What’s the Difference Between Bitcoin Spot and Futures ETFs?
Exchange-traded funds (ETFs) are a popular and flexible portfolio choice that allows investors to benefit from a sector’s performance without the need to directly own individual stocks or assets.
They are an especially appealing option in the cryptocurrency market as the technical aspects of purchasing and holding these coins can be confusing and intimidating for the less technologically inclined.
Crypto ETFs are also more secure than cryptocurrencies themselves, as they trade in regulated marketplaces and are subject to laws that don’t extend to these coins themselves. This can provide peace of mind to investors who are put off by crypto frauds and scandals, some of which have resulted in billions of dollars in losses for those who hold them.
Bitcoin is the best-known cryptocurrency, and for that reason investors often turn to spot Bitcoin ETFs or Bitcoin futures ETFs. While at first glance they may seem similar, they have key differences. They also have their own pros and cons — depending on what type of investor you are, a spot Bitcoin ETF or a Bitcoin futures ETF may be more suitable.
Here Investing News Network breaks down the differences between spot and futures Bitcoin ETFs so you can decide if these investment products are right for you, and if so, which type may be most in line with your goals.
What are spot Bitcoin ETFs and how do they work?
Spot Bitcoin ETFs aim to track the price of Bitcoin, and they do so by holding Bitcoins.
However much money an investor decides to allocate, a fund manager buys the equivalent amount in Bitcoins and stores them safely in a digital wallet. Providers buy and sell Bitcoins when the fund is rebalanced.
What are Bitcoin futures ETFs and how do they work?
Bitcoin futures ETFs function differently from spot Bitcoin ETFs, but they also aim to track the price of Bitcoin.
Instead of purchasing actual Bitcoins, Bitcoin futures ETFs provide exposure to the cryptocurrency’s price moves using Bitcoin futures contracts. Bitcoin futures contracts function similarly to other futures contracts — they stipulate that two parties will exchange a specific amount of Bitcoins for a particular price on a predetermined date.
It’s worth noting that Bitcoin futures ETFs may not be fully comprised of Bitcoin futures contracts.
What are the pros and cons of Bitcoin spot and futures ETFs?
As mentioned, both Bitcoin ETF types have pros and cons to consider before jumping in.
One point is that spot Bitcoin ETFs have a much more simplified structure than Bitcoin futures ETFs as there are no deadlines or contract stipulations. Buying shares of spot Bitcoin ETF is about as close to purchasing the cryptocurrency as you can get without needing the technical knowledge of blockchains, digital wallets and crypto trading platforms.
The price movement of spot Bitcoin ETFs also tends to be more closely aligned with the Bitcoin spot price, since these trading vehicles are directly backed by Bitcoin. Finally, spot Bitcoin ETFs are quite liquid.
Bitcoin futures ETFs provide flexibility to investors who want exposure to the cryptocurrency, but may not track the Bitcoin price as accurately as spot Bitcoin ETFs. For example, Bitcoin futures ETFs can be subject to contango, which happens when the price of a Bitcoin futures contract is higher than the Bitcoin spot price. They can also face backwardation, which happens when the price of a Bitcoin futures contract is below the Bitcoin spot price.
Put simply, Bitcoin futures ETFs represent an interesting investment opportunity for risk-tolerant investors, but may not be a good choice for those with a more risk-averse approach.
When will the US allow spot Bitcoin ETFs?
Although several firms have attempted to get spot Bitcoin ETFs approved in the US, the US Securities and Exchange Commission (SEC) has denied or delayed every application that has crossed its desk since 2016.
Part of the reason, according to SEC Chairman Gary Gensler, is that the risk of fraud and market manipulation is just too great. He has cited examples like the FTX fiasco, which the SEC has been heavily criticized for not noticing sooner — the scheme saw millions of investors swindled out of billions of dollars. Gensler has also pointed to a lack of regulatory framework, and has called on Congress to work with the SEC to establish clear rules around the crypto market.
Some believe Gensler’s concerns are unfounded or overstated, as spot Bitcoin ETFs have been available to Canadians on the Toronto Stock Exchange since February 2021. ETFs like the Purpose Bitcoin ETF (TSX:BTCC), 3iQ CoinShares Bitcoin ETF (TSX:BTCQ) and CI Galaxy Bitcoin ETF (TSX:BTCX.B) are subject to strict regulatory controls and, to date, there have been no cases of fraud, mismanagement or hacking associated with spot Bitcoin ETFs in Canada.
And Canada is not alone — Europe saw the introduction of the Jacobi Bitcoin ETF (AMS:BCOIN) on the Euronext Amsterdam Stock Exchange in August of this year.
These milestones have prompted the question: Will the US be getting spot Bitcoin ETFs soon?
The general consensus among US market participants is that spot Bitcoin ETFs are very likely to be approved soon. In fact, Matteo Greco, a research analyst at Fineqia International, told the Investing News Network that approval could “likely (occur) in early 2024, within the first 10 days of January.”
The SEC is facing mounting pressure from the political sphere to approve applications, and judges and investors alike have been critical of Gensler’s contentious and possibly unwarranted attitude toward crypto ETFs.
The bottom line
The differences between Bitcoin spot and futures ETFs are worth noting, and deciding which route to go — if any — depends on each investor’s risk tolerance and investment goals.
While both ETF types are geared at following the Bitcoin price, they do so in different ways. Because they are correlated less directly with Bitcoin itself, Bitcoin futures ETFs may be a riskier avenue.
The US has yet to approve spot Bitcoin ETFs due to regulatory concerns, but they are available in both Canada and Europe. Despite challenges, it seems likely that spot Bitcoin ETFs are likely to be approved soon in the US, and it will be interesting to see how this new investment vehicle will shape the crypto market in the coming years.
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Securities Disclosure: I, Meagen Seatter, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
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