There is a long-running battle to create a Bitcoin spot exchange-traded fund (ETF). However, only Bitcoin futures ETFs have been approved so far, giving Bitcoin investors more to look forward to.
But why are investors unhappy with a Bitcoin futures ETF and still yearning for a spot ETF? And more importantly, how does a Bitcoin futures ETF differ from a Bitcoin spot ETF?
What is a Bitcoin Futures ETF?
A Bitcoin futures ETF issues publicly traded securities that offer exposure to the price movements of Bitcoin futures contracts.
Bitcoin futures contracts are agreements between traders to buy or sell Bitcoin at an agreed price on an agreed date, regardless of what happens to the price on or before that date.
ETF stands for the value of Bitcoin that you can buy or sell based on contract terms. Generally, in crypto futures trading, futures contract traders do not own the underlying asset they are buying or selling.
They are simply given a contract to buy or sell on a specific date in the future.
Once the date of the contract is reached, it must be settled based on the terms and traders move on to the next contract.
Bitcoin futures contracts are fully regulated by the Commodity Futures Trading Commission (CFTC) and, just like all other regulated contracts, must be traded on exchanges regulated by the CFTC.
ETFs themselves are regulated by the Securities and Exchange Commission (SEC), and the shares they issue are regulated by the SEC. However, Bitcoin is not regulated by the SEC and some investors are not comfortable investing directly in it due to its high volatility.
Bitcoin futures ETFs give such investors access to trade Bitcoin contracts without actually holding Bitcoin.
The contract is between two parties to exchange one contract unit, which is currently equivalent to five Bitcoin. The underlying assets in Bitcoin ETFs are linked to Bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME).
Proshares Bitcoin Strategy ETF (BITO) was the first Bitcoin futures ETF approved by the SEC and has since been listed and currently trades on the New York Stock Exchange. Many more have been approved since the initial approval in 2021.
What is a Bitcoin Spot ETF?
Despite the many approved Bitcoin futures ETFs, the crypto space is still waiting for the SEC to approve a spot ETF. So what is a spot Bitcoin ETF?
Spot Bitcoin ETFs offer investors direct access to Bitcoin by selling them shares that track the asset’s actual price. Then they can buy the ETFs on a standard stock exchange at the actual price of Bitcoin.
The direct access to Bitcoin is why the SEC is wary of a spot Bitcoin ETF that exposes investors to the cryptocurrency and its many pitfalls.
The regulator is therefore intent on ensuring that the crypto market is regulated so that fraud and scams that could harm investors do not occur.
This means that in order to get approval for a spot Bitcoin ETF, crypto exchanges must provide transparent data about their customers so that any violations can be easily traced. However, exchanges like Coinbase already report to the IRS.
However, crypto supporters believe that this violates the idea behind cryptocurrencies in general and Bitcoin in particular, making it difficult to reach an agreement with the SEC.
This is not the case with futures Bitcoin ETFs, which explains why there are many out there while not even a spot ETF exists.
How Do Bitcoin Futures and Spot ETFs Differ?
The biggest difference between a futures Bitcoin ETF and a spot Bitcoin ETF is ownership. In a futures ETF, traders do not own any bitcoin. Instead, they only need to enter into an agreement on the price of bitcoin at a specific date in the future.
Whereas a Bitcoin Spot ETF requires investors to actually buy Bitcoin, which they can later sell as they wish.
Second, a spot Bitcoin ETF allows investors to buy shares based on the actual price of Bitcoin at the time of trade, while a futures Bitcoin ETF will trade based on the price of Bitcoin futures contracts (ie, the price when the contract expires and matures).
Bitcoin Futures ETF vs. Bitcoin Spot ETF: Which Is Better?
Since spot ETFs provide ownership, investors may prefer them over futures Bitcoin ETFs. However, both futures and spot Bitcoin ETFs offer investors some form of access to Bitcoin.
Investors can invest in spot Bitcoin ETFs and track their investments based on Bitcoin’s actual market price. This makes it an easier option to track than futures Bitcoin ETFs, which are priced based on how futures contracts trade.
The price of the contracts can be significantly different from the actual price of Bitcoin, making it not ideal for the average investor with no knowledge of crypto.
On the plus side, a futures Bitcoin ETF streamlines the process of buying the ETF and allows investors to bet on whether the price of Bitcoin will go up or down.
Still, the success of a Bitcoin futures investor depends on the ETF’s ability to accurately track the price of Bitcoin, which is not always the case.
For spot Bitcoin ETFs, investors buy Bitcoin based on the current price. Therefore, there is hardly any price tracking error as the price of the asset is the same as the market.
Another advantage of Bitcoin futures ETFs is that because the price is agreed in advance, there are no worries about volatility. Whatever happens to the price of bitcoin does not affect the deal, so this eliminates the fear of volatility.
For spot Bitcoin ETFs, the concern about volatility remains because the investment is based on the direct price of Bitcoin, which is subject to volatility.
Ultimately, it is up to the investor to choose. Still, crypto supporters believe that a spot Bitcoin ETF is what the industry needs to bring in more institutional investors, which is essential for the much-needed growth.
Which do you prefer?
Now that you know all about futures and spot Bitcoin ETFs, what do you consider a better choice for investing in Bitcoin? Do you want to speculate on the price of bitcoin, or would you prefer to own a piece of it with a spot ETF?
The information on this website does not constitute financial advice, investment advice or trading advice and should not be considered as such. MakeUseOf does not provide advice on any trading or investment matters and does not recommend that any particular cryptocurrency should be bought or sold. Always perform your own due diligence and consult a licensed financial advisor for investment advice.
