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Spot Bitcoin ETFs Finally Approved
Author: Joel Baretto, CFP®
January 11, 2024
Over a decade since the initial filing, the U.S. Securities and Exchange Commission (SEC) has at last granted approval for a spot bitcoin exchange-traded fund (ETF). Remarkably, the SEC has given the green light to 11 spot bitcoin ETFs, providing investors with immediate options. Trading for these ETFs is set to commence on January 11, 2024.
While the question of which ETF will emerge as the leader remains uncertain, one aspect is evident: Spot bitcoin ETFs stand out as the premier choice in the fund market for bitcoin investors.
What is a Spot Bitcoin ETF?
A “spot bitcoin ETF” is the formal designation for an ETF that holds bitcoin. The performance of these ETFs is expected to closely mirror bitcoin prices, adjusting for fees and the fund’s trading costs.
In financial terms, a spot price refers to the immediately available price of a security, while futures prices represent prices at a future date. Stocks and bonds typically trade at spot prices, reflecting current values, whereas commodities often trade at future prices, allowing buyers to secure a specific price for a transaction at a later date.
The nomenclature of “spot bitcoin ETFs” arises primarily due to the precedence of bitcoin futures ETFs, which entered the market in October 2021. Had spot bitcoin ETFs received approval first, they might have been commonly referred to simply as “bitcoin ETFs.”
Is Investing in Spot Bitcoin ETFs a Wise Decision?
Investors need not adopt a specific stance on bitcoin, as succumbing to the fear of missing out is an unsound investment strategy. The decision to invest in spot bitcoin ETFs should be based on a genuine recognition of value. Here are some considerations to weigh when contemplating investment in spot bitcoin ETFs:
- Spot Bitcoin ETFs vs. Other Alternatives
Fees
The SEC’s simultaneous approval of multiple filings has sparked intense competition among issuers, benefiting investors through reduced fees. This fee rivalry is crucial for attracting new assets, prompting issuers to introduce competitive fee structures. Spot bitcoin ETFs notably offer significantly lower fees compared to existing crypto funds. For instance, while Grayscale trusts and the largest bitcoin futures ETF charge 2-3% and 0.95% respectively, Bitwise’s spot bitcoin ETF proposes a mere 0.20% fee.
Futures Drag on Performance
Despite the SEC’s delay in approving spot bitcoin ETFs, it granted approval for the first bitcoin futures ETF over two years ago, with ProShares Bitcoin Strategy ETF BITO becoming the most heavily traded ETF debut. However, it was emphasized then that these were not the desired bitcoin ETFs. Notably, investors in bitcoin futures ETFs incur additional fees for rolling from one futures contract to another, a concern that spot bitcoin ETFs do not encounter.
Non-ETF Grantor Trusts Struggle to Track Net Asset Value
Grantor trusts, exemplified by Grayscale Bitcoin Trust (GBTC), capitalized on a lack of alternatives for investors seeking bitcoin exposure without navigating cryptocurrency exchanges. Launched in 2013, GBTC amassed $40 billion in assets under management by 2021, primarily due to its first-mover advantage and a 2% fee. However, the trust’s structure, resembling closed-end funds, posed challenges for investors in terms of share transactions, especially when GBTC traded at a discount. Spot bitcoin ETFs, in contrast, offer a safer option by closely tracking their net asset value and allowing daily creation and redemption of shares, ensuring better supply and demand management.
- Spot Bitcoin ETFs Are Not as Efficient as Most ETFs
While spot bitcoin ETFs are a preferable choice over bitcoin futures ETFs for most investors, they currently lack the efficiency commonly associated with other ETFs. Unlike many ETFs that benefit from low costs through in-kind creations and redemptions, spot bitcoin ETFs, at least for now, only have approval for cash creations and redemptions. This means that the ETF will incur costs when buying and selling bitcoin during the creation or redemption of shares, potentially impacting the overall performance. The full extent of these costs is still uncertain, prompting some investors to opt for traditional ETFs until this inefficiency is addressed.
How to Choose the Right Spot Bitcoin ETF for You
The first thing you need to understand is that crypto currency investments in any form are still considered speculative investments. That said, carefully consider your investment goals and risk tolerance to allocate your investment portfolio wisely.
While spot bitcoin ETFs aim to provide identical exposure to bitcoin, there are distinctions among them. Investors can choose the most suitable option by considering three key criteria: fees, liquidity, and fund trading costs. For buy-and-hold investors, prioritizing low fees is crucial; active traders should emphasize liquidity, and everyone should monitor how trading costs impact overall performance.
Buy-and-Hold Investors: Focus on Fees
Several issuers offering access to a similar strategy is not a novel occurrence, with historical examples like gold ETFs or S&P 500 trackers displaying nearly identical returns before fees. In the case of spot bitcoin ETFs, fees are anticipated to be the primary factor differentiating total returns.
Bitwise Bitcoin ETF stands out with the lowest ongoing fee at 0.20%, while competitors such as ARK, Fidelity, VanEck, and iShares are within a 5-basis point range. Fee waivers have been employed by issuers to attract initial assets, with six bitcoin ETFs launching with a 0.00% fee after waivers, albeit with limitations. Grayscale, on the other hand, proposes a higher fee of 1.50% without offering any distinct benefits, making it less appealing for investors seeking bitcoin exposure.
Although fees may have a limited impact on performance compared to bitcoin’s volatility, buy-and-hold investors are advised not to settle for a more expensive ETF to maximize long-term returns.
Active ETF Traders: Prioritize Liquidity
Investors must consider their individual costs, particularly in the context of frequent trading and substantial trades, as these actions entail liquidity costs that can accumulate rapidly. Unlike market makers and day traders, buy-and-hold investors face lower exposure to liquidity risks. Active traders engaging in spot bitcoin ETFs should analyze liquidity costs, which can be divided into two components: crossing the bid-ask spread and assessing the depth of liquidity.
- Crossing the bid-ask spread – Traders incur costs each time they execute a transaction, either by buying at the offered price or selling at the bid. Theoretically, fair value lies somewhere between the bid and ask prices, with the midpoint serving as a reasonable proxy. For instance, if two ETFs share an identical value of $10.00, it would be more cost-effective to transact at the offer of a $9.99 bid/$10.01 ask, compared to a $9.95 bid/$10.05 ask.
- Depth of Liquidity – Investors aim to locate sufficient shares for buying or selling close to the current price to avoid suboptimal prices in executing large trades. Deeper liquidity, often signaled by tighter bid-ask spreads, implies more available shares near the current price. This is crucial for those trading significant share volumes, preventing excessive market impact on prices due to their transactions.
All Investors: A Fund’s Trading Costs
The SEC’s requirement for cash creations and redemptions has curtailed the superpowers of spot bitcoin ETFs. Consequently, these ETFs must handle bitcoin trading during share additions or redemptions, passing the associated costs to the fund and its investors, covering transaction costs, bid-ask spread crossing expenses, and market-impact costs.
While differences between issuers may be slight, the competition is unique, with a smaller issuer (Valkyrie) directly challenging the world’s largest asset manager (BlackRock). Advantages may lie with issuers possessing greater resources and capital markets expertise. A potential edge for issuers like Bitwise or VanEck could stem from a deeper connection to the crypto community.
Assuming all other factors are equal, investors ideally prefer an asset manager with direct access or strong connections to market makers and liquidity providers. This holds true for both their own ETFs and when engaging in crypto market trading. Monitoring performance becomes essential to identify which issuer possesses a competitive advantage in this regard.
Disclaimer:
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