Other attributes
A spot bitcoin exchange-traded fund (ETF) is an investment vehicle that allows investors to expose their regular brokerage accounts to the price moves of the bitcoin cryptocurrency. Unlike bitcoin futures ETFs, a spot bitcoin ETF invests in the cryptocurrency as the underlying asset rather than the derivatives contracts based on their prices.
Spot bitcoin ETFs are different from traditional ETFs, which tend to track the performance of an array of investments in that the spot bitcoin ETFs track only the price of bitcoin. For many investors, the spot bitcoin ETF offers a more convenient way to trade on the price movement of bitcoin, as they can be purchased through a standard brokerage account rather than an investor purchasing bitcoin directly. However, the spot bitcoin ETF charges an annual management fee, which makes ownership of a spot bitcoin ETF more expensive than owning the underlying asset. However, due to market competition, the management fees on many spot bitcoin ETFs are competitive (and in some cases have been dropped to get investors purchase).
For the spot bitcoin ETF to work, the underlying fund holds bitcoins in a secure digital vault, which is managed by registered custodians (which is where the management fee comes from). The purpose of the ETF holding bitcoin is to mirror the price of bitcoins in the crypto market. The ETF then issues shares corresponding to the number of bitcoins it holds while the share price of the ETF reflects the prevailing market price of the underlying bitcoin asset. The ETF will also rebalance its holdings through the purchase and sale of tokens, which is done by authorized participants (APs), which are typically large financial institutions. The creation or redemption of shares depends on the market demand.
For investors, purchasing or selling a spot bitcoin ETF works the same as buying any other security or ETF, with the market kept liquid through market makers, who continuously offer to buy and sell shares of ETFs. These market makers can be crucial to maintain a stable market.
Spot bitcoin ETFs have faced some regulatory hurdles, as many jurisdictions were hesitant to approve these ETFs given concerns over market manipulation (which cryptocurrency tends to be more sensitive to) and custodial risk. However, in January 2024, the U.S. Securities and Exchange Commission (SEC) approved the first spot bitcoin ETFs. The regulatory approval came after an unauthorized user published a fake post on the SEC's account on the social media platform X, which stated the agency had approved the products for trading, but the agency quickly disavowed and deleted the post. The incident caused confusion over the eventual announcement for approval.
Following regulatory approval, investment powerhouses BlackRock and Fidelity emerged as the frontrunner for most popular spot bitcoin ETF, according to investment advisory firm Berstein, which calculated that these funds generated around $11 billion in trading volume and approximately $800 million in inflows in only the first two days of trading. Of that amount, BlackRock and Fidelity garnered $498 and $422 million respectively in total flows over those first two days of trading.
In late 2022, the ASX amended listing rulings for ETFs tracking the price of bitcoin, or spot bitcoin ETFs. This came with guidelines for the launch of spot bitcoin ETFs that attempted to address issues around market security, transparency, and pricing to protect Australian investors.
