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What is a spot bitcoin ETF, and why does everyone talk about it

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In June 2023 a top-edge topic in the crypto community became an ETF, due to the possible launch of a spot Bitcoin ETF in the US. So, let's observe the tool everyone is talking about, and also delve into the obstacles companies are facing in bringing this new thing to the market.

What is a Bitcoin ETF?

ETF stands for Exchange Traded Fund, which is a financial tool that combines one or more assets and allows investors to profit from changes in exchange rates. Investors can purchase shares of the ETF to capitalize on the growth of the cryptocurrency’s value. The fund creator, usually a company, determines the available shares for the purchase, which can be 100%, but in some cases it may be cut to about 75%.

A Bitcoin ETF is an exchange-traded fund that solely focuses on BTC. It gives investors the opportunity to profit from the price movements of the cryptocurrency by acquiring shares of the fund. 

ETFs are tradable, similar to stocks, but with some key differences. While stocks represent ownership in a single company, ETFs can provide a basket of assets. This makes ETFs a convenient option for investors looking to diversify their portfolio without directly investing in individual assets. 

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Everyone who wants to invest in ETFs should first open a brokerage account. Conditions for opening one may vary depending on the country. Often it is enough to provide the broker with an identity document. All that remains is to find the ticker (the short designation of the investment tool) in the list and fill in the number of shares to purchase.

Why is everyone talking about the Bitcoin ETF?

Cryptocurrency is not legal in every jurisdiction. Companies seeking to invest in digital assets and earn money on their potential often hit a brick wall due to legal restrictions. 

Even in countries where cryptocurrency is accepted, conservative investment strategies often hinder companies from venturing into the crypto market. As an example, in charge of any public organization (a company with tradable stocks) there is a board of directors. Boards mostly consist of non-millennials (and millennials are the main driving force in the crypto industry), so they may be reluctant to explore cryptocurrency investments. 

That is where the Bitcoin ETF comes in to save the day:

😎 An exchange-traded fund is a completely legal tool. Even if the ETF includes cryptocurrencies, investors formally invest in the fund itself, which in any way does not break the law.

👍 ETF investments are common for large companies. Therefore, crypto-based ETFs offer an attractive solution for companies with risk-averse approaches.

The United States, being the world’s largest economy, has become a central point for possible cryptocurrency ETF launches. Unfortunately, the path for spot Bitcoin ETFs in the US turned out to be a bumpy one.

The rocky journey of American Bitcoin ETFs

As we have learned, cryptocurrency ETFs offer institutional investors a convenient entry point into the crypto market, making the US an ideal launching pad due to its status as a global financial center. Over the past few years, American companies have been trying to introduce these tools, but they have faced a significant obstacle: obtaining approval from US Securities and Exchange Commission (SEC) 🙂

The first wave of cryptocurrency ETF hype emerged between 2017 and 2020, while Jay Clayton chaired the SEC. However, all attempts to launch these tools failed.

In April 2021, Gary Gensler stepped in as SEC chair. People were optimistic, given Gensler’s reputation as a crypto enthusiast and his crypto lectures on the subject at the Massachusetts Institute of Technology. Speculation spread that the new chair would finally approve ETFs. It turned out to be partly true, but wasn’t the complete picture.

With Gensler at the helm, the watchdog faced a new influx of cryptocurrency ETF applications, with most aiming to create funds based on Bitcoin. But Gensler continued the tradition of his predecessor and rejected these applications.

In September 2021, Gensler explained himself, saying that approving a Bitcoin-based tool could be risky since the status of cryptocurrencies in the financial market is not crystal clear. Instead, he hinted at an alternative — Bitcoin futures ETFs.

Bitcoin futures contract is a contract in which the seller undertakes the duty to provide the buyer with specified assets at predetermined prices within specified timeframes. Bitcoin futures have been trading on the Chicago Mercantile Exchange since December 2017. Gensler argued that futures, unlike "pure" spot bitcoin, comply fully with the watchdog's requirements.

Market participants took Gensler's speech seriously, leading to the launch of a futures bitcoin ETF (BITO) by ProShares in October 2021, followed by others. For instance, in April 2022, the SEC approved a similar application from the exchange-traded fund provider Teucrium.

So, what is the deal with these ETFs? Well, there are two types:

 🪙 Spot ETFs: investors buy crypto fund's shares.

📃 Derivative ETFs: investors buy shares of a fund made up of cryptocurrency derivatives, like BTC futures contracts. Then market participants invest into contracts with predetermined conditions, expiration dates, and estimated prices.

Spot Bitcoin-ETF hype 2.0

Bitcoin futures ETFs differ from spot ETFs, driving market participants to continue their attempts to get the SEC's approval for the latter.

The cryptocurrency world is now witnessing a renewed Bitcoin ETF hype in June 2023. BlackRock, one of the largest asset managers, has entered the race to launch this tool in partnership with the Nasdaq exchange.

BlackRock's primary mission is to manage various client assets in a way that makes them profitable,whether through investments in assets or real estate rentals.

Following BlackRock’s move, companies like Fidelity, Invesco, Wisdom Tree, and Valkyrie submitted applications. However, the SEC declared the applications "inadequate". In response, Nasdaq and BlackRock refilled their application, this time including Coinbase.

Coinbase, a prominent crypto exchange, made history as the first United States crypto company to go public through a direct listing of shares (similar to an Initial Public Offering, or IPO) on Nasdaq, which is very rare. Coinbase’s shares are actively traded on the exchange. With its involvement, Nasdaq will ensure transparency and serve as a guarantor for the ETF. 

As of now, these companies are still waiting for the SEC's approval. Bernstein analysts believe that a new wave of applications will finally pave the way for this tool to the market. Jeremy Allair, co-founder and CEO of Circle, shares the same opinion.

According to Michael Saylor, MicroStrategy founder (the largest bitcoin investor among public companies), a spot Bitcoin ETF will attract trillions of dollars. This financial tool could bring new investments into the digital asset market and push cryptocurrencies closer to achieving full legal status.

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​​This article is not an investment recommendation. The financial transactions mentioned in the article are not a guide to action. Itez is not responsible for possible risks. The user should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.

Maria Kachura
Maria Kachura

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