Bitcoin (BTC-USD) is surging. If you haven’t checked in on the crypto market since last year’s “crypto winter,” you might be surprised to hear that BTC is up over 100% YTD after a rally of nearly 20% over the past week alone. After a brutal 2022, Bitcoin found its footing as the broader market rebounded in 2023, but things really started to kick into gear this summer with news that BlackRock (NYSE:BLK), the world’s largest asset manager, had filed an application to list a spot Bitcoin ETF with the SEC.
BlackRock is the world’s largest asset manager, with roughly $9.5 trillion in assets, and observers have noted that they rarely fail to gain approval for an ETF they file for, which contributed to the market’s excitement. But BlackRock wasn’t the only asset manager that filed for such an ETF, as a host of additional prominent asset managers, including Fidelity, VanEck, WisdomTree, and Cathie Wood’s ARK Invest, rushed to file similar applications.
Last week, a premature tweet that the SEC had approved the BlackRock ETF sent Bitcoin higher. This week, discussions about BlackRock’s Bitcoin ETF being listed on the Depository Trust & Clearing Corporation database under the ticker “IBTC” pushed Bitcoin’s price above $34,000.
It’s important to note that nothing is set in stone here and that there is no guarantee that approval of such an ETF is imminent. While we don’t yet know if anything is concrete, it’s a good time to take a step back and discuss what a spot Bitcoin ETF is, how it would differ from the current ETFs in the market, and what it would mean for investors.
What’s the Big Deal about a Spot Bitcoin ETF?
If you follow Bitcoin or the ETF space closely, you may be aware that there are already several Bitcoin-related ETFs in the market at this point in time, such as the ProShares Bitcoin Strategy ETF (NYSEARCA:BITO) and the VanEck Bitcoin Strategy ETF (BATS:XBTF). BITO began trading in 2021, so you may be wondering what the big deal about a spot Bitcoin ETF is.
The key difference is that while these existing ETFs invest in Bitcoin futures, a spot Bitcoin ETF would invest directly in Bitcoin itself. Futures ETFs can stray from the price of the underlying asset based on a variety of factors, but because a spot Bitcoin ETF would directly hold Bitcoin, its price would correlate more closely with the price of Bitcoin.
This would be a significant development for investors, as it would allow them to gain direct exposure to Bitcoin through their normal brokerage and retirement accounts for the first time without having to manage a crypto wallet or set up an account on a crypto exchange like Coinbase.
Managing a Bitcoin wallet can be a daunting step for investors who aren’t crypto-savvy. Investors worry that they can lose their investment if their wallet is hacked. Furthermore, losing one’s keys or seed phrase can separate a user from their funds, and there is no tech support to go to and ask for help, like if you lose your password for an online bank account. Additionally, if using a physical hardware wallet, this device getting lost or damaged can lead to a permanent loss of funds.
Similarly, some investors are understandably cautious about buying and holding Bitcoin on crypto exchanges. That’s because a number of prominent exchanges, including FTX, Voyager Digital, and Celsius Holdings, all imploded last year, and many users lost significant amounts of money when this happened. FTX allegedly commingled customer deposits with its own funds, which didn’t exactly inspire a lot of investor confidence in centralized crypto exchanges.
That’s why there is a good product market fit for spot Bitcoin ETFs. For investors optimistic about Bitcoin’s future but wary of the associated risks, these ETFs offer a simple way to access Bitcoin via regular investment accounts. From a user experience perspective, buying shares of a Bitcoin ETF would feel no different than buying shares of any of the market’s most popular stocks.
Additionally, these ETFs could be a viable option for institutional investors who want to invest in Bitcoin but aren’t structured to buy it and hold it themselves.
A Cost-Effective Option?
In addition to offering everyday investors a seamless and effective way to gain exposure to the price of Bitcoin, spot Bitcoin ETFs could also theoretically present a cost-effective option for investors.
Well-known investor and financial talk show host Ric Edelman recently explained on CNBC the appeal of spot crypto ETFs over crypto futures ETFs, stating, “The absence of a spot bitcoin ETF isn’t stopping people from buying crypto. It’s just forcing them to pay for exotic products that cost more and have less liquidity and higher risk.” Edelman also said, “People are recognizing, ‘I don’t ordinarily buy futures, so if I’m not buying futures in the stock market, why would I buy futures in the crypto market?’’’
While we don’t yet know what the expense ratio of any pending spot Bitcoin ETF will be, Edelman’s view that it will be more cost-effective than a Bitcoin futures ETF seems feasible. The aforementioned Bitcoin futures ETFs, BITO and XBTF, feature relatively high expense ratios of 0.95% and 0.76%, respectively.
Looking Ahead
It’s important to note that nothing is concrete at the moment. The SEC has repeatedly rejected applications for spot Bitcoin ETFs in the past, citing the possibility that these products could fall prey to market manipulation.
However, if approved, spot Bitcoin ETFs would be a convenient option for investors who are bullish on the $660 billion asset but don’t want to go through the hassle or deal with the risks of managing their own crypto wallet or creating an account on a crypto exchange.
While these ETFs would charge fees and thus be more expensive than an individual holding Bitcoin on their own, some investors would be okay with the peace of mind that would come with this tradeoff, and these ETFs would likely be cheaper than the current Bitcoin futures ETFs.
We’ll eventually have more concrete answers on whether a spot Bitcoin ETF is indeed in the cards, but if approved, they would represent a seismic moment for Bitcoin itself and a game-changing option for retail and institutional investors alike.
