Bitcoin ETFs Explained

Introduction: Spot Bitcoin ETFs

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After a long time, many investors got what they were waiting for: the US Securities and Exchange Commission approved Spot Bitcoin ETFs.

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What does spot mean?

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Spot means owning something at the spot, not waiting till the future. Therefore, the new ETFs rolling out will follow Bitcoin’s price minus the fees for the ETF wrapper, which are considerably cheap.

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The news revolving around mentions the term spot because other bitcoin exchange-traded products have already existed on traditional exchanges for quite a while in the form of futures contracts. These funds did not own actual Bitcoin but held contracts for future delivery that would be continuously extended.

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How do these new ETFs aim to compete?

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The most common way investors accessed bitcoin using traditional market exchanges was by owning Grayscale Bitcoin Trust (GBTC), which had a 28 Billion USD market capitalization, which portrays how popular this investment was.

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GBTC levied an annual management fee of 2% and was still popular enough to justify its market capitalization.

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Compared to GBTC, Bitcoin ETFs are landing at management fees of around 0.25%, reducing the cost by 90%.

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While other investors mentioned previously were investing in funds that owned future contracts, those investors were paying around 1% annual management fees and not buying the actual asset. Not only that, but the future contracts were also trading at a higher price, making investors pay a higher premium for their inability to access the spot.

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Therefore, undoubtedly, the bitcoin ETFs will take a lot of funds away from wealth that was invested in future products and GBTC.

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Conclusion: However, is Bitcoin a good investment?

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Bitcoin is a non-income-producing asset, similar to a commodity. We can not price Bitcoin on a future stream of earnings or income (similar to how we would do with equities or real estate) and, therefore, can only price it based on demand/supply. Bitcoin would only be a good investment if others believe it is, as it lacks a fundamental value.

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Gold works in a very similar fashion, and precious metals have remained in demand continuously through time. Bitcoin enthusiasts point to the fact that it would have plenty of way to go if it could take some of Gold’s pie. To compare, Bitcoin’s current market capitalization is less than 1 Trillion USD, whilst Gold remains above 13 Trillion USD.

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Considering the lack of a fundamental value, but with the strong desire of many to invest in this asset, our recommendation is to stay away from putting an excessive portion of your wealth towards this asset, and caution against having more than a few percentage points of your net wealth in it.