Bitcoin spot ETF is the hottest hype topic in the cryptocurrency circle recently. With the end of the lawsuit between Grayscale Investments and the U.S. Securities and Exchange Commission (SEC) on Bitcoin spot ETF, the SEC finally gave up the appeal and Grayscale won. The SEC can no longer use the reasons it rejected before to block the approval of Bitcoin spot ETF. Another news that stimulated the market performance is that the iShares Bitcoin Trust (IBTC), a subsidiary of asset management giant BlackRock, has been shown online in the qualified documents of DTCC (U.S. Securities Depository and Clearing Corporation). Although it was later confirmed that this document had existed as early as August and there were missing operations that needed to be corrected, stimulated by these news, Bitcoin has risen by more than 25% from October to now. All signs seem to indicate that the approval and listing of Bitcoin spot ETF is only a matter of time.

In this week’s CryptoSnap weekly report, Dr.DODO will explain why Bitcoin spot ETF is important and what it represents.

Why is Bitcoin spot ETF a better solution?

According to Galaxy Research statistics, as of September 30, there are already a variety of different Bitcoin investment products (including ETPs and closed-end funds) in the global financial market, holding a total of about 842,000 BTC (about 21.7 billion US dollars). However, existing Bitcoin investment products have many disadvantages for investors, such as high fees, low liquidity and tracking errors, and these products are inaccessible to many investors. The emergence of Bitcoin spot ETFs can provide investors with lower fees, better liquidity and price tracking efficiency, and may also meet the regulators' stricter requirements for supervision and bankruptcy protection, providing many traditional market investors with a more convenient asset allocation method.

Bitcoin spot ETFs can provide more investors (including retail and institutional investors) with access to Bitcoin through formal channels, while also being distributed through more investment channels. Through ETFs, financial advisors can begin recommending Bitcoin investments to their clients, while also attracting older people who hold a lot of wealth. These investors are familiar with how traditional stock markets work but lack knowledge of the cryptocurrency market, and Bitcoin listing in the form of ETFs just meets their needs.

Eight Bitcoin spot ETFs have been submitted to the SEC:

What is the difference between Bitcoin spot ETF and futures ETF?

At this time, many people must have such a question in their minds: what is the difference between Bitcoin spot ETF and futures ETF? Hasn’t the market already approved Bitcoin futures ETF?

At present, there are already many Bitcoin futures ETF products in the US market, including ProShares Bitcoin Strategic ETF (BITO), VanEck Bitcoin Strategic ETF (XBTF) and Fidelity Bitcoin Strategic ETF (FBTC), but the market still has a considerable reaction to the approval of spot ETFs. The reason is that although spot ETFs and futures ETFs are very similar in price fluctuations, they can both provide investors with market exposure to Bitcoin. However, from a product perspective, futures ETFs usually have higher fees and more cumbersome operations. From a psychological perspective, allocating spot ETFs means that investors actually hold Bitcoin, while allocating futures ETFs is more like short-term speculation.

The main differences between Bitcoin spot ETF and futures ETF can be divided into the following four points:

Asset holdings: Spot ETFs hold Bitcoin directly, while futures ETFs track Bitcoin prices by purchasing Bitcoin futures contracts.

Fee Structure: Futures ETFs will typically have higher fees because they require the management of futures contracts, whereas spot ETFs may have lower fees.

Price tracking efficiency: Spot ETFs are usually able to track the price of Bitcoin more accurately, while futures ETFs may be affected by the futures market, resulting in certain deviations in price tracking.

Liquidity: Spot ETFs may offer higher liquidity because they hold Bitcoin directly, while the liquidity of futures ETFs may be limited by the futures market.

Market response

Although there is no clear timetable for the approval of a spot ETF, the price of Bitcoin has doubled since the beginning of the year. In this narrative-driven market, it is common for prices to lead the news.

If the ETF can be successfully passed in the future, in addition to the previously mentioned attraction of investors in traditional fields, the most important two factors for the Bitcoin market are: first, improving liquidity. The launch of spot ETFs may attract more investors into the market, thereby improving the liquidity of Bitcoin; second, increasing legitimacy and trust. Bitcoin has long been considered by many people to be a virtual asset with no real value, but if the spot ETF is approved by regulators, this may increase the market's trust in Bitcoin, thereby increasing its price.

When it comes to Bitcoin spot ETFs, we have to mention GBTC. Grayscale Bitcoin Trust (GBTC) is an investment trust managed by Grayscale Investments and one of the largest Bitcoin investment products on the market, with an asset size of approximately $20 billion. It provides investors with a relatively traditional and simple way to invest in Bitcoin. It is an alternative for traditional market investors who want to invest in Bitcoin before the Bitcoin ETF is listed. However, due to its trust attributes and no redemption mechanism, there has been a very high price premium with Bitcoin spot for a long time. The highest premium in the bull market in 2020 reached +40%, and the lowest premium was -50% when many institutions collapsed last year. With the end of Grayscale's lawsuit, the probability of GBTC being converted into a spot ETF has greatly increased, and the price of GBTC has continued to rise from a premium of -45% at the beginning of the year to -13% today, and the price has also risen from $8 at the beginning of the year to $26 today. It can be said that it is one of the best performing investment targets in the traditional financial market this year.

I think the news about spot ETFs is definitely good news. After all, those of us in this industry are more or less people who have some aspirations for Bitcoin. If Bitcoin is to be accepted by more people and become a part of the asset allocation of more investors, the ETF path is definitely the only way forward.

But is the spot ETF really that attractive to Bitcoin in the short term? The author's view is negative. If the futures ETF has not had a pull effect since its listing, why would the spot ETF have a pull effect after its listing? Do those savvy institutions really only accept spot ETFs and not futures ETFs? Will ETF managers wait until the SEC approves it before starting to buy Bitcoin?

Of course, in the long run, it is a good thing to attract more people to join this market, but in the short term, the author believes that it is still driven by news that causes everyone to buy frantically and pull up the market. After the spot ETF is actually launched, the impact on the price will definitely not be as great as the so-called expectation psychology now. So the conclusion is that while following FOMO, we must also pay attention to the risks involved. When the news is officially released, it is likely that the party music will come to an abrupt end.