Bitcoin Spot ETF: What’s All The Fuss About?

Bitcoin has done more in four weeks than in the last 17 months. Just in October, Bitcoin gained 30%, being its best so far in 2023. What's the cause of this increase? Bitcoin spot ETF.

WTF is Bitcoin spot ETF, and why does it affect Bitcoin’s price?

If you’re conversant with crypto Twitter, you’d have seen activities building up around Bitcoin spot ETF. Financial analysts, traders, and crypto natives are positive and expectant of the Bitcoin spot ETF approval by the Security and Exchange Commission (SEC). They also think it’ll open the floodgate of institutional funds for the crypto market, leading to the next bull run.

Want to know what Bitcoin spot ETF is? Let me show you!

What is a Bitcoin Spot ETF?

To understand Bitcoin spot ETF, you need to know what an ETF means. An ETF, short for Exchange Traded Fund, is an SEC-approved investment fund. It lets investors buy into a fund that invests in different financial instruments.

So, a Bitcoin spot ETF is an investment fund that tracks the market price of Bitcoin. This fund allows regular investors to invest in Bitcoin without actually owning the cryptocurrency. Currently, to invest in Bitcoin, you need a technical knowledge of how things work — you need to know how to navigate crypto exchanges, have a digital wallet, and the best practices for storing your cryptocurrency to prevent hackers.

In short, Bitcoin investing is open to a niche group with technical knowledge of how things work. But with Bitcoin spot ETF, traditional investors can trade the cryptocurrency like they trade stock in their regular brokerage account. When approved, Bitcoin spot ETF will offer convenient and regulated ways for investors to own the digital currency with less risk.

How Does Bitcoin Spot ETF Work?

Bitcoin spot ETF is an investment fund that tracks the price of Bitcoin. The price of the shares issued by the ETF mirrors the current price of Bitcoin in the crypto market.

To track the price of Bitcoin, the registered custodian of the ETF has to hold Bitcoin (the financial instrument it tracks) as its underlying asset in a secure digital vault and issue shares that correspond to the amount of Bitcoin it holds. These shares will be available for trading in the traditional stock market by investors without the technical hassle of buying on crypto exchanges.

Image via Flicker by Dan Matt

The ETF rebalances its holdings (either by buying more Bitcoin or selling the Bitcoin in its vault) based on the number of shares it has issued. Let’s say the Bitcoin spot ETF share is trading at a premium or discount on the stock exchange than the actual price of Bitcoin. The register custodian will arbitrage the difference by redeeming or creating shares in a large block to align the price of the ETF with the price of the actual cryptocurrency.

With a Bitcoin spot ETF, the market becomes more efficient and liquid. It'll be like buying shares on the stock exchange.

Is Bitcoin Spot ETF Good For Bitcoin?

Absolutely! Spot ETF is good for Bitcoin. First, spot ETF removes the hassle currently involved in Bitcoin investing. It also lowers the barrier to entry, which increases the digital currency's adoption.

Here are other benefits of spot ETF to Bitcoin.

1. High Liquidity

A Bitcoin spot ETF will remove the barrier involved in Bitcoin investing. This will move Bitcoin from a tech that attracts high-tech few to a global financial instrument. With this, Bitcoin investing will be opened to a wider group of institutional and private investors who are currently skeptical about the digital currency. It will unlock the floodgate of institutional funds (over $30 trillion) to Bitcoin, which increases liquidity.

2. Increase Demand

Once the Bitcoin spot ETF is approved, there will be an increase in the demand for the cryptocurrency. Bitcoin spot ETF is required to hold Bitcoin as an underlying asset in a secure vault. With just 21 million Bitcoin to be supplied, the demand for the cryptocurrency rises, leading to a price increase.

3. Ease of Access

The spot ETF will make it easier for traditional investors to get involved in Bitcoin. With Bitcoin spot ETF, investing in Bitcoin becomes easier — you don’t need to know how to navigate crypto exchanges, don’t need a digital wallet, and don’t need to learn the best practices of securing your digital wallet. What you need is a brokerage account to buy the shares of the spot ETF.

4. Regulatory Clarity And Market Legitimacy

Approval of a Bitcoin spot ETF by the SEC means Bitcoin has become a recognized financial asset -- a global phenomenon. Those waiting at the sideline will be more confident to jump in.  Moreover, with Bitcoin spot ETF approval, there will be more transparency and standardized reporting, which, again, reinforce investors' confidence in Bitcoin.

What’s The Difference Between Bitcoin Spot ETF And Futures ETF?

Bitcoin spot ETF allows you to track the current price of Bitcoin. Let’s say Bitcoin costs $40,000 on cryptocurrency exchanges. A Bitcoin spot ETF share will also cost $40,000. Moreover, there is a direct exposure to the price change because the fund has to hold Bitcoin in a digital vault to back the ETF.

On the other hand, the Bitcoin futures ETF tracks Bitcoin futures contracts. It speculates on the future price of Bitcoin and does not own Bitcoin. The Bitcoin Future ETF may not always reflect the current price of Bitcoin.

What Does The Future Hold?

As of November 2023, the SEC has yet to approve any Bitcoin spot ETF, citing concerns about market manipulations, fraud, and investor protection.

But recently, there seems to be a light at the end of the tunnel because, in recent weeks, the government agency has decided not to appeal the court judgment that concluded that rejecting the Grayscale ETF proposal is wrong.

Speculatively, this means the agency has been reconsidering its stand on Bitcoin spot ETFs.

So, the dark cloud is clearing already, and the Bitcoin spot ETF is very near.

Conclusion

Approval of a spot ETF won’t only benefit Bitcoin but the whole crypto market. It will bridge the gap between crypto investing and traditional investing. Bitcoin spot ETF approval in the US is just a step that begins the journey of a thousand miles for the cryptocurrency industry as a whole. See this just like when the first gold spot ETF was approved in 2004.

Image via Flickr from Hash Consultants