WHAT IS A SPOT BITCOIN ETF?
Spot Bitcoin Exchange-Traded Funds (ETFs) are designed to track the performance of bitcoin with the custody of the asset being held by the ETF manager.
INTRODUCTION
An exchange-traded fund (ETF) is a type of investment that tracks a specific asset or commodity, in this case, bitcoin. ETFs can be bought and sold on stock exchanges and brokerage accounts, with the custody of the underlying asset being held by the manager of the ETF. This allows for investors to get price exposure to bitcoin without having to worry about self-custody or figuring out how to use a bitcoin exchange. This would potentially give traditional investors peace of mind since they could purchase shares of a spot bitcoin ETF directly through their familiar brokerage accounts.
There are many types of Bitcoin ETFs available. The futures ETFs have had most success in being approved by the Securities and Exchange Commission (SEC) thus far, but these track futures contracts for the expected price of bitcoin at a later date. The contracts do not convey bitcoin ownership and the contracts must be settled or traded for new contracts as they approach expiration.
There are many proponents for a spot bitcoin ETF and numerous applications have been made and denied in the past. Reasons from the SEC included, not providing enough protection for investors and the public interest. While the SEC has not yet approved any spot bitcoin ETF applications, there are numerous bitcoin trusts that are currently on the market.
WHAT IS THE DIFFERENCE BETWEEN A BITCOIN TRUST AND A SPOT ETF?
Both ETFs and trusts offer exposure to Bitcoin without requiring investors to custody the Bitcoin, but they do so with different structures, pricing mechanisms, and levels of regulatory oversight.
BITCOIN TRUST
A bitcoin trust is a private, closed-end fund that is invested exclusively in bitcoin. The trust’s shares are not redeemable, meaning they can’t be exchanged for the underlying bitcoin. The trust’s price can therefore deviate quite substantially from the value of the underlying asset it represents. The most notable examples of bitcoin trusts are MicroStrategy Bitcoin Trust (MSTR) and the Grayscale Bitcoin Trust (GBTC). Shares of a trust often trade at a premium or discount to the net asset value (NAV) of the underlying bitcoin. This is because the supply of trust shares is fixed and can’t be increased or decreased in response to market demand. Trusts like GBTC operate under the SEC’s Rule 144, which allows the public quotation of privately placed securities after a holding period. It’s not subject to the same regulatory oversight as ETFs.
SPOT BITCOIN ETF
A Spot Bitcoin ETF is an open-end fund that can issue or redeem shares based on demand. It’s designed to closely track the spot price of Bitcoin. An ETF is traded on major exchanges, similar to stocks, and can be bought and sold throughout the trading day at prices that are in line with the underlying asset. ETFs allow for the creation and redemption of shares to meet demand. If the price of the ETF diverges from the underlying asset’s value, authorized participants can take advantage of arbitrage opportunities. This mechanism helps to keep the ETF price in line with the NAV of the underlying asset. ETFs are regulated investment products under the Investment Company Act of 1940, providing a higher level of regulatory oversight and consumer protection.
HISTORY OF SPOT BITCOIN ETF APPLICATIONS
The idea of a spot bitcoin ETF has been in the works for several years. Numerous proposals have been submitted to regulatory authorities,until January 2024 before it was approved.
