Bitcoin Spot ETFs are the recent buzz in the cryptocurrency realm. With the lawsuit between Grayscale Investments and the U.S. Securities and Exchange Commission (SEC) over Bitcoin Spot ETFs reaching a conclusion, the SEC dropping the appeal marked a victory for Grayscale. The SEC could no longer use the previous reasons to block the approval of Bitcoin Spot ETFs. Another stimulant for market performance was the revelation that iShares Bitcoin Trust (IBTC), a subsidiary of asset management giant BlackRock, appeared in the qualified documents at DTCC (The Depository Trust & Clearing Corporation). Though it was later confirmed that the document existed as early as August and needed correction, the news spurred a more than 25% surge in Bitcoin prices from October till now. All signs indicate that the approval of Bitcoin Spot ETFs is merely a matter of time.

This week’s CryptoSnap report by Dr.DODO will explain why Bitcoin Spot ETFs are important and what they signify.

Why is Bitcoin Spot ETF a Better Solution?

According to statistics from Galaxy Research as of 9/30, the global financial markets already have various Bitcoin investment products (including ETPs and closed-end funds) holding a total of about 842,000 BTC (approximately $21.7 billion). However, existing Bitcoin investment products have many drawbacks for investors, such as high fees, low liquidity, and tracking errors, and are inaccessible to many investors. The emergence of Bitcoin Spot ETFs can offer lower fees, better liquidity, and price tracking efficiency to investors, while possibly meeting stricter regulatory and bankruptcy protection requirements, offering a more convenient asset allocation method for many traditional market investors.

Bitcoin Spot ETFs can provide more investors (including retail and institutional investors) with exposure to Bitcoin through formal channels and can be distributed through more investment channels. Through ETFs, financial advisors can begin recommending Bitcoin investments to their clients and attract a wealthier older demographic familiar with traditional stock market operations but lacking knowledge of the cryptocurrency market. Bitcoin ETFs cater precisely to their needs.

The eight Bitcoin Spot ETFs already submitted for SEC approval:

Differences Between Bitcoin Spot ETFs and Futures ETFs?

There's a question in many minds regarding the difference between Bitcoin Spot ETFs and Futures ETFs, especially since Bitcoin Futures ETFs have already been approved in the market.

Currently, several Bitcoin Futures ETF products have been launched in the US market, including ProShares Bitcoin Strategy ETF (BITO), VanEck Bitcoin Strategy ETF (XBTF), and Fidelity Bitcoin Strategy ETF (FBTC), among others. However, the market has had a significant reaction to the possible approval of Spot ETFs. While both Spot and Futures ETFs are quite similar in terms of price volatility and provide market exposure to Bitcoin, from a product perspective, Futures ETFs usually have higher fees and are more complex to manage. Psychologically, allocating to Spot ETFs means investors genuinely own Bitcoin, while allocating to Futures ETFs is more akin to short-term speculation.

The primary differences between Bitcoin Spot and Futures ETFs can be summarized in four points:

• Asset Ownership: Spot ETFs directly hold Bitcoin, while Futures ETFs track Bitcoin prices through purchasing Bitcoin futures contracts.

• Fee Structure: Futures ETFs usually have higher fees as they need to manage futures contracts, while Spot ETFs may have lower fees.

• Price Tracking Efficiency: Spot ETFs typically can track Bitcoin prices more accurately, while Futures ETFs may experience some tracking error due to the futures market's influence.

• Liquidity: Spot ETFs might offer higher liquidity as they directly hold Bitcoin, whereas Futures ETFs liquidity may be constrained by the futures market.

Market Reactions

Although there's no clear timetable for the approval of Spot ETFs, Bitcoin prices have doubled since the beginning of the year. In this narrative-driven market, price often leads the news.

If ETFs are smoothly approved, besides attracting traditional investors, two major factors are crucial for the Bitcoin market. Firstly, the introduction of Spot ETFs might lure more investors into the market, thereby enhancing Bitcoin's liquidity. Secondly, it could increase legitimacy and trust. Bitcoin has long been seen by many as a virtual asset with no real value, but if Spot ETFs gain regulatory approval, this might boost market trust in Bitcoin, hence elevating its price.

Speaking of Bitcoin Spot ETFs, one cannot ignore GBTC. Grayscale Bitcoin Trust (GBTC), managed by Grayscale Investments, is one of the largest Bitcoin investment products in the market, with a fund size of around $20 billion. It provides a relatively traditional and simple way for investors to invest in Bitcoin, serving as an alternative for traditional market investors wanting to invest in Bitcoin before the ETFs launch. However, due to its trust nature, there's no redemption mechanism, and there has been a significant price premium over Bitcoin Spot. During the 2020 bull market, the premium reached as high as +40%, and during last year's institutional collapse, it plummeted to -50%. With the end of Grayscale's lawsuit, the chances of GBTC converting to a Spot ETF have greatly increased. GBTC's price has risen from the -45% premium at the beginning of the year to -13% now, and the price has risen from $8 at the start of the year to $26 now, making it one of the best performing investment targets in the traditional financial market this year.

Author's Perspective

The author believes that the news about Spot ETFs is certainly a positive development, especially for those of us engaged in this industry who harbor some admiration for Bitcoin.

For Bitcoin to be embraced by a broader audience and become a part of more investors' asset allocation, the path of ETFs is indispensable. However, is there really such a massive allure for Bitcoin in the short term with the Spot ETF? The author's opinion is negative on this. If the introduction of Futures ETFs to the market until now hasn’t spurred a rallying effect, why would the launching of Spot ETFs have such an effect? Would these savvy institutions truly only accept Spot ETFs and not Futures ETFs? Would the managers of ETFs wait for SEC approval before buying into Bitcoin? Of course, attracting more people to this market in the long run is a good thing, but in the short term, the author believes it's still the news-driven frenzy causing everyone to buy in and drive up prices. Once Spot ETFs are truly launched, the impact on prices will definitely not be as significant as it is now, being driven by so-called anticipatory psychology. The conclusion is that while following FOMO, one must also be mindful of the risks involved. The time when the news officially lands might very well be when the music at the ball suddenly stops.