On 10 January 2024, the US-based Securities & Exchange Commission (SEC) approved the listing and trading of a number of Spot Bitcoin Exchange-Traded Product (ETP) shares.
In a turning point for Bitcoin investment, 11 Spot Bitcoin Exchange-Traded Funds (ETFs) were approved for the US market, opening up a more regulated way for investors to benefit from Bitcoin’s fluctuating price variations, while mitigating some of the inherent risks of crypto.
But what does a Spot Bitcoin ETF do? Gravita’s specialist Crypto team gives you the lowdown on ETFs and bitcoin investments:
- What is a Spot Bitcoin ETF?
- What does the introduction of Spot Bitcoin ETFs mean for the UK investment market?
- What impact could Spot Bitcoin ETFs have?
- Gravita: Your first choice of crypto accountant and auditor
What is a Spot Bitcoin ETF?
Spot Bitcoin ETFs offer a new and innovative way for professional investors to invest in Bitcoin – one of the first, and certainly the most well-known, Cryptocurrencies.
Spot Bitcoin ETFs are a potential game-changer for Bitcoin investment. Why? ETFs offer a regulated and more accessible way for investors to gain exposure to Bitcoin’s price movements. These benefits of improved regulation and accessibility come from the way that ETFs function, especially when compared to previous crypto investment products.
Here’s a breakdown of how Spot Bitcoin ETFs works:
- Underlying asset – a Spot Bitcoin ETF holds actual Bitcoin in its reserves, in a similar way that a gold ETF holds physical gold bars. Bitcoin is held directly within the ETF, something that was previously unavailable through most crypto investment vehicles.
- Creation and redemption – authorised participants (large institutions) can deal directly with the ETF issuer. Bitcoin can be delivered to the ETF in exchange for newly created ETF shares, or vice versa (redeeming shares for Bitcoin). This process helps maintain the price of the ETF shares, in line with the underlying Bitcoin price.
- Trading on exchanges – once created, Spot Bitcoin ETF shares trade on stock exchanges like any other security. This allows regular investors to buy and sell shares easily through their brokerage accounts.
- Price movement – the value of a Spot Bitcoin ETF share directly reflects the price movement of Bitcoin itself. When the price of Bitcoin goes up, the ETF share price goes up proportionally, and vice versa. So, investors have a clearer and more direct view of how the asset is trading – and when it’s prudent to buy or sell.
What does the introduction of Spot Bitcoin ETFs mean for the UK investment market?
What are the implications if Spot Bitcoin ETFs – and when might ETFs be available in the UK.
The Financial Conduct Authority (FCA) published a statement on 11 March 2024, stating that the FCA will not object to requests from exchanges to create a UK listed market segment for cryptoasset-backed Exchange Traded Notes (cETNs).
Following on from this announcement, the FCA has subsequently given the green light for one Bitcoin ETP to begin trading on 28 May 2024. ETPs and ETFs are available now in the UK investment market, but are currently only open to professional investors.
To get you up to speed, it’s worth noting some key differences between ETFs and previous crypto investment vehicles:
- Direct ownership – Unlike Bitcoin futures ETFs, which were the first type approved, Spot Bitcoin ETFs actually hold the underlying asset (Bitcoin) itself. This directly links the ETF share price to Bitcoin’s price movements.
- Accessibility – Spot Bitcoin ETFs trade on traditional exchanges, making them accessible to a wider range of investors. Investors don’t need a cryptocurrency exchange account and don’t have to manage their own Bitcoin wallet.
- Potential for increased liquidity – By attracting more investors, Spot Bitcoin ETFs could increase the overall liquidity of the Bitcoin market. This could, potentially, lead to smoother price movements and reduced volatility.
- Regulation – Spot Bitcoin ETFs are subject to regulations by financial authorities, including the SEC and the FCA. This offers some level of investor protection when compared to directly investing in Bitcoin on unregulated exchanges.
Spot Bitcoin ETFs do offer a new way to dip a toe into the burgeoning crypto investment market. But there are some potential challenges to consider:
- Regulatory hurdles – The market for ETFs is still in the early stages and will evolve over time, so investors will need to keep a close eye on the regulatory framework.
- Underlying volatility – Bitcoin remains a volatile asset. Spot Bitcoin ETFs inherit that volatility, meaning that investors should be prepared for price swings.
- Management Fees – There will be fees associated with managing the ETF, which can eat into any potential returns that investors may make.
What impact could Spot Bitcoin ETFs have?
Spot Bitcoin ETFs represent a potential turning point by offering a more accessible, and potentially more regulated, way to invest in Bitcoin. But ETFs are not the only way to invest in Bitcoin. There are other pre-existing Bitcoin investment vehicles to be aware of, each with their own associated mix of investment benefits and risks.
Let’s take a look at five reasons companies may invest in Bitcoin, each of which will have their own advantages and considerations:
- Direct Purchase – Investors can buy Bitcoin directly on a cryptocurrency exchange. This offers direct ownership and potentially higher returns, but also means the investor carries the full risk of any price fluctuations and must also manage their own digital wallets (the place where Bitcoins are digitally held).
- Bitcoin ETFs (Exchange-Traded Funds) – Investors can invest in Bitcoin ETFs that hold actual Bitcoin. This offers easier access and regulation when compared to direct purchases of Bitcoin. However, ETFs are still relatively new and might have higher fees associated with management of the funds.
- Bitcoin Futures Contracts – Investors can speculate on the future price of Bitcoin through futures contracts traded on regulated exchanges. This allows them to benefit from potential profit from price movements but without directly owning Bitcoin. This approach offers high leverage and risk of significant losses, if prices drop significantly.
- Bitcoin Investment Trusts – Investors could invest in companies that hold a significant portion of their assets in Bitcoin. This offers indirect exposure to Bitcoin’s price movements with less potential volatility than directly owning it. This approach does represent an investment in the company’s overall performance, not just Bitcoin.
- Bitcoin Payment Processors – Investors could partner with Bitcoin payment processors to accept Bitcoin payments from customers. This can attract new customers and allows the investor to gain potential benefits from Bitcoin’s growing adoption. By accepting Bitcoin payments, investors do carry the risk of price fluctuations when converting Bitcoin to traditional currencies, however.
Gravita: your first choice of crypto accountant and auditor
Spot Bitcoin ETFs may offer a turning point for the UK investment market. But if you’re wondering how to account for any crypto investments, it’s worth talking to the experts.
Our dedicated crypto team offers both accounting, tax and audit services for crypto-based entities. We’ll help you meet your compliance requirements while keeping you up to date with legal rulings and the ever-changing crypto regulatory framework. Learn more about Gravita’s crypto team here, to get the lowdown on accounting, tax and audit for crypto.
If you would like to get in touch with our crypto team, please email hello@gravita.com.
