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As bitcoin and the greater macro market roll into 2024, one key narrative in the US surrounding bitcoin is on everyone’s mind right now: the Bitcoin Spot ETF.
There’s been an awful lot of talk online about it over the past couple of months ever since the asset management giant BlackRock initially filed for the ETF on June 15th of this year.
If you’re new to bitcoin, you may understandably be a bit confused: What even is an ETF? Why do people care about them? How will an ETF help bitcoin? Or will it hurt?
What Is An ETF?
Let’s start with the basics.
An ETF, or exchange-traded fund, is a type of investment fund that tracks the performance of a specific index, stock, bond, commodity, or other assets. Like a mutual fund, ETFs pool together funds from investors to store in a diversified portfolio of assets.
Unlike a mutual fund, however, you can trade ETFs on major exchanges just like individual stocks – hence why they’re “exchange-traded.” While this makes them a bit more fluid and easier to manage than other types of funds, it also means that ETFs can be more volatile and experience larger price swings on a day-to-day basis.
Historically speaking, ETFs have been a great choice for investors. They’re cost-efficient, flexible, liquid, transparent, and benefit from a few key tax advantages thanks to their unique structure, making them a versatile tool suited for both newcomers and seasoned veteran investors.
Spot Vs. Futures ETF
There’s a wide variety of ETFs available for trade, but in the context of Bitcoin, there are two types that get talked about the most:
Bitcoin Futures ETF
A Bitcoin Futures ETF invests in Bitcoin futures contracts, which enable price speculation on bitcoin without having to own the asset itself. Within these contracts is an agreement between a buyer and seller to make an exchange based on a predetermined price and date.
The fact that Bitcoin Futures ETFs don’t hold actual bitcoin is why they don’t carry as much weight in the market. Since buying with this type of ETF doesn’t require buying real bitcoin, it doesn’t have an impact on Bitcoin’s supply, and has much fewer applications in the everyday person’s portfolio.
While not as impactful, Bitcoin Futures ETFs are a testament to how far Bitcoin has come over the years, considering it most likely started from someone’s basem*nt.
Many Bitcoin Futures ETFs have received approval in countries all around the world, including the United States. Spot ETFs, on the other hand, are another story.
Bitcoin Spot ETF
Unlike futures, Bitcoin Spot ETFs invest directly in bitcoin itself. Buyers and sellers exchange shares that track the price of bitcoin closely. Since this ETF requires custodians to actually purchase bitcoin, this is the ETF that has most of the market’s attention.
However, while the ETF itself holds bitcoin, that doesn’t mean investors do. Bitcoin Spot ETF investors just own a share of the actual bitcoin held by the ETF – in other words, they hold an IOU.
Spot ETFs are similar to traditional ETFs that hold physical assets like stocks or commodities, but creating a Bitcoin Spot ETF in particular raises unique challenges due to the current US regulatory environment that bitcoin finds itself in.
Where Bitcoin Spot ETFs Are Today
Since BlackRock’s initial spot ETF filing in June, we’ve seen a flurry of Bitcoin Spot ETF applications pile up in the US for the Securities and Exchange Commission (SEC) to either approve or deny, from the likes of Wisdomtree, Fidelity, and others joining a long list of many waiting for approval.
In other countries, however, Bitcoin Spot ETFs are becoming more and more commonplace.
Major countries like Australia, Brazil, Canada, Germany, Sweden, Singapore, Switzerland have all passed Bitcoin Spot ETFs while the US still fumbles with legislation.
Historically, Bitcoin Spot ETFs in the US have gotten nothing but delays and rejections, but BlackRock’s recent filing may signify a shift in attitude from regulators. The SEC has only ever rejected a BlackRock ETF filing once in 2014, while approving 575 others.
Keep in mind that just a week before BlackRock filed for an ETF, the SEC cracked down on major crypto exchanges Coinbase and Binance for selling unregistered securities in the US.
It looks like legislators and regulators are “cleaning up the streets,” so to speak, before the big financial players enter the scene. Given BlackRock’s strong track record of successful ETF filings, their Bitcoin Spot ETF filing could be the first approval of many heading into 2024-2025.
Why Won’t The US Approve Bitcoin Spot ETFs Today?
Now, you may be wondering why we’ve been approving more speculative futures ETFs over more grounded, less volatile ETF products like a Bitcoin Spot ETF.
As aforementioned, spot ETFs carry a lot more weight in the future implications for bitcoin than futures ETFs do. Since they require direct exposure to the asset the ETF is tracking, a Bitcoin Spot ETF means buying real bitcoin, unlike a futures ETF.
If the SEC starts approving Bitcoin Spot ETFs, that opens the floodgates for trillions of dollars worth of capital to flow into bitcoin from institutions with people’s retirement funds, pensions, and more.
It represents a massive shift in the way we approach traditional finance – a shift that the SEC is highly aware of.
Is A Bitcoin Spot ETF Actually Good For Bitcoin?
The big question here: Is approving a Bitcoin Spot ETF actually a good thing?
What can we expect to happen? Why might it not be as good for Bitcoin as one might think?
Benefits Of Bitcoin Spot ETFs
On paper, a Bitcoin Spot ETF may seem like a great idea for Bitcoin holders. By approving one, bitcoin could gain:
- More mainstream adoption as companies and retirement funds will have the green light to start incorporating bitcoin into their portfolios.
- Greater accessibility to high net worth investors and companies who want exposure to bitcoin without having to manage it themselves.
- Higher liquidity as more capital flows into the asset, making it easier than ever to trade in and out of.
- Increased awareness and education as bitcoin’s mainstream acceptance gradually captures more of buyers’ collective mind share.
Sounds great, right? What could the problem be with approving one?
Risks Of Bitcoin Spot ETFs
In reality, Bitcoin Spot ETFs introduce a dangerous precedent for the network and newcomers to bitcoin.
Their approvals will come with many, but primarily two key risks that newcomers to bitcoin need to be aware of:
Misled Investors
The first and most obvious red flag to note is that Bitcoin Spot ETFs don’t allow people to take self-custody of bitcoin. An ETF is just a share that tracks the price movement of bitcoin, meaning that an ETF is really just a fiat-based investment vehicle, at its core.
The point of bitcoin is not to sell it for fiat dollars later; it’s an alternative to the money we have today, and it comes with unique properties that only direct holders benefit from.
Bitcoin Spot ETFs may attract investors who aren’t aware of what bitcoin is or what it has to offer. They’ve seen the price rising over time, and they just want exposure to the price. That may work out until they come to realize why Bitcoin’s price has climbed over the years: its sound, sovereign monetary principles – that ETF holders cannot enjoy.
Meanwhile, larger and richer institutions like BlackRock profit off this ignorance as they stock up on all the real bitcoin.
If ETF buyers want real bitcoin at this point instead of an ETF, they’ll have to sell it for dollars to convert into real bitcoin, which of course also triggers taxable events that could have been avoided otherwise.
Paper Bitcoin
Paper bitcoin is a major problem today, and Bitcoin Spot ETFs will only exacerbate the problem. “Paper” bitcoin is a name for all the IOU bitcoin out there – accumulated by those who simply buy on a custodial exchange and leave it there, or in this case buy up shares of bitcoin through a spot ETF.
The number of “paper” bitcoin out there today vastly overstates the actual supply that’s available for people to take self custody of.
For example, after the FTX collapse in November 2022, it came to light that FTX was missing close to $1.6 billion worth of clients’ BTC – that simply never existed at all.
History shows plenty of examples of why paper bitcoin (and custodial solutions at large) are a problem. In 2022 alone, beyond FTX, we’ve seen:
- Voyager’s bankruptcy, losing more than $1.4 billion in client funds.
- Celsius’s bankruptcy, rugging more than $4.7 billion from customers.
- BlockFi’s bankruptcy, freezing anywhere from $1 billion to $10 billion in assets.
- Gemini’s Earn Program, which is currently struggling to find over $900 million they had sitting with Digital Currency Group (GCG).
These are just a few names among many, but the point is clear:
Not your keys, not your coins.
These companies’ balance sheets aren’t living on a distributed ledger like Bitcoin’s, so we have to place trust in them to be responsible caretakers of our funds. It’s a system that’s let us down time and time again, and Bitcoin Spot ETFs may end up joining this ever-growing list of failed custodianship.
What You Can Do To Secure Your Bitcoin
The unfortunate reality is that Bitcoin Spot ETFs are likely a “necessary evil” to usher in a fully hyperbitcoinized future. It’s not that ETFs are inherently evil, it’s just that the incentives behind them have proven time and time again to fail people.
ETFs underscore a huge development in Bitcoin’s future. Bitcoin is making its way onto the big stage, and it’s likely going to face a whole host of new problems alongside this one as we navigate a fiat-bitcoin hybrid world.
As more custodial Bitcoin products rush into the market over the coming years, proper security of your bitcoin will become more crucial than ever. To keep your stack safe:
- Store your bitcoin in single-sig or multi-sig wallets to take proper self custody.
- Avoid keeping large amounts of BTC in “hot wallets” – wallet devices that are connected to the internet. Instead, treat hot wallet BTC like you would cash – enough for daily spending, but not too much that losing it would ruin you financially.
- Implement advanced security measures like air gaps and stamping your seed phrase into metal and storing it in a secure location.
- Run your own node to verify your bitcoin is interacting with the real Bitcoin blockchain.
Final Thoughts
Despite the fact that Bitcoin Spot ETFs drastically undermine the public’s ability to take self custody and truly enjoy the sovereign benefits of bitcoin, spot ETFs may just be the catalyst needed to fully send bitcoin into the mainstream.
The big takeaway here is: not your keys, not your coins.
Bitcoin is money for an advanced civilization, currently sitting in the hands of 21st century guardians. It was designed to make saving easy for everyone, but that doesn’t mean transitioning to a Bitcoin standard will be.
FAQs About Bitcoin Spot ETFs
Q: How is a Bitcoin Futures ETF different than a Bitcoin Spot ETF?
A: Bitcoin Futures ETFs invest in futures contracts, whereas Bitcoin Spot ETFs hold actual bitcoin, giving them more direct exposure to bitcoin.
Q: Is it better to buy bitcoin or a Bitcoin ETF?
A: Buying bitcoin grants you access to its open monetary network, whereas an ETF merely serves as a financial instrument to track the price of bitcoin. Buying either depends on your goals, but understand that Bitcoin Spot ETFs do not let you use bitcoin as a technology. You take on custodial risk and will have to sell your ETF for fiat currency to secure any profits.
Q: Is a Bitcoin Spot ETF the same as a bitcoin?
A: No, a Bitcoin Spot ETF is an investment vehicle backed by real bitcoin that underpins its value. It merely tracks the price of bitcoin, whereas real bitcoin is a technology with censorship-resistant monetary qualities.
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