This content is created by AP Buyline in accordance with AP’s editorial guidelines and supervised and edited by AP staff. Our evaluations and opinions are not influenced by our advertising relationships, but we may earn commissions from our partners’ links in this content. Learn more about AP Buyline here.
In a nutshell
On Jan. 10, 2024, the Securities and Exchange Commission (SEC) approved 11 exchange-traded funds (ETFs) to track bitcoin, which have been dubbed "spot bitcoin ETFs."
- An exchange-traded fund (ETF) is an SEC-registered investment that lets individuals buy into a fund that can include stocks, bonds and other securities.
- Spot bitcoin ETFs break the mold of many traditional ETFs since they only hold bitcoin as the underlying asset.
- Investing in a spot bitcoin ETF can help investors diversify their portfolios by giving them exposure to the price movements of this digital currency.
- There are considerable risks that come with investing in spot bitcoin ETFs, including risks associated with custodianship and the price volatility of cryptocurrencies.
How do spot bitcoin ETFs work?
Spot bitcoin ETFs let individuals gain exposure to the price movements of bitcoin without owning the digital currency itself. This is important since many investors are wary of using crypto platforms to purchase digital assets, and they don't necessarily want to deal with storing their own bitcoin or maintaining their own private keys.
With a spot bitcoin ETF, bitcoin is held by a custodian in a bitcoin wallet. In most cases, this wallet will be held offline, meaning the bitcoin remains protected in "cold storage" that is not directly connected to the internet.
Spot bitcoin ETFs set the price of shares based on the amount of bitcoin they own and its current value. Investors are then able to purchase shares of spot bitcoin ETFs that fluctuate in value based on fluctuations in the current value of bitcoin.
Spot bitcoin ETFs are more accessible than buying bitcoin directly. Investors can buy into various spot bitcoin ETFs via traditional brokerage firms and investing apps that many people already use. For example, you can invest in spot bitcoin ETFs through the Robinhood app or traditional platforms like Charles Schwab and Fidelity.
It is important not to confuse spot bitcoin ETFs with futures bitcoin ETFs
Where spot bitcoin ETFs track the current price of bitcoin to help investors gain exposure to cryptocurrency, futures bitcoin ETFs help investors speculate on what bitcoin may be worth in the future via bitcoin futures contracts.
Pros:
- Gain exposure to the price movements of bitcoin: Investors who want to diversify their portfolios or dabble in bitcoin investing can do so through traditional brokerage firms or investing apps they already use.
- Invest in bitcoin through brokerage firms and investing apps: Spot bitcoin ETFs let investors buy shares without having to deal with crypto exchanges or long-term storage.
- Potential for lower trading fees than buying bitcoin through crypto exchanges: Some platforms have lower trading fees for spot bitcoin ETF transactions than crypto exchanges offer.
- Legitimizes bitcoin as a true asset: Having the SEC approve spot bitcoin ETFs early in 2024 increased the legitimacy of bitcoin dramatically, which may bode well for its value in the future.
Cons:
- Potential for price volatility: The price of bitcoin has been very volatile since its inception, so investors could be in for a bumpy ride.
- Annual expense ratios can be high: For example, the expense ratio for the Hashdex Nasdaq Bitcoin ETF is 0.90%. For the Grayscale Bitcoin Trust, it's 1.50%.
- You don't have ownership of bitcoin: Owning shares of a bitcoin ETF gives you exposure to price movements of bitcoin, but you don't actually own the underlying asset.
- More regulation: SEC approval also means more government oversight and regulation, which could affect long-term price volatility for bitcoin.
Spot bitcoin ETFs vs. other ETFs
Spot bitcoin ETFs may help investors gain exposure to the price movements of bitcoin in a brand new way, but they aren't necessarily as efficient as other exchanged-traded funds available to investors.
In fact, traditional ETFs typically come with low operating costs and may have considerable diversification already built in. Spot bitcoin ETFs, on the other hand, invest in one asset class (bitcoin) and have higher expense ratios than many other ETFs available to individual investors.
Other ETFs may also expose investors to considerably less risk and price volatility based on their underlying assets. This is because bitcoin itself is a speculative investment that has seen huge price swings in the short amount of time it has been available to the public.
How risky are spot bitcoin ETFs?
Spot bitcoin ETFs carry the same level of risk as investing in bitcoin directly. The price of bitcoin has been highly volatile since 2009, so investors shouldn’t rely on these ETFs for investment returns. As with any type of investing, it’s best to have a well-diversified portfolio.
A look back at the price history for bitcoin from the last decade provides an insight into the volatility we're talking about. For example, the price of a single bitcoin has fluctuated dramatically from $775.57 on December 15, 2016 to its former high of $67,617.02 on Nov. 9, 2021. The digital currency dropped as low as $16,625.08, on Jan. 1, 2023 only to close at $42,265.19 by year's end. Just this year, the price of a single bitcoin closed as high as $73,083.50 on March 13, 2024 but dropped as low as $63,032.41 on March 19.
Price volatility aside, it's important to note that bitcoin ETFs all use a custodian to store their crypto assets and hold their private keys. Most of the approved spot bitcoin ETFs (8 out of 11) have chosen the crypto trading platform Coinbase for this role, so investors will need to put a lot of trust into this company and its security protocols. Considering the cryptocurrency industry has been affected by fraud and subject to manipulation in the past, we will have to see whether bitcoin ETFs provide more stability and safety for consumers.
The AP Buyline roundup
There are 11 spot bitcoin ETFs to choose from at the moment, and these are offered on top of bitcoin futures ETFs that speculate on the future prices of this digital currency. If you're interested in investing in either type of ETF, you may be able to do so with your current brokerage firm or any number of investing apps that make it easy to open and fund an account.
That said, you should invest in spot bitcoin ETFs with the same amount of caution as if you were buying bitcoin or other digital currencies directly. Have a plan for your crypto investments that is built around your risk tolerance and long-term investing goals instead of investing based on fear of missing out (FOMO) alone.
Frequently asked questions (FAQ)
Do spot Bitcoin ETFs have custodianship risk?
Custodianship risk is a major concern with spot bitcoin ETFs since an individual platform is charged with storing and protecting bitcoin for investors. This means individual platforms hold the private keys that could potentially be used to steal the underlying assets. Also note that platforms used to store and protect bitcoin with these ETFs are not banks but crypto exchanges themselves. For example, many spot bitcoin ETFs (8 out of the 11 available) are using Coinbase as the custodian for their bitcoin.
What does this mean for the Bitcoin price?
The introduction of spot bitcoin ETFs could lead to price increases in bitcoin over the long term, mostly because it opens the door for more individual investors to buy this asset. However, bitcoin prices have been volatile over time, and many of the top "experts" you see cheering it on will directly benefit if bitcoin prices surge. The fact is, nobody knows what the future holds when it comes to the price of bitcoin and other cryptocurrencies like ethereum.
Do spot bitcoin ETFs pay dividends?
Spot bitcoin ETFs do not pay dividends. Instead, investors get the chance to benefit when bitcoin increases in value.
What is the difference between bitcoin ETFs and bitcoin futures ETFs?
Futures bitcoin ETFs help investors bet on what bitcoin may be worth in the future via bitcoin futures contracts, but they don't hold bitcoin as an underlying asset. Spot bitcoin ETFs typically do hold bitcoin as the underlying asset, and the price of the ETF is closely tied to fluctuations in its value.
This content is created by AP Buyline in accordance with AP’s editorial guidelines and supervised and edited by AP staff. Our evaluations and opinions are not influenced by our advertising relationships, but we may earn commissions from our partners’ links in this content. Learn more about AP Buyline here.
