The difference between Bitcoin spot ETF and Bitcoin futures ETF

Summary

• Bitcoin exchange-traded funds (ETFs) enable investors to gain exposure to Bitcoin price fluctuations without directly holding or managing Bitcoin.

• The main differences between Bitcoin spot ETFs and Bitcoin futures ETFs include underlying assets, factors affecting performance, liquidity needs, potential price differences and exposure.

• Bitcoin ETF is a bridge between traditional investors and the cryptocurrency world.

• Financial institutions such as BlackRock, Invesco, Ark Invest and Fidelity have submitted applications for Bitcoin spot ETFs. If these applications are approved, investors will have more Bitcoin ETFs to choose from.

What is an ETF?

An exchange-traded fund (ETF) is an investment fund, similar to stocks, that trades on a stock exchange. These funds typically hold a variety of assets, such as stocks, commodities or cryptocurrencies, and aim to track the performance of a specific index or asset.

For example, an S&P 500 ETF holds shares of companies listed on the S&P 500 and seeks to mimic the performance of the index. If there are changes in the index's constituent stocks, ETF managers will adjust fund holdings accordingly in order to continue to track the composition and performance of the index.

Unlike mutual funds, whose net asset value (NAV) is calculated at the end of each trading day, ETFs trade on stock exchanges and can be bought and sold throughout the trading day at market prices that fluctuate with supply and demand.

Although the net asset value of ETFs is calculated multiple times during the trading day, investors still use market prices for transactions. This provides investors with greater liquidity and flexibility compared to mutual funds. Additionally, investors can employ various trading strategies, such as short selling or margin trading, which are not common with mutual funds.

What is a Bitcoin ETF?

In the ever-changing world of cryptocurrency investment, Bitcoin ETFs have become an important financial tool. Bitcoin exchange-traded funds (ETFs) allow investors to gain exposure to Bitcoin price fluctuations without directly holding or managing Bitcoin. This type of exposure is favored by some investors.

Bitcoin ETFs hold Bitcoins or contracts related to the price of Bitcoin, similar to company stocks, traded on traditional stock exchanges. As the cryptocurrency market further develops, interest in Bitcoin ETFs has surged, especially the two main types of Bitcoin ETFs: Bitcoin spot ETFs and Bitcoin futures ETFs. These two Bitcoin ETFs fit different investment strategies and risk appetites.

What is a Bitcoin spot ETF?

Bitcoin Spot ETF is an exchange-traded fund that directly holds Bitcoin as the underlying asset. This means that the performance of spot ETFs is directly related to the real-time value of the Bitcoin held. When investors buy shares of a spot ETF, they are essentially buying Bitcoin, they just don’t personally hold the Bitcoin themselves.

For example, suppose a Bitcoin spot ETF is called "BTC-one". If BTC-One holds 10,000 Bitcoins and issues 1 million shares, each share theoretically represents 0.01 Bitcoins. This means that the performance of BTC-One is directly linked to the real-time value of the Bitcoin held.

Advantages and Disadvantages of Bitcoin Spot ETF

There are several advantages to investing in Bitcoin Spot ETF. It allows investors to still benefit from exposure to Bitcoin price fluctuations without having to manage or store Bitcoin, eliminating security and digital wallet concerns. Additionally, since these ETFs trade on traditional stock exchanges, this brings Bitcoin into the regulatory framework, increasing trust among a broad audience. Finally, for traditional investors, Bitcoin spot ETF investment is simpler because it operates within the stock trading framework they are familiar with.

However, as with any investment, there are potential risks with Bitcoin Spot ETFs. The value of the Bitcoin Spot ETF will fluctuate with the price of Bitcoin. Additionally, ETFs may not always perform exactly as Bitcoin due to associated fees or management issues. Although ETFs bring Bitcoin closer to traditional finance and regulation, the cryptocurrency market remains unpredictable. Finally, the cost of trading ETFs is higher than trading spot cryptocurrencies due to the additional fees charged for trading ETFs. Fees associated with ETFs can be as high as 2.5%, while fees for spot cryptocurrency trading are typically much lower.

Please note that Ethereum spot ETFs or other cryptocurrency spot ETFs operate similarly to Bitcoin spot ETFs, and their pros and cons are similar.

What is Bitcoin Futures ETF?

The Bitcoin Futures ETF is an exchange-traded fund that does not hold Bitcoin directly. It invests in Bitcoin futures contracts, which are agreements to buy or sell Bitcoin at a predetermined price on an agreed-upon date in the future. This allows investors to speculate on Bitcoin’s future price fluctuations without owning them.

Suppose there is a Bitcoin futures ETF called "BitFutures" whose main goal is to track the future price of Bitcoin by purchasing Bitcoin futures contracts. BitFutures ETF is established and managed by a financial institution. Assume that BitFutures plans to purchase 1,000 Bitcoin futures contracts, each contract representing the right to purchase one Bitcoin in three months for $55,000.

To raise funds to purchase the contracts, "BitFutures" issued 10 million shares, each representing ownership of the profits (or losses) that may arise from these futures contracts. This means that each share represents an ownership of 0.0001 of each futures contract.

Investors can buy shares of BitFutures on the common stock exchange, just like buying shares of other companies. If the market believes that Bitcoin will be worth well above $55,000 in three months, these shares may trade at a premium. Conversely, if the market is pessimistic, then the shares may trade at a discount.

Assume BitFutures trades at $10 per share. One investor, believing that Bitcoin prices will rise over the next three months, spent $10,000 to buy 1,000 shares. After three months, if the futures contract is profitable, the value of BitFutures stock will likely increase. If the investor is correct and the price per share rises to $12, the investment is now worth $12,000 and the net profit is $2,000.

Essentially, when you buy shares of a Bitcoin futures ETF like BitFutures, you are indirectly betting on the future price of Bitcoin, but are not directly holding the cryptocurrency or futures contract. Instead, you purchase a portion of the fund that owns those contracts. Note that the Ethereum Futures ETF works similarly to the Bitcoin Futures ETF.

Advantages and Disadvantages of Bitcoin Futures ETF

The advantages of Bitcoin Futures ETF are similar to Bitcoin Spot ETF. Bitcoin futures ETFs allow investors to gain exposure to Bitcoin price fluctuations without having to purchase or manage Bitcoin. Bitcoin futures ETFs also operate in a regulated environment, which means that Bitcoin futures ETFs need to comply with standards set by financial regulators. In addition, they provide greater liquidity than other investment vehicles, and investors can easily buy and sell ETF shares on traditional stock exchanges.

One of the disadvantages or risks of the Bitcoin Futures ETF is that it does not provide direct Bitcoin exposure. Investors in Bitcoin futures ETFs do not hold Bitcoin directly, but rather hold shares of the fund invested in futures contracts. Due to the complexity of the contract market, and the performance of Bitcoin futures ETFs is linked to the contract market, Bitcoin futures ETFs are also relatively complex. In addition to additional management fees that drive down returns, the value of a Bitcoin futures ETF may not always align with Bitcoin's price movements. Finally, Bitcoin futures ETFs are also subject to counterparty risk, as the counterparty to the futures contract may be unable to fulfill the requirements of the contract.

The main differences between Bitcoin Spot ETF and Bitcoin Futures ETF

The main differences between Bitcoin Spot ETF and Bitcoin Futures ETF are summarized below. Note that these distinctions generally apply if the underlying asset is Ethereum or another asset.

	Bitcoin Spot ETF	Bitcoin Futures ETF
Underlying asset	Hold Bitcoin	Hold futures contracts related to Bitcoin
Performance impact Factors	are directly linked to the real-time price of Bitcoin	influenced by contract market dynamics
Liquidity needs	Need to hold and safely store Bitcoin, so transactions may not be frequent to ensure that the ETF is consistent with the spot price of Bitcoin	Trading is more frequent, and rollovers are performed when the contract expires , the liquidity management process is more complex
Potential price differences	Usually tracking Bitcoin’s spot price closely	Subject to contract market dynamics and contract expiry dates, which may differ significantly from the Bitcoin spot price
Exposure and Risk	Direct exposure to Bitcoin price fluctuations . Risks are primarily related to the price volatility of Bitcoin	Indirect exposure to Bitcoin price and risk may be affected by Bitcoin volatility and contract market complexities such as leverage and expiry
Operational complexity	Requires infrastructure for storing Bitcoin	Requires experience in futures contract trading and contract markets Professional knowledge

What Bitcoin ETFs can investors buy?

There are a large number of Bitcoin ETFs and Ethereum ETFs available for investment in the market, and investors can easily find a list of such funds through reliable sources. If you are interested in investing in these ETFs, be sure to read the fund details carefully to understand its fee structure, fund management company, and liquidity.

Different ETFs have different fee structures, and you need to understand management fees, transaction fees and other factors that may reduce returns. The reputation and track record of the ETF provider should be considered when selecting. It is relatively safer to choose a well-known fund management company with excellent performance records. Check ETF liquidity. ETFs that can buy and sell stocks seamlessly without significant price fluctuations generally have an advantage.

Additionally, some Bitcoin ETFs may offer diversified exposure to other cryptocurrencies as well. If you want a diversified cryptocurrency investment, consider ETFs that hold multiple digital assets.

As of 2023, well-known financial institutions such as BlackRock, Invesco, Ark Invest and Fidelity have submitted applications for Bitcoin spot ETFs. If these applications are approved, investors will have a more diverse selection of Bitcoin ETFs to choose from in the future.

Who should consider investing in Bitcoin ETFs?

It’s important to understand the difference between Bitcoin spot ETFs and Bitcoin futures ETFs and which investors each are suitable for.

The Bitcoin Spot ETF is suitable for investors who want to gain direct exposure to the real-time price fluctuations of Bitcoin without holding or managing Bitcoin. For example, investors who have confidence in the long-term value proposition of Bitcoin and want to participate in investments that closely track the market price of Bitcoin. They may prefer simpler spot ETFs to complex contract transactions.

Bitcoin Futures ETF is suitable for more experienced investors who are interested in the price of Bitcoin and can flexibly deal with the complex contract market. For example, investors may wish to take advantage of contract market dynamics, hedge other investments or look for opportunities in short-term price fluctuations. In addition, such investors may be willing to assume the potential risks and rewards of contract trading, including complex contract rollover issues.

Conclusion

Bitcoin ETF is a bridge between traditional investors and the cryptocurrency world. The Bitcoin Spot ETF provides direct exposure to Bitcoin's price movements by holding Bitcoin, while the Bitcoin Futures ETF provides exposure through futures contracts that predict Bitcoin's future price.

However, all investments must be treated with caution. Bitcoin and related investment vehicles come with many potential risks. Investors who want to be successful should do adequate research before making a decision. Perhaps most importantly, it’s important to consult a reliable financial advisor who can provide professional advice tailored to your financial goals and risk tolerance.

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