, including rug pulls.

One of the main advantages of investing in a spot Bitcoin ETF is that it eliminates the need for investors to own and store the cryptocurrency themselves. This helps reduce the technical complexities and security risks associated with digital wallets.

Instead, investors can buy shares of the ETF and gain exposure to Bitcoin's price movements through a regulated and transparent investment vehicle.

In summary, a Bitcoin Spot ETF works by holding actual bitcoins, enabling investors to track the price of Bitcoin. This investment vehicle provides easy access to the cryptocurrency through stock exchanges, eliminating the need for investors to own and store Bitcoin themselves.

Which is Better: Bitcoin Spot vs Bitcoin Spot ETF?

Investing in Bitcoin directly involves buying and owning the actual cryptocurrency. If you want to save yourself from the potential collapse of the dollar, you would be better off opting into Bitcoin Spot rather than ETF.

On the other hand, investing in a Bitcoin Spot ETF provides exposure to Bitcoin without the investor directly owning the digital asset, here's why:

#1: Self-Sovereign

When investing in Bitcoin directly, you will have complete ownership and control over your digital assets. This means moving them in any wallet at your will without the approval or pending time of any external parties involved.

However, you are 100% responsible for every financial move, while ETFs have the backing of experts deciding on portfolio strategy.

#2: Self-Reliant on Security

Owning Bitcoin directly requires you to secure your digital wallet and guard against potential hacks or theft. ETFs are not exposed to such risks.

#3: Transaction Fees

Each time you update your personal portfolio, like increasing or reducing your Bitcoin holding size, adjust based on the market situation. You need to pay Bitcoin transaction fees for every single transaction.

If you plan to use a cold storage method, you might want to consider spending up to $100 for a decent hardware wallet if an app-based wallet is not your thing.

#4: Ease of Access

Anyone can receive Bitcoin anywhere around the world as long as they have a valid Bitcoin address. Many app-based wallets like Trust, Gluwa, Leather, Metamask, and more exist even if you are not using a hardware wallet.

Bitcoin Spot ETF

#1: Managed by Professional

Investing in a Bitcoin Spot ETF means the investor owns shares of the fund, which in turn holds the Bitcoin.

These professionals usually have many financial backgrounds and understand risk management far better than average Joes.

It may sound absurd, but if you decided to hold GBTC instead of BTC, you would probably receive more value for your invested USD compared to BTC. Remember, this is not financial advise.

#2: Lesser Hacking Risks

Investing in a Bitcoin Spot ETF eliminates the need for the investor to handle and secure their digital assets, as the fund is responsible for safeguarding them. However, there is still a risk of the fund being hacked or experiencing security breaches.

The US Securities and Exchange Commission (SEC) has filed lawsuits against several cryptocurrency companies allegedly engaged in fraudulent activities, including rug pulls.

#3 Management Fee

Even though you don't need to pay for restrategizing the ETF portfolios, investing in a Bitcoin Spot ETF still involves management fees charged by the fund, which can vary depending on the provider. iShares ETF charges around 0.25% management fees.

#4: KYC-Required

Although Bitcoin Spot ETFs can be bought and sold on traditional brokerage platforms and accessed through existing investment accounts, platforms usually require you to complete your KYC process.

If you are worried about your privacy, consider DeFi-based Bitcoin ETF solutions. However, such solutions are still not as good as CeFi's ETF management standards.

Types of Bitcoin Spot ETFs: Futures-Based ETFs vs. Spot ETFs

When it comes to investing in Bitcoin, there are two main types of ETFs to consider:

Futures-based ETFs
Spot ETFs

Futures-based ETFs

As the name suggests, futures-based ETFs derive its value from Bitcoin futures contracts. These contracts speculate on the future price of Bitcoin, allowing investors to gain exposure to the cryptocurrency without actually owning it.

The advantage of futures-based ETFs is that they are regulated by the U.S. Commodity Futures Trading Commission (CFTC), providing certain safeguards for investors.

However, there are potential drawbacks, including the risk of market manipulation and the fact that the price of the ETF may not always reflect the exact spot price of Bitcoin.

Spot ETFs

Spot ETFs hold actual Bitcoin as their underlying asset.

These ETFs give investors direct ownership and control over their digital assets, offering a more transparent and secure investment option.

Spot ETFs are subject to the regulatory framework of the Securities and Exchange Commission (SEC) and may offer a higher level of investor protection compared to futures-based ETFs.

Take note: Both types of ETFs provide exposure to Bitcoin, albeit through different structures and regulatory frameworks. It's important for investors to consider their risk tolerance, investment objectives, and understanding of the cryptocurrency market before choosing between futures-based ETFs and spot ETFs.

Risks & Benefits of Investing in a Bitcoin Spot ETF

The Benefits:

Provides a regulated, transparent investment vehicle with SEC oversight, establishing trust and credibility.
Enhances market liquidity by offering a convenient way for a range of investors to access the crypto market.
Offers a clear investment path by closely tracking Bitcoin's spot price through direct ownership.
Lower-risk entry point to Bitcoin exposure compared to holding the asset directly.
Simplifies operational costs by eliminating the expenses of purchasing and securing Bitcoin oneself.

The US Securities and Exchange Commission (SEC) has filed lawsuits against several cryptocurrency companies allegedly engaged in fraudulent activities, including rug pulls.

The Risks:

Regulatory uncertainty in the evolving cryptocurrency market could impact ETF viability.
Potential for price manipulation in the volatile crypto market, leading to losses.
Traditional asset managers may lack expertise in managing cryptocurrency assets.
Must consider operational costs like management fees that reduce investor returns.

Conclusion

In conclusion, investing in a Bitcoin Spot ETF offers benefits and risks that potential investors need to consider.

On the positive side, a Bitcoin Spot ETF gives you exposure to Bitcoin without the headache and the need to buy and store actual Bitcoin, making it more convenient for retail investors. It also offers a regulated platform, which can help mitigate some concerns related to security and custodianship.

This will open the floodgate to more people who want to participate in the Bitcoin economy. One may argue that Bitcoin Spot ETF is another form of inversed real-world assets tokenization.

Bitcoin Spot ETF also makes DEX on Bitcoin much more trustworthy to the mainstream.