The Rise of Bitcoin ETFs: A New Era for Cryptocurrency Investing

Bitcoin started the digital currency revolution, and few inventions in the financial industry have had the same revolutionary and disruptive impact as it has.

The rise of Bitcoin from a little-known idea to a widely acknowledged asset has been astounding, drawing interest from the general public, financial institutions, and investors alike.

The introduction of Bitcoin ETFs (exchange-traded funds) in recent years has introduced a dramatic upheaval in the cryptocurrency scene. These cutting-edge financial products have made investing in Bitcoin more accessible to a wider audience. That, in turn, has fueled the cryptocurrency’s popular acceptance and driven up its price.

The evolution of Bitcoin investing

Prior to the introduction of Bitcoin ETFs, cryptocurrency investing presented a myriad of challenges. Many institutional and ordinary investors were put off by security worries, regulatory uncertainties, and technical complexity. But the advent of ETFs has given the cryptocurrency industry a new degree of accessibility and legitimacy.

Understanding Bitcoin ETFs

Bitcoin ETFs operate in a manner akin to conventional ETFs, following the fluctuations in value of an underlying asset — in this case, Bitcoin. They make it easier to invest without actually owning or storing Bitcoin by enabling buyers to purchase shares that signify ownership of the digital currency. Because the ETF provider oversees the storage and security of the Bitcoin assets, this structure allays concerns about security and custody.

There are two types of Bitcoin ETFs: futures and spot ETFs. Spot Bitcoin ETFs are the preferred ETFs for many reasons. What’s more, the firms that offer traders the ability to invest in spot Bitcoin ETFs in stock exchanges are the ones who hold the actual Bitcoins. So, they peg the price of the actual Bitcoin to the ETF, which you (the trader) can now trade. In other words, assuming the price of one Bitcoin is $35k, you will see these ETFs as $35k in the stock exchanges.

Bitcoin futures and Spot ETFs: what’s the difference?

Futures and spot ETFs are the two types of Bitcoin ETFs currently available. There are major differences between these two ETFs.

The Bitcoin spot ETF is where the actual Bitcoin is directly linked to the ETF — buying this ETF means you are essentially purchasing a representation of real Bitcoin. Conversely, Bitcoin futures ETFs do not accurately reflect the value of Bitcoin.

Purchasing these ETFs actually entails purchasing Bitcoin-related contracts. In these contracts, you hedge and concur on specific future dates-based price movements for Bitcoin. Essentially, you make predictions about market trends and use the futures contract to determine whether to buy or sell.

The underlying assets of these two ETFs are where the differences begin. While futures ETFs are futures contracts, the underlying assets of the spot Bitcoin ETFs are actually Bitcoins.

Secondly, the value of spot Bitcoin ETFs is tied directly to the price of BTC in real time. On the other hand, futures Bitcoin ETFs are connected to the dynamics of the futures market.

Thirdly, the risks and exposure of Bitcoin spot ETFs are closely linked to actual market fluctuations. However, futures Bitcoin ETFs are indirectly exposed to changes in the price of Bitcoin.

New windows of opportunity

As mentioned at the start of this article, the launch of Bitcoin ETFs was a significant turning point for cryptocurrency investing, drawing in institutional investors and established financial firms. The growth of Bitcoin ETFs has been attributed to a number of factors:

• Accessibility: Because ETFs are traded on regulated exchanges, investors can access them through conventional brokerage accounts without needing to understand the complexities of the cryptocurrency space.
• Regulation: Investors concerned about the unregulated nature of the cryptocurrency market can feel more secure knowing that ETFs are subject to regulatory oversight. Regulatory agencies such as the SEC have typically already investigated the companies that sell these ETFs.
• Portfolio diversification: If you’re an investor looking to expand your holdings into the cryptocurrency space without actually owning a wallet, an ETF is a good starting point. You can easily trade Bitcoin in real time, especially with spot ETFs.
• Transparency and liquidity: ETFs are transparently priced, offer transparent portfolio holdings, and trade on well known exchanges, enabling investors to make well-informed decisions.
• Reduced risk: ETFs mitigate the risks associated with storing and securing Bitcoin directly, which has been a longstanding issue in the volatile cryptocurrency market.
• Institutional adoption: Institutional investors who had previously been reluctant to venture into the volatile cryptocurrency space have shown a great deal of interest in ETFs, potentially paving the way for increased institutional adoption.
• Income opportunity: Ultimately, the biggest advantage Bitcoin ETFs offer is that they give investors access to the crypto market. It provides a chance to profit from investments whether it is through spot or futures Bitcoin ETFs.

Impact on the Cryptocurrency Market

Since Bitcoin ETFs were introduced and approved, the cryptocurrency industry has undergone significant changes. The increasing awareness of the asset among investors has contributed to an increase in the demand and price of Bitcoin.

Moreover, the inflow of institutional capital through ETFs signifies a shift in public perception and affirms Bitcoin’s standing as a reliable investment option.

Top firms with Bitcoin ETF applications currently in play

• Blackrock: The biggest asset manager in the world submitted its application on June 15th, proposing BNY Mellon to serve as the cash custodian and Coinbase as the cryptocurrency custodian and source of spot market data.
• Invesco Galaxy: On September 22, 2021, Galaxy Digital and Invesco jointly filed a Bitcoin ETF. This would be the first of many cryptocurrency-specific ETFs that the pair intended to list on US markets. The two applied again in the middle of 2023.
• Valkyrie Investments: In January 2021, asset manager Valkyrie submitted its initial application to create a Bitcoin ETF. In June 2023, they submitted an additional application in which Coinbase was listed as a partner for sharing surveillance data.
• Ark Invest: In June 2021, the investment firm headed by Cathie Wood submitted its application for the Ark21Shares ETF. The company filed a second amended application for its spot Bitcoin ETF on October 11, 2023, after the SEC twice postponed making a decision on Ark Invest’s ETF application in August and September.
• Fidelity/Wise Origins: The Wise Origin Bitcoin Trust’s application, submitted in March 2021, called for Fidelity Digital Assets to act as the ETF’s custodian and Fidelity Service Company Inc. to act as administrator. On October 17, 2023, the Boston-based investment firm revised its application, primarily addressing the product’s risk.

What’s next?

Bitcoin ETFs had a slow entry into the cryptocurrency market and encountered numerous rejections. Nevertheless, exchange-traded funds, or Bitcoin ETFs, allow trading of Bitcoin-related assets even in the absence of actual Bitcoin stored in a cryptocurrency wallet.

Given the growing popularity of Bitcoin ETFs, it is likely that regulatory authorities in various jurisdictions will approve similar investment vehicles for other cryptocurrencies.

This growth could lead to increased market acceptance and expansion by offering more opportunities for investment in the digital asset space.