The Distinction between Bitcoin Spot and Futures ETFs
Understanding ETFs
In the past few years, exchange-traded funds (ETFs) have gained popularity as an investment channel. These are basically trade investment funds listed on stock exchanges, providing investors with an exposure to a diversified basket of investment products. Exchange-traded funds are created for purposes of tracking the performance of an index, sector or a particular asset class; they are considered as stocks but offer diversification benefits.
Introduction to Bitcoin ETFs
The coming of cryptocurrencies has resulted in bitcoin exchange-traded funds and these are now common investment items that people use as an avenue into the digital currency markets. Bitcoin ETFs are a tool that allows the investors trading of bitcoins without actually owning the assets themselves. Investors will be able to buy the shares representing proportional ownership in bitcoins held by the fund, rather than actually purchasing the bitcoin itself (spot bitcoin ETFs). Fund does not hold any bitcoins, but gains synthetic exposure to Bitcoin via futures market for futures ETFs.
Distinguishing Bitcoin Spot and Futures ETFs
These spot and futures ETFs primarily differ on the basis of how they measure up with the price of Bitcoins and the holding assets they bear. Here’s how:
Spot ETFs
Physically backed ETFs, widely referred to as spot ETFs, seek to mirror the price of the cryptocurrency. At the moment though, there are no spot ETF’s that have been approved. These Bitcoins are held by these ETFs, and traders shares are issued in accordance with that value. Henceforth, Spot ETFs should give direct Bitcoins prices exposure to its investor.
Investors will enjoy numerous advantages in the spot ETFs because it is convenient and easy to trade in bitcoin rather holding physical possession as well as handling its issues that come along with it. Moreover, spot ETFs are regulated investment instruments with an aspect of transparency and accountability that may not exist in other modes of investment in bitcoins.
Nevertheless, spot ETFs are not devoid from risks as well. Theft or loss of the bitcoin kept by the ETF is one of the major risks associated with this. There would be a risk of theft since holding the underlying assets in a crypto wallet would involve exposure to issues with cybersecurity. Moreover, there will inevitably be daily ups and downs for spot ETFs that track any particular daily prices for BTC.
Futures ETFs
However, futures ETFs, which are alternative ways of trading on cryptocurrencies, do not possess physical cryptocurrency. Therefore, such ETFs track the price of bitcoin using futures contracts as traders are allowed to gauge the future cost of an asset without physically having it. Futures ETFs rely on bitcoin spot price to determine the price where Bitcoin shall be bought or sold against Bitcoin futures contracts entered into by such futures ETFs.
Spot ETFs provide certain benefits especially when it comes to using them in an unstable market with low prices for bitcoins predicted. Futures ETFs offer an alternative and a more effective way to get exposure to Bitcoin.
However, there are some risks that are associated with futures EFTs. Contract renewal and expiration is one of the major risk factors. All futures contracts have expiries, meaning that at expiry, the ETF needs to offload the expiring contract and buy a new one. Such a rollover can be costly and prone to tracking errors.
What is holding Spot ETFs from getting Approved?
The SEC is in charge of spot ETFs (securities), one category of financial products, in the United States. Nevertheless, the SEC has so far not granted a green light for spot bitcoin ETFs up to December 2023.
SEC has raised worries about the existence of an unregulated crypto market that is large enough not to be manipulated. Nonetheless, rulings in support of Grayscale have been made of late implying high chances that a Bitcoin ETF will be licensed. The US courts are dissatisfied with the SEC’s decision to allow the listing of futures-based Bitcoin products, but reject spot Bitcoin ETFs.
Therefore, the SEC now has to choose one of the twelve applications for a single spot Bitcoin ETF. The companies that have proposed Bitcoin spot ETFs include VanEck, ProShares, Invesco, Valkyrie Digital Assets, Galaxy Digital, Fidelity, WisdomTree, NYDIG Asset Management and Grayscale.
Comparison between Spot and Futures Bitcoin ETFs.
It is also necessary to know the main distinctions of spot and futures bitcoin ETFs before taking decision on which one should be preferred for investments. The spot ETFs are purported to provide a direct correlation with the price of Bitcoin since their portfolio includes Bitcoins themselves. However, in this case, most futures ETFs seek to track the price of Bitcoin using futures contracts.
The other variation in dealing with spot and futures ETFs is how we buy or sell Bitcoin. Spot ETFs buy and store bitcoin in cold storage and Futures ETF trade on the price index of bitcoin through futures contracts.
Moreover, spot ETFs would give investors share in the own Bitcoin against futures ETFs that allow only exposure of Bitcoin via derivative contracts.
In Conclusion
Investors have more than one option to gain access in the digital currency market including; spot, as well as futures based bitcoin ETFs. Investing using spot ETFs is similar to owning Bitcoins directly but it is an easier avenue than trading on exchanges. However, futures ETFs are the products that track the cost of Bitcoin via future contracts..
Traders need to think about their own objectives, attitude towards risk, and future projections of the market when choosing between the spot and futures Bitcoin ETFs. There are different kinds of ETFs, all having their pros and cons, hence one has to choose a suitable one according to his or her convenience and taste.
It doesn’t matter what kind of EFT it is; one should do proper research work and consider all the risks when taking investment decisions..