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Bitcoin Futures ETF vs. Spot ETF

We see headlines in the news about Bitcoin ETFs (exchange traded funds) but there are actually two types that people are referring to - futures ETF and spot ETF. Investors can access the price movement of bitcoin using either of the financial instruments, but they go about it in various ways.

Actual BTC is kept in custody by Bitcoin spot ETFs. A Bitcoin ETF provider buys an equivalent quantity of Bitcoin on the open market and adds it to its portfolio whenever an investor acquires shares in the fund. Similar to how they sell their shares, the ETF provider also sells an equivalent quantity of bitcoin from its stock when they do the same. When the ETF is rebalanced, this buying and selling process takes place.

As the ETF exactly reflects Bitcoin's price, it offers a dependable approach to expose oneself to price changes.

On the other hand, Bitcoin is not directly owned by Bitcoin futures ETFs. As an alternative, they enable users to invest in Bitcoin futures contracts, which are arrangements to purchase and sell Bitcoin at a particular price on a particular date. These ETFs' value is affected not only by the current price of Bitcoin but also by predictions for its future worth, which may cause the futures ETF price to differ from the current price.

Futures ETFs are thought of as more adaptable financial instruments, and they come with their own set of advantages and dangers. Futures ETFs, as opposed to Bitcoin spot ETFs, allow for the shorting of BTC.

ETFs are a category of regulated financial instrument in the US and the majority of other nations, which means that companies offering them to the public must first meet certain requirements and receive regulatory clearance. Investors who are hesitant to invest in financial goods that are not regulated may feel more secure as a result.

Most Bitcoin owners today buy their BTC from a broker, a P2P exchange, or a centralized exchange.

Despite the fact that this procedure is now rather straightforward, some potential investors are turned off by the difficulty of holding, protecting, and conducting transactions in digital currencies like Bitcoin.

Instead, many investors would want to use brokers to buy, hold, and sell Bitcoin on their behalf, taking a hands-off approach to the investment. This would possibly open the door to investments from mutual funds, pension funds, insurance firms, and more, as well as give less technically skilled investors exposure to Bitcoin's price movement.

Compared to Bitcoin Futures ETFs, Bitcoin spot ETFs have a number of advantages that may make them a more appealing investment choice.

Several of these benefits include:

Simplified structure: Investors won't have to deal with tricky details like leverage, margin calls, and expiration dates.

Direct price tracking: A Bitcoin spot ETF's price is probably closer to the current BTC spot price because it is backed directly by Bitcoin. As opposed to futures, which can vary because of factors like backwardation and contango.

Reduced counterparty risk: Parties to futures contracts must perform their obligations. Rarely, counterparties may choose not to or be unable to carry out their obligations. which might affect the holder of a futures contract.

Despite all the potential positives of a spot ETF, the US Securities and Exchange Commission (SEC) has yet to approve a Bitcoin spot ETF. The SEC has turned down dozens of proposals since 2013.

The SEC has given a variety of justifications for its denials over the years, but in general it argues that the Bitcoin market is too small to support a Bitcoin spot ETF and that there are insufficient safeguards against market manipulation and fraud.

However, most experts agree that it is only a matter of time before a spot ETF is approved by the SEC.

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