What’s the Difference Between Bitcoin Spot ETF and Bitcoin Futures ETF?

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What’s the Difference Between Bitcoin Spot ETF and Bitcoin Futures ETF?

What's the Difference Between Bitcoin Spot ETF and Bitcoin Futures ETF?

Summary

  • An ETF acts like a stock on a stock exchange, however, it follows the price of one or a group of assets that can belong to a variety of markets

  • Just like regular ETFs, crypto ETFs follow the price of one or a group of cryptocurrencies. A Bitcoin spot ETF is investing directly in the Bitcoin market and holds Bitcoin while a Bitcoin futures ETF is investing in Bitcoin futures contracts.

  • A Bitcoin spot ETF’s profitability and risk are only linked to the Bitcoin price. A Bitcoin futures ETF, on the other hand, can offer better profitability for investors who are willing to take on more risk.

  • At the moment, we have multiple Bitcoin futures ETFs around the world including in the US market, however, a Bitcoin spot ETF is facing much more regulatory hurdles.

  • In the US, the Securities and Exchange Commission (SEC) has either rejected or delayed any application for a Bitcoin spot ETF, reasoning that the crypto market is too nascent and young to be able to prevent any market manipulations.

Table of Contents

What is a Bitcoin ETF?

Before talking about a Bitcoin ETF, let’s see what an ETF really is.

An Exchange Traded Fund, or an ETF for short, is an investment tool that allows you to get exposure to price movements of one or various financial assets at once. With an ETF, you don’t need to buy the actual underlying assets and hold them; you can simply trade the ETF itself on a stock market.

But, how does an ETF make this happen?

Simply put, an ETF acts like a stock on a stock exchange, however, it follows the price of one or a group of assets that can belong to a variety of markets. An ETF may follow the price of a diverse selection of commodities, stocks, currencies, or even crypto.

As you can see, an ETF acts like a mutual fund in many ways, however, it is much more accessible and can easily be traded on a regular stock exchange.

Types of ETFs you can see in the markets:

  • Commodity ETFs
  • Bond ETFs
  • Stock ETFs
  • Currency ETFs 
  • Crypto ETFs

Crypto ETFs explained

Just like regular ETFs, crypto ETFs follow the price of one or a group of cryptocurrencies. However, they are quite important for the crypto space and its growth in the long term.

Cryptocurrencies are novel financial assets; They are designed in an innovative way and because of that, their transfer, storage, and trading are different from other traditional assets. This can intimidate many traditional investors and traders, holding them back from entering the crypto market.

However, a crypto ETF can be just the right solution. With a crypto ETF, investors don’t need to buy and hold the actual crypto asset which saves them all the hassle crypto storage comes with. They can simply get exposure to the price movements of their favorite cryptocurrency by trading its ETF on a stock exchange.

At the moment, the industry is facing some regulatory hurdles and only specific Bitcoin ETFs have been allowed.

What is a Bitcoin spot ETF?

A Bitcoin spot ETF follows the actual price of Bitcoin and is the closest an investor or trader can get to owning Bitcoin without actually holding the actual coin in their crypto wallets.

The price of a Bitcoin spot ETF is directly affected by the price swings of Bitcoin and its performance is completely dependent on how Bitcoin is doing itself.

By buying the shares of a Bitcoin spot ETF, you are getting direct exposure to the price of Bitcoin, just like holding some Bitcoin yourself.

What is a Bitcoin Futures ETF?

Unlike a Bitcoin spot ETF, a Bitcoin futures ETF holds futures contracts, not the actual Bitcoin.

Futures contracts are a type of financial product that allows you to bet on the future price of an asset. With futures contracts, you would agree to buy or sell the underlying asset at a specific price on a set date in the future.

By investing in a Bitcoin futures ETF, you are indirectly investing in Bitcoin market by speculating on its price in the future. However, you aren’t holding the Bitcoin futures contracts or actual bitcoins yourself.

Key Differences Between Bitcoin spot ETF and Bitcoin futures ETF?

Now, let’s summarise the key differences between a Bitcoin spot ETF and a Bitcoin futures ETF.

Underlying asset

The underlying asset is probably the most prominent difference between a Bitcoin spot ETF and a Bitcoin futures ETF.

As mentioned before, a Bitcoin spot ETF is investing directly in the Bitcoin market and holds Bitcoin while a Bitcoin futures ETF is investing in Bitcoin futures contracts.

Investment period

Futures contracts have expiration dates while investors can hold their bitcoins as long as they want. As a result, a Bitcoin futures ETF is considered more of a short-term investment, while a Bitcoin spot ETF can be suitable for any investment period.

Pricing

A Bitcoin spot ETF follows the actual price of Bitcoin and shows less divergence. On the other hand, a Bitcoin futures ETF can experience sharp price divergences from the actual Bitcoin price based on the market sentiment and the expiration date.

Risks and profits

In general, the derivatives market is much more complicated and riskier than the spot market. However, this market also offers more profit opportunities that can be significant in amount because of the complex products available.

Bitcoin ETFs follow this rule as well. A Bitcoin spot ETF’s profitability and risk are only linked to the Bitcoin price. A Bitcoin futures ETF, on the other hand, can offer better profitability for investors who are willing to take on more risk.

Impact on the Bitcoin market

A Bitcoin spot ETF is expected to have a great impact on the Bitcoin price. The fund needs to actually buy bitcoins, bringing buying pressure on the market and pushing the Bitcoin price higher.

Additionally, the fund will offer Bitcoin to investors and traders who may have been mainly trading outside of the crypto market. This can boost crypto adoption, causing the Bitcoin price to increase.

Another important factor is the positive market sentiment a Bitcoin spot ETF brings with itself, which can be beneficial for the entire crypto space.

Regulatory status

At the moment, we have multiple Bitcoin futures ETFs around the world including in the US market, however, a Bitcoin spot ETF is facing much more regulatory hurdles. ProShares Bitcoin Strategy ETF (BITO) is the first and largest Bitcoin futures ETF in the US.

In the US, the Securities and Exchange Commission (SEC) has either rejected or delayed any application for a Bitcoin spot ETF, reasoning that the crypto market is too nascent and young to be able to prevent any market manipulations.

Closing Remarks

Regardless of their types, crypto ETFs offer traditional traders and crypto enthusiasts an easy way to get exposure to the price movements of different cryptocurrencies. Crypto ETFs can also follow the stock price of major public crypto companies such as Marathon Digital, one of the major Bitcoin mining companies in the world.

Although crypto ETFs are easier to trade and are accessible on a regular stock exchange, they aren’t free of risk. As always and like with any other investment decision, do proper due diligence and always do your own research.

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