Investors already have access to exchange-traded funds that invest in Bitcoin (BTC) futures contracts, but soon they may be able to buy ETFs that track the current spot price of the original cryptocurrency.
Grayscale Investments has been aiming to launch a spot Bitcoin ETF since October 2021 and has recently made strides in its regulatory tug-of-war with the Securities and Exchange Commission to accomplish its goal.
A spot Bitcoin ETF would offer simpler, safer exposure to the world’s most popular cryptocurrency without requiring that investors own it directly, presumably making it accessible to a wider group. In the meantime, ProShares Bitcoin Strategy ETF (ticker: BITO) and other popular funds already trade on public markets and invest in Bitcoin futures.
Here are some key things to be aware of regarding Grayscale’s sparring with the SEC, spot Bitcoin ETFs and where Bitcoin investing might be headed:
Grayscale sued the SEC after the agency, in June 2022, rejected Grayscale’s request to turn its over-the-counter Grayscale Bitcoin Trust (GBTC) into a listed spot Bitcoin ETF. Grayscale objected to the SEC ruling on the basis of its previous approval of ETFs that held Bitcoin futures contracts.
Grayscale made a legal coup on Aug. 29 of this year, when the District of Columbia Court of Appeals ruled that the SEC erred in rejecting Grayscale’s proposal for a Bitcoin ETF without providing a reasonable explanation. The SEC had the option to appeal, but Bloomberg reported Oct. 13 that it had no intention of asking the federal appeals court to reconsider the ruling.
Analysts also stated that it was unlikely that the SEC would try to make a different argument because that would have required it to backpedal on its prior approval of Bitcoin futures ETFs. Since the SEC has declined to appeal the ruling, Grayscale’s proposal will be reviewed again. If it’s approved, the cryptocurrency industry will score a major win.
The price of Bitcoin hit nearly $30,000 on Oct. 16 after a rumor circulated on social media platform X (formerly Twitter) that the SEC had approved BlackRock’s separate spot Bitcoin ETF application. BlackRock put the rumor to rest by saying no decision had been made yet, and Bitcoin’s price settled above $28,000 as of Oct. 17.
With the strong demand for cryptocurrencies not ebbing despite the FTX scandal and other high-profile foibles, a Bitcoin spot ETF represents the next frontier. Experts say the SEC’s approval could be a long-term tailwind for the original crypto’s price.
Grayscale has been the leader behind this movement, but other firms like Invesco, BlackRock, Fidelity and Cathie Wood’s Ark Invest also want to launch Bitcoin spot ETFs. The SEC reportedly has applications for spot Bitcoin ETFs on hold from WisdomTree, VanEck, Bitwise and Valkyrie as well.
While investors may see a spot Bitcoin ETF before the end of 2023, some market watchers say it’s more likely to come to fruition before the end of 2024.
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.
Will Peck, head of digital assets at WisdomTree, highlights how Bitcoin ETFs make the cryptocurrency more accessible to investors: “Bitcoin in an ETF wrapper can provide investors with a simple, secure and cost-efficient way to gain exposure to the price of Bitcoin while benefiting from the safety and security they get from an asset manager that is adhering to strict regulatory guidelines.”
“A spot Bitcoin ETF approval will be a result of years of regulatory engagement and dialogue with the SEC, and this productive engagement ensures that the product that eventually reaches investors meets or exceeds high regulatory standards,” he adds.
Higher investor confidence in a secure way to invest in Bitcoin can drive more demand for the digital asset. Other investment firms are closely watching as Grayscale approaches a resolution to its application.
In brief, spot Bitcoin ETFs make it easier to invest in Bitcoin. You don’t have to create a digital wallet or understand much about the blockchain to get started. You don’t have to remember your private key or take on the risks of decentralization.
You also don’t have to go into your digital wallet to conduct trades or store your crypto in a riskier hot wallet for easier accessibility. Traders can exchange Bitcoin spot ETFs throughout the trading day right from their investment portfolios.
However, spot ETFs aren’t perfect. Investors should consider the shortcomings of ETFs before deciding how to invest in Bitcoin and other cryptocurrencies.
“When you buy BTC from an exchange and move it to a self-custody wallet, you actually own the underlying asset. When you invest in a Bitcoin ETF, a third party owns the underlying asset,” says Kadan Stadelmann, chief technology officer for the Komodo crypto platform. “The risk with Bitcoin ETFs is that the fund manager might not actually buy or hold the underlying asset.”
Trustworthy fund managers can remove the risks of investors having to keep track of their own private keys. However, the operating word here is “trustworthy.” Any vulnerabilities in the security system or someone losing access to a digital wallet can lead to significant losses.
“When a broker or other third party has control of your private keys, you don’t have true access to your funds. The ability to access your funds depends solely on the ETF provider’s security practices and fund management practices,” Stadelmann explains. “The only way to avoid this pitfall and to make sure 100% of your funds remain available at all times is to buy BTC outright and store it in a self-custody wallet.”
ETFs are also more expensive in the long run. These funds regularly charge maintenance fees that always stick around. You will continue to pay these fees for as long as you hold onto the fund. If you buy Bitcoin, you only have to pay one transaction fee. Then, the asset can grow without additional fees disrupting your gains.
Owning Bitcoin in your own wallet is the equivalent of being in the driver’s seat and accepting the risks. Buying shares in a spot Bitcoin ETF is the equivalent of being in the passenger seat and continuously paying a driver to take the risks for you. That said, it’s easier, and perhaps less stressful for some, to ride shotgun.
Grayscale recently scored a big win on the path to a spot Bitcoin ETF, which would give investors an alternative to investing via a company like Coinbase Global Inc. (COIN), which depends on Bitcoin’s demand to generate strong financials.
But it’s also important to consider whether this type of ETF fits into your portfolio before it goes mainstream. A spot ETF will generate strong demand and fanfare, but you should look beyond the noise.
Bitcoin is a high-risk, high-reward asset. It has soundly outperformed the S&P 500 and Nasdaq 100 year to date and over the past five years. Bitcoin’s price chart resembles a high-growth stock with a high valuation. There have been plenty of rallies, but the downturns can be brutal for new investors. Bitcoin is still down by more than 50% from its all-time high.
Ironically, although Bitcoin is known for its volatility, the digital asset has been relatively stable since mid-March, gaining roughly 4% through Oct. 16. Since analysts believe spot Bitcoin ETFs can drive more demand for the cryptocurrency, there’s an argument for buying Bitcoin before the Grayscale ETF debuts.
Of course, investors should consider their long-term goals and risk tolerance before buying or selling any asset, including Bitcoin. Cryptocurrency may make sense for some investors, but it’s not for everyone.
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 setups, 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.
But it’s hard to deny that crypto looks poised to cross another milestone in a brave new world of investing. The release of spot Bitcoin ETFs will make the cryptocurrency more accessible, and may also inspire spot ETFs that track other cryptocurrencies, such as Ether (ETH) and Cardano (ADA).
