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What Are the Differences between Bitcoin Spot ETF and Bitcoin Futures ETF?
Bitcoin is the most popular and valuable cryptocurrency in the world, with a market capitalization of over $1 trillion as of August 2023. Many investors are interested in gaining exposure to this digital asset, but they may not want to deal with the challenges and risks of buying, storing, and securing Bitcoin directly. That's where Bitcoin exchange-traded funds (ETFs) come in.
Bitcoin ETFs are investment vehicles that track the price of Bitcoin or related assets, such as Bitcoin futures contracts or blockchain companies. They are traded on traditional stock exchanges, like any other ETF, and can be bought and sold through brokerage accounts. Bitcoin ETFs offer several advantages over owning Bitcoin directly, such as liquidity, diversification, tax efficiency, and regulatory oversight.
However, not all Bitcoin ETFs are the same. There are two main types of Bitcoin ETFs: spot ETFs and futures ETFs. Spot ETFs aim to track the current market price of Bitcoin, while futures ETFs track the price of Bitcoin futures contracts, which are agreements to buy or sell Bitcoin at a specified date and price in the future. These two types of ETFs have different characteristics, risks, and returns that investors should be aware of before investing.
In this article, we will explain the differences between Bitcoin spot ETFs and Bitcoin futures ETFs, and how they affect investors' decisions. We will also review some of the best Bitcoin ETFs available in the market as of August 2023.
What Is a 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.
A spot Bitcoin ETF would ideally hold physical Bitcoins in a secure custody solution, such as a cold wallet or a trust company. The fund would then create or redeem shares in exchange for Bitcoins, depending on the supply and demand of investors. This way, the fund would always reflect the value of its Bitcoin holdings, minus fees and expenses.
However, there is currently no spot Bitcoin ETF approved by the U.S. Securities and Exchange Commission (SEC), which is the main regulator of ETFs in the country. The SEC has rejected several applications for spot Bitcoin ETFs over the years, citing concerns about market manipulation, fraud, custody, liquidity, valuation, and investor protection.
The SEC has also stated that it would prefer to see a robust and regulated Bitcoin futures market before considering a spot Bitcoin ETF. This is because futures contracts are traded on regulated exchanges that have surveillance-sharing agreements with other markets and regulators, which can help prevent illicit activities and ensure fair pricing.
As a result, investors who want to invest in a spot Bitcoin ETF have to look for other options outside the U.S., such as Canada or Europe. For example, Canada has approved several spot Bitcoin ETFs since February 2021, such as the Purpose Bitcoin ETF (BTCC), which was the first one in the world. Europe also has several exchange-traded products (ETPs) that track the spot price of Bitcoin, such as the ETC Group Physical Bitcoin (BTCE), which is technically an exchange-traded note (ETN) rather than an ETF.
What Is a Futures Bitcoin ETF?
A futures Bitcoin ETF is an open-end fund that invests in Bitcoin futures contracts rather than physical Bitcoins. A futures contract is a derivative instrument that allows investors to speculate on the future price of an asset without actually owning it. Futures contracts have an expiration date and a settlement price, which determine how much the contract is worth at maturity.
A futures Bitcoin ETF would buy and sell Bitcoin futures contracts on regulated exchanges, such as the Chicago Mercantile Exchange (CME) or Bakkt. The fund would then track the performance of a specific index that measures the price of these contracts, such as the CME CF Bitcoin Reference Rate (BRR) or the MVIS CryptoCompare Institutional Bitcoin Index (MVIBTC).
A futures Bitcoin ETF would not hold any physical Bitcoins in its portfolio, but it would still provide exposure to the price movements of Bitcoin through its futures contracts. However, there are some important differences between investing in a futures Bitcoin ETF and investing in a spot Bitcoin ETF.
First, a futures Bitcoin ETF may not track the spot price of Bitcoin very closely, due to factors such as contango and backwardation. Contango occurs when the futures price is higher than the spot price, which means that investors have to pay a premium to buy futures contracts. Backwardation occurs when the futures price is lower than the spot price, which means that investors can buy futures contracts at a discount. These price differences can create tracking errors between the fund and its underlying index.
Second, a futures Bitcoin ETF may incur higher costs than a spot Bitcoin ETF, due to factors such as rollover and management fees. Rollover occurs when the fund has to sell its expiring futures contracts and buy new ones with a later expiration date, which can incur transaction costs and price slippage. Management fees are the fees that the fund charges for its services, which can vary depending on the fund’s strategy and complexity.
Third, a futures Bitcoin ETF may have different tax implications than a spot Bitcoin ETF, depending on the jurisdiction and the investor’s situation. For example, in the U.S., futures contracts are subject to a 60/40 tax rule, which means that 60% of the gains or losses are treated as long-term capital gains or losses, and 40% are treated as short-term capital gains or losses, regardless of the holding period. This can be advantageous or disadvantageous for investors, depending on their tax bracket and their other investments.
As of August 2023, there is also no futures Bitcoin ETF approved by the SEC in the U.S., but there are several applications pending review. Some of the most notable ones are from ProShares, Invesco, VanEck, Valkyrie, and Galaxy Digital. The SEC has set deadlines for approving or rejecting these applications in October and November 2023, which could potentially mark the launch of the first Bitcoin ETF in the U.S.
What Are the Best Bitcoin ETFs to Invest In?
The best Bitcoin ETFs to invest in depend on several factors, such as the investor’s preferences, goals, risk tolerance, and location. However, based on some general criteria, such as performance, fees, liquidity, and reputation, here are some of the best Bitcoin ETFs available in the market as of August 2023:
- Purpose Bitcoin ETF (BTCC): This is the first and largest spot Bitcoin ETF in the world, with over $1 billion in assets under management (AUM) as of August 2023. It’s listed on the Toronto Stock Exchange (TSX) and tracks the spot price of Bitcoin using physical Bitcoins held by Gemini Trust Company. It charges a management fee of 1% per year and has an average daily trading volume of over $20 million.
- ETC Group Physical Bitcoin (BTCE): This is the most popular and liquid Bitcoin ETP in Europe, with over $800 million in AUM as of August 2023. It’s listed on several exchanges, such as Xetra, SIX Swiss Exchange, and London Stock Exchange (LSE), and tracks the spot price of Bitcoin using physical Bitcoins held by BitGo Trust Company. It charges a management fee of 2% per year and has an average daily trading volume of over $50 million.
- ProShares Bitcoin Strategy ETF (BITO): This is one of the most anticipated futures Bitcoin ETFs in the U.S., with a potential launch date of October 18, 2023. It's expected to be listed on the NYSE Arca and track the performance of the CME CF Bitcoin Reference Rate using Bitcoin futures contracts traded on CME. It's estimated to charge a management fee of 0.95% per year and have a high trading volume due to its brand recognition and first-mover advantage.
Bitcoin ETFs are an attractive option for investors who want to gain exposure to the price movements of Bitcoin without having to buy, store, and secure physical Bitcoins. However, there are different types of Bitcoin ETFs that have different characteristics, risks, and returns that investors should be aware of before investing.
Spot Bitcoin ETFs aim to track the current market price of Bitcoin using physical Bitcoins held in custody. They offer a direct and transparent way to invest in Bitcoin, but they are not available in some jurisdictions, such as the U.S., due to regulatory hurdles.
Futures Bitcoin ETFs aim to track the price of Bitcoin futures contracts traded on regulated exchanges. They offer an indirect and convenient way to invest in Bitcoin, but they may not track the spot price of Bitcoin very closely due to factors such as contango and backwardation. They may also incur higher costs due to factors such as rollover and management fees.
The best Bitcoin ETFs to invest in depend on several factors, such as performance, fees, liquidity, and reputation. Some of the best Bitcoin ETFs available in the market as of August 2023 are Purpose Bitcoin ETF (BTCC), ETC Group Physical Bitcoin (BTCE), and ProShares Bitcoin Strategy ETF (BITO).
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