Popular Science The Difference Between Bitcoin Spot ETF and Bitcoin Futures ETF

Understanding the Distinct Differences Between Bitcoin Spot ETFs and Bitcoin Futures ETFs in Popular Science

Author | Binance Academy

Editor | Colin Wu

Original Article Link:

https://academy.binance.com/en/articles/bitcoin-spot-etf-vs-bitcoin-futures-etf-what-s-the-difference?ref=AZTKZ9XS&utm_source=BinanceTwitter&utm_medium=GlobalSocial&utm_campaign=GlobalSocial

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Summary

• Bitcoin Exchange Traded Funds (ETFs) allow investors to gain exposure to Bitcoin price fluctuations without directly holding or managing Bitcoin.

• The main differences between Bitcoin Spot ETF and Bitcoin Futures ETF include underlying assets, performance influencing factors, liquidity demand, potential price differences, and exposure.

• Bitcoin ETFs act as a bridge between traditional investors and the cryptocurrency world.

• BlackRock, Invesco, Ark Invest, and Fidelity are among the financial institutions that have applied for Bitcoin Spot ETF. If these applications are approved, investors will have more Bitcoin ETF options to choose from.

What is an ETF?

An Exchange Traded Fund (ETF) is an investment fund that can be traded on a stock exchange, similar to a stock. These funds typically hold a mix of assets, such as stocks, commodities, or cryptocurrencies, and aim to track the performance of a specific index or asset.

For example, an ETF tracking the S&P 500 index holds stocks of the companies listed in the S&P 500 index, attempting to mimic the performance of that index. If there are changes in the index constituents, the ETF manager will adjust the fund’s holdings accordingly to continue tracking the composition and performance of the index.

Unlike mutual funds, which calculate the Net Asset Value (NAV) of the assets at the end of each trading day, ETFs trade on a stock exchange and can be bought and sold throughout the trading day at market prices that fluctuate based on supply and demand.

Although the NAV of an ETF is calculated multiple times during the trading day, investors still trade based on market prices. This provides investors with greater liquidity and flexibility compared to mutual funds. Additionally, investors can employ various trading strategies such as short selling or margin trading, which are less common with mutual funds.

What is a Bitcoin ETF?

In the ever-changing field of cryptocurrency investment, Bitcoin ETFs have become an important financial tool. Bitcoin Exchange Traded Funds (ETFs) allow investors to gain exposure to the price fluctuations of Bitcoin without directly holding or managing Bitcoin. This type of exposure is favored by some investors.

Bitcoin ETFs hold Bitcoin or contracts related to the price of Bitcoin, similar to company stocks, and trade on traditional stock exchanges. As the cryptocurrency market continues to develop, there has been a surge of interest in Bitcoin ETFs, especially two main types: Bitcoin Spot ETFs and Bitcoin Futures ETFs. These two types of Bitcoin ETFs cater to different investment strategies and risk preferences.

What is a Bitcoin Spot ETF?

A Bitcoin Spot ETF is an exchange-traded fund that directly holds Bitcoin as its underlying asset. This means that the performance of a spot ETF is directly linked to the real-time value of the held Bitcoin. When investors purchase shares of a spot ETF, they are essentially buying Bitcoin, but they don’t personally hold the Bitcoin themselves.

For example, let’s say there is a Bitcoin Spot ETF called “BTC-One”. If BTC-One holds 10,000 Bitcoins and issues 1 million shares, theoretically each share represents 0.01 Bitcoin. This means that the performance of BTC-One is directly linked to the real-time value of the held Bitcoin.

Pros and Cons of Bitcoin Spot ETFs

Investing in Bitcoin Spot ETFs has several advantages. It allows investors to benefit from the exposure to Bitcoin price fluctuations without the need to manage or store Bitcoin, thus eliminating concerns about security and digital wallets. Additionally, since these ETFs trade on traditional stock exchanges, it brings Bitcoin into a regulatory framework, increasing trust among a wider audience. Finally, for traditional investors, investing in Bitcoin Spot ETFs is simpler as it operates within the familiar framework of stock trading.

However, like any investment, Bitcoin Spot ETFs also come with potential risks. The value of Bitcoin Spot ETFs will fluctuate with changes in the price of Bitcoin. Furthermore, due to associated fees or management issues, the performance of ETFs may not always align perfectly with Bitcoin. Although ETFs bring Bitcoin closer to traditional finance and regulation, the cryptocurrency market remains unpredictable. Lastly, trading ETFs incurs additional costs, making the cost of trading ETFs higher compared to trading spot cryptocurrencies. The associated fees of an ETF can go up to 2.5%, while the fees for spot cryptocurrency trading are generally much lower.

Please note that the workings of Ethereum Spot ETFs or other cryptocurrency spot ETFs are similar to Bitcoin Spot ETFs, and their pros and cons are also similar.

What is Bitcoin Futures ETF?

Bitcoin Futures ETF is an exchange-traded fund that does not directly hold Bitcoin. It invests in Bitcoin futures contracts, which are agreements to buy or sell Bitcoin at a predetermined price on a future date. This allows investors to speculate on the future price fluctuations of Bitcoin without actually owning it.

Let’s say there is a Bitcoin Futures ETF called “BitFutures” whose main objective is to track the future price of Bitcoin by purchasing Bitcoin futures contracts. BitFutures ETF is established and managed by a financial institution. Let’s assume BitFutures plans to buy 1,000 Bitcoin futures contracts, where each contract represents the right to buy one Bitcoin at a price of $55,000 after three months.

To raise funds for purchasing the contracts, “BitFutures” issues 10 million shares, with each share representing ownership of the potential profits (or losses) from these futures contracts. This means that each share represents ownership of 0.0001 of each futures contract.

Investors can buy shares of BitFutures on a regular securities exchange, just like buying stocks of other companies. If the market believes that the price of Bitcoin will be significantly higher than $55,000 after three months, these shares may be traded at a premium. Conversely, if the market is bearish, these shares may be traded at a discount.

Let’s assume the trading price of BitFutures is $10 per share. An investor who believes that the price of Bitcoin will rise in the next three months spends $10,000 to buy 1,000 shares. After three months, if the futures contracts are profitable, the value of BitFutures shares is likely to increase. If the investor’s prediction is correct and the price per share rises to $12, their investment is now valued at $12,000, resulting in a net profit of $2,000.

Essentially, when you buy Bitcoin Futures ETF shares similar to BitFutures, you are indirectly speculating on the future price of Bitcoin without directly holding the cryptocurrency or futures contracts. Instead, you are buying a portion of the fund that owns these contracts. Note that the operation of Ethereum Futures ETF is similar to Bitcoin Futures ETF.

Advantages and Disadvantages of Bitcoin Futures ETF

Bitcoin Futures ETF shares the advantages of Bitcoin Spot ETF. It allows investors to gain exposure to Bitcoin price fluctuations without the need to purchase or manage Bitcoin. Bitcoin Futures ETF also operates within a regulated environment, meaning it needs to comply with standards set by financial regulatory bodies. Furthermore, they provide greater liquidity compared to other investment tools, allowing investors to easily buy and sell ETF shares on traditional securities exchanges.

One of the disadvantages or risks of Bitcoin Futures ETF is that it does not provide direct exposure to Bitcoin. Investors in Bitcoin Futures ETF do not directly hold Bitcoin but hold shares of the fund that invests in futures contracts. Due to the complexity of the futures market, and the performance of Bitcoin Futures ETF being tied to the futures market, Bitcoin Futures ETF is also relatively complex. Apart from additional management fees that can lower returns, the value of Bitcoin Futures ETF may not always correspond directly to the price movements of Bitcoin. Lastly, Bitcoin Futures ETF also faces counterparty risk, as the counterparties in the futures contracts may not fulfill the contract requirements.

The main differences between Bitcoin Spot ETF and Bitcoin Futures ETF

The main differences between Bitcoin Spot ETF and Bitcoin Futures ETF are summarized as follows. Please note that these differences also generally apply if the underlying asset is Ethereum or other assets.

Which Bitcoin ETFs can investors buy?

There are a large number of Bitcoin ETFs and Ethereum ETFs available for investment in the market, and investors can easily find such fund lists through reliable sources. If you are interested in investing in these ETFs, be sure to read the fund details carefully to understand their fee structure, fund management companies, and liquidity.

Different ETFs have different fee structures, and you need to understand factors such as management fees, trading fees, etc. that may reduce returns. When selecting, consider the reputation and performance records of ETF providers. It is relatively safer to choose well-known fund management companies with excellent performance records. Check the liquidity of the ETF. ETFs that can be traded seamlessly with minimal price fluctuations usually have advantages.

In addition, some Bitcoin ETFs may also provide diversification exposure to other cryptocurrencies. If you want to diversify your cryptocurrency investment, you can consider holding ETFs that hold multiple digital assets.

As of 2023, well-known financial institutions such as BlackRock, Invesco, Ark Invest, and Fidelity have submitted applications for Bitcoin Spot ETFs. If these applications are approved, investors will have a more diverse selection of Bitcoin ETFs in the future.

Who should consider investing in Bitcoin ETFs?

Understanding the differences between Bitcoin Spot ETFs and Bitcoin Futures ETFs and who they are suitable for is crucial for investors.

Bitcoin Spot ETFs are suitable for investors who want to gain direct exposure to real-time price fluctuations of Bitcoin without holding or managing Bitcoin. For example, investors who have confidence in the long-term value proposition of Bitcoin and want to participate in closely tracking Bitcoin market prices. Compared to complex contract trading, they may prefer simpler spot ETFs.

Bitcoin Futures ETFs, on the other hand, are more suitable for experienced investors who are interested in the price of Bitcoin and are able to adapt flexibly to the complex contract market. For example, investors may want to take advantage of contract market dynamics, hedge other investments, or seek opportunities in short-term price fluctuations. In addition, such investors may be willing to take on the potential risks and rewards of contract trading, including complex contract rollover issues.

Conclusion

Bitcoin ETFs are bridges connecting traditional investors with the cryptocurrency world. Bitcoin Spot ETFs offer direct exposure to Bitcoin price movements by holding Bitcoin, while Bitcoin Futures ETFs provide exposure through futures contracts that predict future Bitcoin prices.

However, it is important to be cautious when it comes to all investments. Bitcoin and related investment tools come with various potential risks. Before making any decisions, aspiring successful investors should conduct thorough research. Consult a reliable financial advisor who can provide targeted professional advice based on individual financial goals and risk tolerance, as this may be the most important factor.

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