ETFs
Jan 25, 2024

Spot the Difference: A Deep Dive into Spot Bitcoin ETFs

Your Guide to Understanding the Next Major Development in Bitcoin Investment

Spot the Difference: A Deep Dive into Spot Bitcoin ETFs

The hottest topic in Bitcoin right now is the US Bitcoin ETFs. WIll they or won’t be approved? At this point there have been over a dozen high profile applications submitted to the US Securities and Exchange Commission (SEC). Among the notable applicants is BlackRock, the world's largest asset manager. These applications highlight the potential transformative impact a favorable SEC decision could have on the Bitcoin market.

Key takeaways:

  • Approval of US-listed spot Bitcoin ETFs could significantly broaden Bitcoin's investor base. In particular, spot ETFs offer a familiar vehicle to financial advisors and institutional investors serving as a bridge between traditional investment vehicles and digital currency.
  • These ETFs promise enhanced accessibility and transparency, potentially improving Bitcoin's market liquidity.
  • It is crucial to carefully assess these ETFs beyond their promotional and marketing claims. Apollo is committed to offering a clear and unbiased analysis, helping you navigate the nuances and potential impact of spot Bitcoin ETFs.

While direct Bitcoin ownership remains the most robust method of investment, spot Bitcoin ETFs offer an alternative route which has the potential to open Bitcoin to a new class of investors, particularly those who may find direct ownership challenging.

Before these ETFs become available, let's dive into what they are, how they're different from other ETFs, and what you should consider before investing in them.

What are ETFs? 

Exchange Traded Funds (ETFs) are a type of fund that can hold multiple underlying assets and trade on an exchange like a stock. Since the first ETF listed in the US in 1993, ETFs have revolutionized investment access, offering a low-cost, transparent way to invest in various asset classes. 

ETFs can contain various types of investments from an individual commodity to a large collection of stocks or bonds. 

‍Bitcoin ETFs are Single Commodity ETFs

Single commodity ETFs represent a unique segment in the ETF universe. Unlike diversified ETFs that hold a basket of different assets, single commodity ETFs channel investment into one specific commodity, like Bitcoin, gold, silver, oil, or agricultural products.

By focusing on a single commodity, these ETFs simplify the investment process for individuals looking to gain exposure to a specific market segment without the complexities of direct ownership. 

As an example, if an individual investor wanted exposure to oil price, it would be extremely cumbersome (if not impossible) to store barrels of crude oil and trade these based on one’s view of the oil price. Oil ETFs track the price of the relevant oil index and trade on stock exchanges, providing liquidity and ease of entry and exit, without the complexity of direct custody of oil. Spot Bitcoin ETFs offer the same investment model for Bitcoin. 

Spot vs. Futures Bitcoin ETFs: The Superiority of Spot ETFs

The world of Bitcoin ETFs is broadly divided into two categories: Spot and Futures. Spot Bitcoin ETFs directly hold Bitcoin, with their value reflecting the current price of the digital asset. In contrast, Futures Bitcoin ETFs invest in contracts that speculate on the future price of Bitcoin, providing price exposure without direct ownership.

Below table summarizes the differences between Spot and Futures Bitcoin ETFs and highlights why Spot ETFs are often considered superior:

Consideration Spot Bitcoin ETFs Futures Bitcoin ETFs
Exposure Type ETF owns Bitcoin directly Indirect exposure through Bitcoin futures contracts
Complexity Lower complexity with the fund’s core job to securely custody Bitcoin. More accessible and understandable for average investors. Higher complexity due to futures contracts and associated roll costs. Requires understanding of futures markets and associated risks.
Bitcoin Price Tracking Closely tracks the real-time market price of Bitcoin. May experience price discrepancies due to futures market dynamics.
Tax Considerations Generally straightforward due to direct asset ownership. Potentially complex due to the nature of futures contracts.

How to Compare Spot Bitcoin ETFs

Spot Bitcoin ETFs are expected to list in the US in early 2024. It is a little early to comprehensively compare various ETFs as detailed product specifications are not yet available. At a high level, the considerations when comparing such ETFs are:

1. Custody and Security - The Cornerstone of Trust

Different ETF provider's may adopt different approaches to custody - i.e. storage and security of Bitcoin. Key considerations will include the track record and reputation of the custodian, types of wallets used - offline ‘cold’ storage vs online ‘hot’ wallets, the security protocols in place, and insurance coverage. 

2. Cash vs. In-Kind Creation & Redemption

For retail investors, the distinction between cash and in-kind creation and redemption of ETF units may seem subtle. However, for larger transactions, some ETF providers may permit Authorized Participants to use actual Bitcoin for these processes. This in-kind approach, subject to regulatory frameworks, can have implications for market dynamics and liquidity.

3. Expense Ratio - Understanding the Long-term Impact

The expense ratio, representing the annual operating expenses of the ETF, is an important factor to consider. While a fee, such as 1.0%, may appear minimal, over long holding periods even a small differential in fees can accumulate to a significant amount. As an example, for an initial $10,000 investment, a 0.5% difference in fees over a 20 year holding period results in a $6,400 difference in returns (assuming a return of 10.0% pa).  

4. Tracking Error - Accuracy in Tracking Performance

The tracking error is an important measure of how closely the ETF’s performance mirrors the actual price movements of Bitcoin. A lower tracking error signifies a more accurate reflection of Bitcoin's market performance, an essential aspect for investors seeking Bitcoin price exposure. 

Current Status of US Spot Bitcoin ETF Applications 

(current as of Jan 4, 2024)

Issuer ETF Final SEC Deadline
Ark/21 Shares Ark/21 Shares Bitcoin Trust (Refiled) 2024-01-10
Bitwise Bitwise Bitcoin ETP (Refiled) 2024-01-14
VanEck VanEck Bitcoin Trust (Refiled) 2024-01-15
WisdomTree WisdomTree Bitcoin Trust (Refiled) 2024-01-15
Invesco Invesco Galaxy Bitcoin ETF (Refiled) 2024-01-15
Fidelity Wise Origin Bitcoin Trust by Fidelity (Refiled) 2024-03-15
BlackRock iShares Bitcoin Trust 2024-03-15
Valkyrie Valkyrie Bitcoin Fund (Refiled) 2024-03-19
Global X Global X Bitcoin Trust (Refiled) 2024-04-19
Franklin Templeton Franklin Bitcoin ETF 2024-05-30
Hashdex Hashdex Bitcoin ETF (Updated Filing to Includes Spot Bitcoin) 2024-05-30
Grayscale Grayscale Bitcoin Trust (Re-File) Conversion unknown

Navigating the Future of Bitcoin Investment

The introduction of spot Bitcoin ETFs represents a significant evolution in Bitcoin investment. As we get closer to their arrival, it's key to stay informed and carefully evaluate your options.

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