What is a Bitcoin Spot ETF?
Bitcoin is the first digital currency issued by Bitcoin blockchain. ETFs are investment instruments that track the price of an underlying asset such as digital currencies and issue shares.
ETF shares are listed on stock exchanges rather than crypto trading platforms. Bitcoin spot ETF is an investment pool that tracks the value of BTC from spot markets. It means that the value of Bitcoin spot ETF shares is directly pegged to the market price of Bitcoin.
Advantages of Bitcoin Spot ETF
Here are some advantages associated with Bitcoin spot ETFs:
Bitcoin spot ETF allows investors to gain direct exposure to the spot market value of BTC without directly purchasing the coin.
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Bitcoin spot ETF shares are traded on the traditional stock market it means that they are regulated and bring more regulatory clarity to the DeFi sector.
Bitcoin spot ETF introduced digital currency trading to traditional investors leading to increased demand and capital inflow.
Risks Associated with Bitcoin Spot ETF
Here are some limitations associated with Bitcoin spot ETFs:
- The volatile price of Bitcoin spot ETF changes with the price changes in spot market bringing more volatility.
- The administration fees and other factors can deflect the price of Bitcoin spot ETF shares from spot market.
What is Bitcoin Futures ETF?
A futures contract is a derivative contract that allows investors to purchase or sell a given quantity of an underlying asset at a specified value during a given time. In this manner, investors are able to speculate about the future prices of Bitcoin without directly investing in the BTC coin.
Bitcoin futures ETFs are a basket of Bitcoin futures contracts that tracks the purchase and sales of futures contracts in the fund. If the investors expect the value of Bitcoin to increase in near term they can purchase the shares at a premium and if the price are expected to decline the shares are traded at a discount.
Advantages of Bitcoin Futures ETFs
Here are some benefits of Bitcoin futures ETFs:
- Bitcoin futures ETFs also allow investors to trade BTC without buying it from spot market.
- Bitcoin futures ETFs are regulated and supervised by financial regulators.
- Bitcoin futures ETFs offer more liquidity in comparison to other investment vehicles.
Limitations of Bitcoin Futures ETFs
Here are some disadvantages associated with Bitcoin futures ETFs:
- Bitcoin futures ETFs does not have direct Bitcoin exposure meaning the issuer does not hold Bitcoin reserves but manages Bitcoin futures contracts.
- Bitcoin futures contracts can be complex to understanding on account of its association with the futures markets.
- Bitcoin futures ETFs can harbor additional management fees that increase the cost of trading.
- The value of Bitcoin futures ETFs is not directly pegged to spot value of BTC.
- Bitcoin futures ETFs are subjected to counterparty risk.
Bitcoin Spot ETFs Vs Bitcoin Futures ETFs
Here are some important distinctions between Bitcoin spot and futures ETFs:
Bitcoin spot ETFs acquire and add Bitcoin to the fund reserves. On the other hand, Bitcoin futures ETFs deal in Bitcoin futures contracts that are connected to BTC.
Bitcoin spot ETF value is connected to the changes in the real-time price fluctuations of BTC. On the other hand, Bitcoin futures ETF value is related to the Bitcoin futures contracts and futures market dynamics.
Liquidity management for Bitcoin futures ETFs is more complex since futures contracts in the fund can have different expiration dates. However, managing liquidity for Bitcoin spot ETFs is easier as long as the fund is investing and holding in the required amount of BTC in the reserves.
The price and value of Bitcoin spot ETFs shares is dependent on the spot prices of BTC for the most part. Meanwhile, Bitcoin futures ETFs price divergence takes place based on futures markets fluctuations and approaching expiration date for the futures contracts added in the fund.
Bitcoin spot ETF traders have to deal with the risks associated with the price volatility of Bitcoin in the spot market. However, Bitcoin futures ETFs are affected by spot market changes as well as futures market factors such as leveraged positions and contract expiration dates.
Bitcoin spot ETF issuers need infrastructure to store Bitcoins. On the contrary, Bitcoin futures ETF investors should have knowledge about derivative trading and futures market exposure.
Bitcoin spot and futures ETFs are both regulated investment options that bring more investment interest to the Bitcoin market. Both carry a varied variety of benefits and risks. Therefore, investors should gain more knowledge about both types of investment options to increase their profit-earning potential based on different market dynamics.
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