The entry of index funds into the world of digital currencies is a significant development, especially after the launch of spot Bitcoin index funds, making it possible to invest in Bitcoin through traditional exchanges without needing to own the digital currency directly. However, there is a clear difference between the two types of these funds: spot funds and futures funds, each with its own characteristics, performance drivers, and risks.
First, the asset that each type of fund tracks
The spot fund relies on buying and storing actual Bitcoin, meaning the fund physically holds Bitcoin on behalf of investors. As the price of Bitcoin increases, the value of the fund rises, and vice versa, just like the IBIT fund from BlackRock, which holds a large amount of Bitcoin in secure wallets.
On the other hand, the futures fund does not hold actual Bitcoin but invests in Bitcoin futures contracts, which enable the investor to bet on the future price of Bitcoin. This means that the fund's performance does not always accurately follow the price of Bitcoin, as it is influenced by the prices of futures contracts that may be higher or lower than the current price of Bitcoin, like the BITO fund that invests in Bitcoin contracts listed on the Chicago CME.
Second, liquidity and tracking accuracy
In terms of liquidity, spot funds have gained massive interest from investors after receiving regulatory approval, with some of these funds exceeding billions of dollars in asset size, such as IBIT, which has recorded significant trading since its launch. On the other hand, futures funds like BITO still have relatively smaller volumes.
In terms of tracking accuracy, spot funds track the actual price of Bitcoin better because they simply own the asset itself. On the other hand, futures funds may suffer from performance discrepancies due to the difference between the contract price and the actual price of Bitcoin, known as basis risk. Therefore, you may find that the performance of the futures fund does not fully reflect market movements.
Thirdly, performance and risk engines
Spot funds are directly affected by the price of Bitcoin, and as the market moves, the value of the fund moves accordingly. They also feature relatively lower management fees, which reflects on long-term performance.
In contrast, futures funds are subject to other factors that affect their performance, including continuous contract renewal fees, the price difference between the old and new contracts, and the contango phenomenon, where the future contract price is higher than the current price of Bitcoin, leading to gradual losses when renewing contracts.
In terms of risks, the spot fund is exposed to the risks of storing Bitcoin, but it usually uses secure custodial companies like Coinbase. On the other hand, the futures fund is exposed to renewal risks and volatility that may not align with the actual price of Bitcoin and sometimes uses leverage, increasing these risks.
Summary
If you are looking for an investment that closely follows the price of Bitcoin with as much accuracy and transparency as possible, then the spot fund is the best option. However, if you are trading in the short term or seeking indirect exposure to Bitcoin, futures funds may be a suitable option. Nevertheless, it is always important to understand the nature, risks, and structure of each fund before making an investment decision.
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