What are Spot Bitcoin ETFs, and How do they Work?

Spot Bitcoin ETFs (exchange-traded funds) are all the rage now, with the US SEC (Securities and Exchanges Commission) greenlighting 11 Bitcoin spot ETFs at once after resisting crypto ETFs for years. This historic event has pulled bullish enthusiasm into the crypto market, and opened the floodgates for conventional investors to get into crypto once and for all. 

Though you may be wondering why spot Bitcoin ETFs in just this one country have positive implications for the global crypto space. In this post, we’ll simplify crypto ETFs for you: from their definition to their working to the weight of this decision from the SEC, and even the future possibilities.

What are Spot Bitcoin ETFs?

When someone mentions Bitcoin ETFs, the first question you need to ask is whether it has Bitcoin itself as an underlying asset. A Bitcoin spot ETF essentially gives you direct exposure to the current price of Bitcoin. As ‘spot’ trading crypto suggests trading crypto in real time, spot crypto ETFs allow you to do something similar. These ETF shares track the current value of Bitcoin closely.

Other countries in the world have their own spot Bitcoin ETFs already, such as several offerings in Brazil, including one from Itaú Asset Management and Galaxy Digital. But the US is the beating heart of global finance, and yet until January 2024, it neither had the country regulated its crypto sector nor had it approved instruments like spot crypto ETFs, which bring traditional investors a higher stake in crypto than future ETFs. This is precisely why spot Bitcoin ETFs in the US now symbolize the country taking one step closer to recognizing crypto, propelling other nations to follow suit.

How do Spot Bitcoin ETFs Work?

Spot Bitcoin ETFs represent the real-time price of bitcoins. Here’s how Bitcoin spot ETFs work, step by step:

• The crypto ETFs in question buy bitcoins through crypto exchanges or in a peer-to-peer manner from Bitcoin holders.
• The custodian holds the purchased bitcoins in a digital wallet, and is responsible for managing them. 
• Here you may note that these bitcoins are usually stored in offline (or cold) crypto wallets to avoid any threats of hacking.
• Now, Bitcoin spot ETFs issue shares relevant to the number of bitcoins they have in custody. The price for each share parallels the market price of the crypto in question.
• These spot Bitcoin ETF shares are then made available on conventional stock exchanges for the general public to access.
• Now the spot Bitcoin ETFs have their shares tracking the value of Bitcoin as well as possible, while they rebalance holdings from time to time based on market dynamics through buying more bitcoins, or selling some of the existing holding.

Aside from these simplified steps of the working of spot crypto ETFs, you may want to remember some additional factors. For instance, the part of creating new ETF shares and redemption is carried out by the financial institutions issuing them, called APs or authorized participants. BlackRock is behind one of the 11 spot Bitcoin ETFs to launch in the US recently, and they play a similar role for the BlackRock iShares Bitcoin ETF (IBIT).

Now, in case the ETF shares are trading at a premium or a discount to the actual Bitcoin price at a given moment, the APs arbitrage the difference by creating/redeeming their respective ETF shares in big blocks. The end goal is to make the Bitcoin market price and ETF share price align. 

How Can I Buy Bitcoin Spot ETFs?

When you buy a spot Bitcoin ETF, it’s akin to buying shares for a conventional security. You might find the market to be comparatively more liquid than spot crypto markets, in fact, as Bitcoin spot ETFs lower the entry barrier into crypto for the regular man and are a more reliable instrument to them due to their long existence in traditional finance. 

What this implies is that you would be able to buy or sell your crypto ETFs shares with ease, much in the same way a traditional investor does. 

The SEC Brings BTC Closer to Mainstream Recognition

Now, why is the SEC’s decision something that could have a positive impact on Bitcoin and crypto in the long run? As mentioned above, the US is the heart of finance, and the relevant regulatory body in the country allowing investors to trade in crypto in real time through ETFs is symbolic of their growing acceptance of the asset class. This would encourage other countries which are yet to recognize the potential of crypto to take the plunge. For instance, Hong Kong has received its first spot Bitcoin ETF application in the wake of the SEC’s decision. While Hong Kong was already pro-crypto, the domino effect is still a highly possible outcome. 

On the other hand, the traditional investor wants to buy into an instrument they can trust while being in their comfort zone. An ETF is right up their alley, and when a regulator approves ETFs tracking a crypto’s price in real-time, they can finally engage with crypto without having to understand the technicalities of digital currency. In the long term, this would lead the common man into crypto itself as well, once they get the hang of the asset class.

Both scenarios combine to spell out a world where Bitcoin (and crypto in turn) is a mainstream asset like gold.

The Future is Bright with Spot Crypto ETFs

In brief, here’s what the future holds with spot Bitcoin ETFs active in the US: increased liquidity and a diverse array of investors in Bitcoin will initiate a sustained rally. BlackRock’s IBIT has crossed $2 million in AUM in just over 10 days, and the other 10 are keeping up, from reputed firms like Grayscale, Fidelity, and more. The launch of the 11 will be remembered in the history of finance for the grand response.