At long last, the Securities and Exchange Commission has approved the first spot Bitcoin (BTC) exchange-traded funds to be listed on U.S. exchanges.
Following a multiyear legal battle with the SEC, Grayscale Investments, as well as a slew of other investment firms, will be able to give investors a simpler and safer path to buying the world’s most popular cryptocurrency via ETF offerings.
Funds like ProShares Bitcoin Strategy ETF (ticker: BITO) have offered Bitcoin futures to public market participants, but spot Bitcoin ETFs offer direct exposure to the digital currency.
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The SEC’s Jan. 10 decision allows 11 spot Bitcoin ETFs to trade so far, including funds from Grayscale, Fidelity, Invesco, BlackRock, VanEck, Bitwise, Hashdex, Valkyrie, Franklin, Ark Invest and WisdomTree.
Here’s what you need to know about spot Bitcoin ETFs and how to invest after their SEC approval:
— What is a spot Bitcoin ETF?
— How spot Bitcoin ETFs will impact investors.
— Spot ETFs may emerge for altcoins.
— Bitcoin vs. spot Bitcoin ETFs.
— Should investors buy a spot Bitcoin ETF?
What Is a Spot Bitcoin ETF?
A spot Bitcoin ETF is a fund that experiences price movements proportionate to Bitcoin’s price. This type of fund does not give investors exposure to any other assets.
The relationship of cryptocurrency ETFs to spot Bitcoin ETFs has some parallels to the relationship between gold mining ETFs and spot gold ETFs.
Investing in a spot Bitcoin ETF means you wouldn’t have to worry about a crypto miner or brokerage firm misallocating investments. In other words, spot ETFs follow the price of Bitcoin instead of businesses with significant exposure to Bitcoin. This eliminates the risk of a Bitcoin miner mismanaging its funds, losing its crypto or becoming overleveraged, for example.
ETFs offer investors a way to buy Bitcoin in a more regulated environment. Patrick Cleary, CEO of ETF Architect, explains how this dynamic can lead to more demand for Bitcoin: “Regulation and structure can provide investors some modicum of comfort that those overseeing their funds are fiduciaries, held to a regulatory standard, and are subject to inquiry and enforcement.”
Regulatory guardrails for ETFs can also keep consumers away from fraudulent crypto firms like FTX. Instead, investors can focus on Bitcoin’s performance rather than wondering if the place they stored their crypto is legitimate.
How Spot Bitcoin ETFs Will Impact Investors
Spot Bitcoin ETFs will make the world’s largest cryptocurrency more accessible to investors. Bitcoin has comfortably outperformed the S&P 500 and Nasdaq 100 over the past five years. Cryptocurrencies have always been volatile, however, and higher demand could lead to more volatility.
The 11 spot Bitcoin ETFs are already trading on the public market. You can buy shares of each ETF or buy one of them. Unlike ETFs that hold a basket of stocks with different objectives, however, every spot Bitcoin ETF offers the same portfolio. More competition can lead to better deals on management fees.
“Established firms will offer low-fee products, forcing newer issuers to compete in a race to the bottom concerning fees,” explains David Waugh, lead analyst at Coinbits. Several firms are not charging any fees for their spot Bitcoin ETFs for the first three to six months.
That means investors can keep all of the fund’s gains during this time. Most funds will keep their expense ratios under 0.3% after the “free trial” concludes.
“In the week leading up to the SEC’s approval, firms continuously updated their applications, lowering fees each time. This indicates they expect significant inflows to offset revenue losses associated with cutting fees,” Waugh says.
Spot Bitcoin ETFs also make it easier to diversify into alternative assets. Everyday investors have real estate investment trusts, or REITs, as a way to gain exposure to real estate, for example. Now, investors can receive direct exposure to Bitcoin with heightened regulation.
[READ: 10 of the Best Vanguard ETFs to Buy]
Spot ETFs May Emerge for Altcoins
Bitcoin is the first cryptocurrency that the SEC approved for a spot ETF, but it likely won’t be the last. While it’s easy for investors to speculate when other cryptocurrencies like Ether (ETH) and Dogecoin (DOGE) may have their own spot ETFs, some firms are already taking action.
“Issuers like BlackRock have also applied for spot Ether ETFs, implying that they think approval for such products is likely after spot Bitcoin ETFs are approved,” Waugh explains. “Given that the SEC has already approved an Ether futures ETF and (with) the spot Bitcoin ETF approval … the agency will be hard-pressed to deny a spot Ether product. Given the SEC’s approval timeline, spot Ether ETFs could be approved in late 2024 or early 2025.”
While Bitcoin is likely to gain value due to spot ETFs, other cryptos could experience a similar fate. Investors can monitor how Bitcoin’s price changes with the new spot ETFs and use that to gauge how other cryptocurrencies will perform if they receive spot ETFs.
Cryptocurrencies with futures ETFs already in the market seem to have a better chance of a spot ETF in the future. While a spot Ether ETF is already in the works, other cryptocurrency spot ETFs could become available in a few years. These ETFs could flood the market when that time arrives.
“The first fund is always the hardest, but as standards are set, best-in-class practices adopted, etc., I could see more products coming to market more quickly,” Cleary says.
Bitcoin vs. Spot Bitcoin ETFs
Spot ETFs make it easier to invest in Bitcoin, but each path has its own risks. While spot Bitcoin ETFs are more expensive, Bitcoin investors should consider the risks of buying the digital asset instead of using an ETF.
“Owning Bitcoin involves custody risk, requiring secure management of private keys. Conversely, a spot Bitcoin ETF carries counterparty risk as it’s integrated within the traditional financial system, subject to its regulations and market forces.”
Spot Bitcoin ETFs are also easier to trade since you don’t have to open your digital wallet to access your Bitcoin. You can trade spot Bitcoin ETFs in the same dashboard where you keep your stocks, bonds and other investments.
Buying a fund can be more convenient, but you put your trust in the fund manager to not lose the private key. Furthermore, you do not own the asset directly if you buy shares in a spot Bitcoin ETF. Buying your own Bitcoin outright and storing it in a wallet allows you to access it at all times.
Should Investors Buy a Spot Bitcoin ETF?
Investors can currently choose from all 11 spot Bitcoin ETFs, and with some of these funds temporarily waiving their fees, you have time to test them out and determine if you want to keep them in your portfolio.
A decision around spot Bitcoin ETFs boils down to how you feel about Bitcoin, your risk tolerance and your financial goals. Bitcoin is a riskier asset that has significantly outperformed the stock market over the past five years. However, the crashes have tested even the most patient investors.
Risk-averse investors entering retirement may want to consider other investments. Bitcoin is a high-risk investment that can result in considerable losses during an economic downturn. Bitcoin and spot Bitcoin ETFs do not generate cash flow, which can be a turn-off for dividend investors.
Not every investor needs to buy investments that significantly outperform the market to achieve their goals. Younger investors typically take on assets with high-risk, high-reward characteristics since they have more time for their investments to grow. Because they are earlier in their careers, young investors can more easily recover from losses than soon-to-be retirees.
Investors may also want to consider cryptocurrencies that are likely to have their own spot ETFs in the future. A flurry of spot ETFs may get approved in the future, with Bitcoin doing what it does best: blazing a trail for the other cryptocurrencies.
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Spot Bitcoin ETFs: How to Invest After Their SEC Approval originally appeared on usnews.com
