Introduction
Ever since the news about BlackRock filing for Bitcoin spot ETF has made it into media, there is an increasing debate around Bitcoin futures and spot ETFs. This article sheds light on the pros and cons of Bitcoin spot and futures ETFs for a comparative analysis.
Introduction to Spot and Futures Trading
Spot trading is directly purchasing or selling cryptocurrencies from exchange platforms, DEXs, or other secondary markets. On the other hand, futures are a type of derivative contract for cryptocurrency.
It is a contract that allows investors to purchase or sell the underlying asset at a later date at a predetermined price in the future. The future contract is executed at the agreed upon date and the holder cannot utilize it before the expiration.
What is an Exchange Traded Fund (ETF)?
An Exchange Traded Fund (ETF) is type of investment fund that is amalgamation of index and mutual funds. ETF can track the performance of specified assets based on predetermined conditions or performance.
At the same time, it operates like a basket of various assets to distribute risk and maximize returns like a standard mutual fund. ETFs allow investors to invest in an underlying asset without directly dealing in them.
What is a Bitcoin ETF?
Bitcoin ETFs track the prices of Bitcoin in the spot markets or hold Bitcoin contracts. A Bitcoin ETF is listed on a traditional stock exchange like share listings. In other words, Bitcoin ETFs allow investors to gain exposure without directly buying or selling BTC.
Investors who have reservations about Bitcoin volatility and do not want to deal with risk of securing private keys for Bitcoin storage tend to favor Bitcoin ETFs instead. At present, two types of Bitcoin ETFs have grabbed attention from investors namely Bitcoin Spot ETFs and Bitcoin Futures ETFs.
What is Bitcoin Spot ETF?
Bitcoin Spot ETF tracks the price of Bitcoin from spot markets. It means that Bitcoin ETF value is pegged to the real-time price changes for BTC. If an investor purchases one Bitcoin spot ETF share, it represents the price of one Bitcoin in the spot market without holding Bitcoin directly.
If Bitcoin spot ETF under ticker issues 1000 shares and holds 100 Bitcoins in reserves. It means that each Bitcoin spot ETF share represents 0.1 Bitcoin.
Advantages of Bitcoin Spot ETF
Bitcoin spot ETF investors do not have to invest directly with crypto wallets, exchange accounts, registration process.
Bitcoin spot ETF holders do not have to worry about safeguarding their private keys or secure their BTC holdings to counter hack attacks.
Bitcoin spot ETFs are listed on traditional exchanges that make them a regulated investment option. Thus, they offer more security for investors.
Spot ETFs are more accessible and convenient for traditional investors on account of their familiarity with stock trading.
Risks Associated with Bitcoin Spot ETFs
The value of Bitcoin spot ETFs is directly related to spot market and inherits its volatility.
This ETF may not emulate Bitcoin prices perfectly on account of differences with management fees and other costs. They are subjected to regulatory oversight.
What are Bitcoin Futures ETFs?
Bitcoin Futures ETF tracks the performance of futures contract for Bitcoin. It means that investors can speculate regarding the future price of Bitcoin without buying or selling the coin directly. For example, a financial firm can opt to purchase 100 Bitcoin futures contracts to establish a new Bitcoin future ETF.
Each futures contract allows the holder to purchase 1 BTC at $35K after 70 days. The Bitcoin futures ETF will issue 1000 shares that represent profit or loss these futures contract will materialize. It means that each Bitcoin futures ETF share represents 0.1 percent profit or loss stake in Bitcoin futures contracts.
Advantages of Bitcoin Futures ETF
Bitcoin futures ETFs also offer Bitcoin exposure without directly dealing in crypto. They are regulated and follow the guidelines set by government agencies.
They provide more liquidity in comparison to other investment vehicles meaning that investors can easily purchase or sell their shares on stock exchanges.
Risks Associated with Bitcoin Futures ETFs
These ETFs are complex, as the fund has invested in Bitcoin futures contracts rather than owning Bitcoin reserves.
It poses greater risk for investors since their profit depends on future market movements. Bitcoin futures ETFs do not track the real-time value of Bitcoin and they are also subjected to Counterparty risk.
Conclusion
Bitcoin spot and futures ETFs offer different advantages and setbacks for their investors. They differ from each other in terms of direct Bitcoin ownership, performance metrics, liquidity ratio, price divergence coefficient, risks, and complexity.
