What is a Bitcoin ETF and How Does it Impact Crypto Payments?
Bitcoin ETFs are financial products that track the price of Bitcoin. Despite Bitcoin being around for over a decade, Bitcoin ETFs are a newer development, gaining approval from U.S. regulators in January 2024. Currently, the widespread adoption of crypto payment gateway and the approval of Bitcoin ETF are among the most important and discussed topics. Let’s explore what a Bitcoin ETF is and how it can influence crypto payments and investments.
Exploring the World of Bitcoin ETFs
What is a Spot Bitcoin ETF?
A spot Bitcoin ETF functions much like regular exchange-traded funds, following the real-time price of Bitcoin during trading hours. Unlike ETFs based on futures, which are pegged to Bitcoin futures contracts, spot ETFs actually own the cryptocurrency. This means investors in spot Bitcoin ETFs have direct ownership of a stake in Bitcoin, similar to how investors in spot gold ETFs own physical gold.
Spot ETF vs. Traditional Investments
Investors may prefer the safety of a professionally managed spot Bitcoin ETF over owning an actual BTC due to concerns about security and accessibility. Despite increasing interest in Bitcoin as an investment, some people have concerns about risks such as hacking or the challenges of handling digital wallets. Additionally, not everyone is comfortable with using cryptocurrency exchanges, and traditional retirement accounts like IRAs or 401(k) plans may not offer direct exposure or a way to gain exposure to Bitcoin.
The Evolution of Bitcoin Strategy ETFs
Bitcoin strategy ETFs track Bitcoin's price indirectly, using investment methods. Some invest in a Bitcoin futures contract, while others focus on Bitcoin-related stocks like those of mining companies. These ETFs have been available before spot Bitcoin ETFs, although their returns may not perfectly mirror Bitcoin's performance.
From Futures to Strategy: The Shift in Bitcoin ETFs
The SEC approved the ProShares Bitcoin Strategy ETF (BITO) in October 2021, making it the first Bitcoin-linked ETF on the New York Stock Exchange. Many in the crypto community had hoped for an ETF backed by actual Bitcoin, but the SEC rejected such proposals until 2024.
A court decision in August 2023 prompted the SEC to reconsider. This led to the approval of 11 Bitcoin spot ETFs on January 10, 2024. These ETFs hold Bitcoin instead of futures contracts like the ProShares ETF.
The Intricacies of Bitcoin ETFs
Understanding Bitcoin Futures ETFs
A Bitcoin Futures ETF is a type of investment that is traded on exchanges. It allows investors to track the price of Bitcoin without actually trading the crypto itself. The ETF holds Bitcoin futures contracts and sells shares to investors. To create these ETFs, futures contracts are purchased and grouped into a fund which is then made available for investors to purchase shares in.
Goals and Limitations of Bitcoin Futures ETFs
Bitcoin Futures ETFs provide a way for people to invest in Bitcoin without actually owning the digital asset. This helps to address concerns about security and financial barriers. But these investment vehicles face challenges like tracking errors, regulatory issues, liquidity problems, and cybersecurity risks. These issues can affect how well they work as investment options.
How Do Spot Bitcoin ETFs Work?
Spot Bitcoin ETFs typically utilize third-party custodians to store the Bitcoin they possess, similar to spot gold ETFs safeguarding a physical gold holding within third-party vaults.
Maintaining Price and Custodianship Risks
The majority of spot Bitcoin ETFs use Coinbase as their Bitcoin custodian, with exceptions like Fidelity and VanEck. If Coinbase faces financial challenges in the future, such as a cyberattack or government penalties, the safety of Bitcoin ETF holdings could be compromised. Although mechanisms for ETFs and investors to recover holdings in the event of a Coinbase bankruptcy exist, such processes may not be immediate.
The Broad Spectrum of Bitcoin ETFs
Bitcoin ETFs offer investors diverse ways to access the cryptocurrency market, ranging from spot ETFs to strategy ETFs.
A Closer Look at Spot Bitcoin ETFs
Let's delve into the top five Bitcoin ETFs to better understand their features and offerings.
Top Picks and What They Offer
- Grayscale Bitcoin Trust: 1.5% fee, no waivers.
- Bitwise Bitcoin ETF: 0% to 0.2% fee with waiver on first $1 billion in AUM until July 11, then 0.2%.
- Valkyrie Bitcoin Fund: 0% that will rise to 0.25% on April 11.
- iShares Bitcoin Trust: 0.12% fee until January 2025, then 0.25%.
- Fidelity Wise Origin Bitcoin Fund: 0% that will rise to 0.25% on August 1.
Navigating Through Bitcoin Strategy ETFs
Bitcoin strategy ETFs are designed to replicate the price movements of Bitcoin indirectly, using a variety of investment strategies. These ETFs have been around for a while, even before spot Bitcoin ETFs were approved.
Strategy Over Spot: A Comparative Analysis
Spot ETFs simply follow the price of Bitcoin, whereas strategy ETFs use futures contracts or mining stocks to mimic Bitcoin's performance. Different approaches lead to different levels of risk and potential returns for investors. While strategy ETFs may provide diversification benefits beyond Bitcoin, they also bring added complexities and uncertainties.
Impact and Implications of Bitcoin ETFs
How Bitcoin ETFs Affect Crypto Investments
The approval of Bitcoin ETFs has democratized cryptocurrency investing, making it accessible to a broader range of investors. Spot Bitcoin ETFs, in particular, offer a familiar investment vehicle for those hesitant to directly hold cryptocurrencies.
The Ripple Effect on the Cryptocurrency Market
The approval of spot Bitcoin ETFs has led to a significant increase in interest in Bitcoin, resulting in a decrease in its availability and causing its price to rise. This development has historically had an impact on the value of alternative cryptocurrencies, pushing many of them up as Bitcoin continues to climb.
Additionally, the authorization of spot Bitcoin ETFs has prompted a wave of requests for similar products, such as spot Ethereum ETFs.
The Future of Bitcoin ETFs
On January 10, the SEC approved eleven spot Bitcoin ETFs, indicating a change in how regulators view crypto. This milestone has sparked an increase in the number of applications for spot Bitcoin ETFs, hinting at more options becoming available in the market.
Spot vs. Futures: What Lies Ahead?
Spot Bitcoin ETFs will further encourage people to use Bitcoin and increase the desire for the asset. As rules change, the choice between these ETF options will affect how people invest in cryptocurrencies, which will in turn influence the market and how investors feel.
Investing in Bitcoin ETFs: Pros and Cons
Bitcoin ETFs can provide investors with easier access and credibility, which could boost trade volume and stabilize prices. They might also lower transaction costs compared to traditional exchanges. However, they are closely monitored by regulators, leading to worries about the safety and management of assets. Moreover, their yearly fees might exceed the upfront savings on trading fees.
