What Is A Spot Bitcoin ETF?

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A spot Bitcoin ETF (Exchange Traded Fund) is a type of investment product that creates shares tradeable on a stock exchange that track the performance of the underlying asset (Bitcoin) without the investors having to buy or hold the actual cryptocurrency itself.

Investors can gain exposure to Bitcoin without owning it directly which removes some of the technical hurdles that people need to overcome in order to add the crypto asset to their portfolio by purchasing it through a cryptocurrency exchange.

A spot Bitcoin ETF is an open-end fund which is backed by actual Bitcoins and tracks the Bitcoin’s spot market price. Shares are dynamically issued (or redeemed) based on the demand for the product at any given time.

Although a spot Bitcoin ETF is exposed to the same risks and volatility as Bitcoin itself, it offers an easier path for both institutional and retail investors to gain exposure to the asset class.

The ‘spot’ part of the title refers to the fact that when someone buys shares in the ETF the actual Bitcoin is immediately bought and owned. Effectively they are buying a small chunk – or share – of the crypto asset at the point of purchase.

The added bonus of using a spot Bitcoin ETF to gain exposure to cryptocurrency is that it’s a highly liquid product that is easily tradeable on the stock exchange where it’s listed.

Spot Bitcoin ETF fees and downsides

The one major downside of a spot Bitcoin ETF is the potential for the fees to be higher than actually buying the crypto itself due to the complex nature of buying and securely storing it.

Also, Bitcoin spot ETFs are operated by large, centralised financial institutions who control the underlying Bitcoins and hence the private keys associated with them.

This means that if the regulatory landscape were to dramatically shift it could threaten your investment, and some fear there’s the potential for market manipulation due to a small number of players having a disproportionate market share.

Financial behemoths such as BlackRock, Fidelity, Invesco, WisdomTree and 21 Shares/ARK Investment Management are all in the spot Bitcoin ETF market and as such wield a huge amount of influence in the sector.

Keeping your Bitcoin safe and secure

Buying Bitcoin through a cryptocurrency exchange then moving it to a self-custody wallet, either hardware or an app, means that you are in complete control of your coins and no-one can influence what happens to them, no matter what regulators may decide in the future.

In contrast, buying shares in a spot Bitcoin ETF involves selecting an investment or share dealing service/app that supports the product you want to purchase, setting up a brokerage account and placing an order in the open market as you would any other shares.

The underlying Bitcoin that backs to spot ETF belongs to the product provider rather than the investor.

Spot Bitcoin ETF battle with the SEC

There has been a long running battle between the companies named above, and others, and the Securities and Exchange Commission for approval of a spot Bitcoin ETF.

Spot Bitcoin ETFs are classed as a high-risk investment so you should only buy shares in this product if you’re prepared to lose all the money you spend.

However, there’s the potential for strong returns as well, especially as a spot Bitcoin ETF marks a significant move towards mainstream acceptance of Bitcoin as a viable investment product which financial giants may add to pension funds and other investment products by way of diversification.