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Bitcoin Spot ETF: Good or Bad for Cryptocurrency?

Everyone is waiting for Bitcoin Spot ETF to be approved, but are they a force of good to the cryptocurrency ecosystem as a whole?

Joshua Yap

Oct 20, 2023 • 8 min read

Bitcoin Spot ETF has been hitting the news as BlackRock is trying to get its BlackRock’s iShares Bitcoin Trust approved.

Any news related to the approval of the BlackRock Bitcoin ETF will pump the cryptocurrency market upward, similar to what happened on October 16, when the official X account of Cointelegraph mistakenly tweeted that the BlockRock ETF is approved when, in reality, it isn't. (The tweet has been deleted since.)

Unfortunately, this is not true for Future or Perpetual Contract traders, as liquidation hit up to $104M in both long and short positions due to unpredictable insane volatility.

The false tweet proves that a Bitcoin ETF approval can sour the market upwards—potentially good for the average crypto holders.

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.

Bitcoin Spot

#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.

#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.