Bitcoin (BTC-USD) is booming. If you haven’t checked the crypto market since last year’s “crypto winter,” you might be surprised to learn that BTC is up over 100% year-to-date after a rally of almost 20% in the last week alone. After a brutal 2022, Bitcoin found its footing as the broader market rebounded in 2023, but things really started to kick off this summer with the announcement that BlackRock (NYSE:BLK), the world’s largest asset manager, had filed an application to list a spot Bitcoin ETF with the SEC.
BlackRock is the world’s largest asset manager, with about $9.5 trillion in assets, and observers have noted that they rarely fail to gain approval for an ETF they file for, which which contributed to market enthusiasm. But BlackRock wasn’t the only asset manager to file for such an ETF, as many other top asset managers, including Fidelity, VanEck, WisdomTree and Cathie Wood’s ARK Invest, jumped in to file similar requests.
Last week, a premature tweet that the SEC had approved the BlackRock ETF sent Bitcoin higher. This week, talk of BlackRock’s Bitcoin ETF listing on the Depository Trust & Clearing Corporation database under the symbol “IBTC” pushed the price of Bitcoin above $34,000.
It is important to note that nothing is set in stone here and there is no guarantee that approval of such an ETF is imminent. While we don’t know yet if anything is concrete, it’s a good time to take a step back and discuss what a spot Bitcoin ETF is, how it would differ from current ETFs on the market, and what it would mean for investors.
What’s the problem with a Spot Bitcoin ETF?
If you follow Bitcoin or the ETF space closely, you may know that there are already several Bitcoin-related ETFs in the market right now, such as the ProShares Bitcoin Strategy ETF (NYSEARCA: BITO) and the VanEck Bitcoin Strategy ETF (BATS: XBTF). BITO began trading in 2021, so you may be wondering what the big deal is with a spot Bitcoin ETF.
The main difference is that while these existing ETFs invest in Bitcoin futures, a spot Bitcoin ETF would invest directly in Bitcoin itself. Futures ETFs can deviate from the price of the underlying asset depending on various factors, but because a spot Bitcoin ETF would directly hold Bitcoin, its price would be more closely correlated with the price of Bitcoin.
This would be a significant development for investors, as it would allow them for the first time to gain direct exposure to Bitcoin through their normal brokerage and retirement accounts without having to manage a crypto portfolio or open an account on a crypto exchange like Coinbase (NASDAQ:COIN).
Managing a Bitcoin portfolio can be a daunting step for investors who are not crypto-savvy. Investors fear losing their investment if their wallet is hacked. Additionally, losing their keys or seed phrase can separate a user from their funds, and there is no tech support to turn to for help, like losing your password. an online banking account. Additionally, if you use a physical hardware wallet, loss or damage to that device may result in permanent loss of funds.
Likewise, some investors are understandably cautious when purchasing and holding Bitcoin on crypto exchanges. Indeed, a number of major exchanges, including FTX, Voyager Digital, and Celsius Holdings, all imploded last year and many users lost significant amounts of money when that happened. FTX reportedly mixed customer deposits with its own funds, which didn’t exactly inspire much investor confidence in centralized crypto exchanges.
This is why there is a good market of products suitable for spot Bitcoin ETFs. For investors optimistic about the future of Bitcoin but wary of the associated risks, these ETFs provide a simple way to access Bitcoin through regular investment accounts. From a user experience perspective, buying shares of a Bitcoin ETF would be no different than buying shares of one of the most popular stocks on the market.
Additionally, these ETFs could be a viable option for institutional investors who want to invest in Bitcoin but are not structured to buy and hold it themselves.
A profitable option?
In addition to offering ordinary investors a transparent and efficient way to gain exposure to the price of Bitcoin, spot Bitcoin ETFs could also theoretically present a profitable option for investors.
Well-known investor and financial talk show host, Ric Edelman, recently explained on CNBC the attractiveness of spot crypto ETFs versus crypto futures ETFs, stating: “The absence of spot bitcoin ETFs doesn’t stop people from buying crypto. It just forces them to pay for exotic products that cost more, have less liquidity and are higher risk.” Edelman also said, “People recognize, ‘I don’t usually buy futures, so if I don’t buy futures on the stock market, why would I buy futures on the stock market? cryptography? »
While we don’t yet know what the expense ratio of a Bitcoin futures ETF will be, Edelman’s opinion that it will be more profitable than a Bitcoin futures ETF seems feasible. The aforementioned Bitcoin futures ETFs, BITO and XBTF, have relatively high expense ratios of 0.95% and 0.76% respectively.
Looking forward
It is important to note that nothing is concrete at the moment. The SEC has repeatedly rejected applications for spot Bitcoin ETFs in the past, citing the possibility that such products could fall prey to market manipulation.
However, if approved, spot Bitcoin ETFs would be a practical option for investors who are optimistic about the $660 billion asset, but don’t want to go through the hassle or deal with the risks of managing their own crypto wallet or creating an account on an account. crypto exchange.
Although these ETFs would charge fees and therefore be more expensive than an individual holding Bitcoin alone, some investors would be OK with the peace of mind that would come with this trade-off, and these ETFs would likely be less expensive than bitcoin ETFs. current Bitcoin term. .
We’ll eventually have more concrete answers as to whether a spot Bitcoin ETF is indeed in the cards, but if approved, it would represent a seismic moment for Bitcoin itself and a game-changing option for retail and institutional investors.