Spot Bitcoin ETFs: Fact vs Fiction
Spot Bitcoin ETFs, the financial instruments that directly mirror the value of Bitcoin, have recently become a hot topic in the financial world. Amidst the whirlwind of information, a cloud of misconceptions and misunderstandings has formed. It’s time to dispel these myths and take a comprehensive look at what Spot Bitcoin ETFs truly represent.
Understanding Spot Bitcoin ETFs
A Spot Bitcoin ETF is like a mirror for Bitcoin’s price. It’s a product you can buy and sell on the public market, just like stocks. When you invest in a Spot Bitcoin ETF, you’re essentially investing directly in Bitcoin, because its price moves with the real-time price of Bitcoin.
Unlike some other products, a Spot Bitcoin ETF doesn’t use futures contracts (agreements to buy or sell Bitcoin at a future date) to track Bitcoin’s price. Instead, it tracks the price of Bitcoin as it is right now.
However, the U.S. Securities and Exchange Commission (SEC), which oversees these kinds of products, hasn’t approved any Spot Bitcoin ETFs yet. So, while they’re a hot topic, you can’t actually invest in a Spot Bitcoin ETF at the moment.
The Most Surprising Misconceptions
As the SEC is on the verge of potentially approving a spot Bitcoin ETF, Alistair Milne, Chief Investment Officer (CIO) of Altana Digital Currency Fund, has tackled several myths associated with Spot Bitcoin ETFs. Recently, several startlingly inaccurate rumors have been circulating, creating a distorted view of what a future with a spot ETF might look like.
Milne highlighted the strict legal and operational rules that govern spot ETFs. He debunked the widespread myth that a spot ETF could dilute the 21 million supply of BTC by introducing “paper Bitcoin”. He clarified, “Spot ETFs are legally required to invest net inflows in BTC, which will be held by a custodian, fully audited, etc.”
The Function of ETF Providers
ETF providers such as BlackRock, Fidelity, and Bitwise are ‘seeding’ their ETFs with cash on exchanges in anticipation of buying Bitcoin when inflows occur. This is a proactive step to manage liquidity and ensure the ETF’s performance aligns with Bitcoin’s market movements. Also, the actions of spot ETFs are determined by inflows and outflows, not by the discretionary decisions of fund managers like BlackRock’s Larry Fink. This means the ETF’s Bitcoin transactions are purely transactional, based on the fund’s need to balance inflows and outflows. “ETF providers have no discretion regarding buying or not buying, only inflows/outflows may dictate their trading,” Milne explained.
Spot Bitcoin ETFs vs Derivative ETFs
In contrast to derivative ETFs, spot Bitcoin ETFs involve actual BTC, highlighting their direct connection to the market dynamics of the cryptocurrency. “Bitcoin spot ETFs will significantly increase the proportion of spot BTC traded vs derivative (unbacked) volumes … reducing the influence of the latter. BTC’s price will be more difficult to suppress, not easier,” Milne explained.
Market Makers and Spot Bitcoin ETFs
Market Makers (MMs) and others will trade or arbitrage the ETF’s stock versus spot Bitcoin. This is done to ensure that the ETF is priced as close to the actual market value of BTC as possible, thereby exploiting any inefficiencies for profit. Milne further explained that a spot ETF that underperforms Bitcoin (before fees) will likely go out of business, as its value is expected to mirror that of Bitcoin’s market performance.
Investor Movement Between Different ETF Providers
The discussion also explored the dynamics of investor movement between different ETF providers. In response to a question about potential shifts from Grayscale Bitcoin Trust (GBTC) to other ETFs, Milne clarified, “GBTC will instantly be at par value, so the only sellers are likely those who bought at a discount and want to rotate back to self-custody (like me). The net effect after 1-2 working days would be zero. Someone selling GBTC and buying, for example, IBTC at the same hour should have no effect either.”
Trustworthiness of ETFs
Another myth revolves around the trustworthiness of ETFs. A user expressed skepticism about reliance on traditional auditing methods, suggesting that on-chain signed messages from the custodians would be the only reliable proof to prevent fraud like FTX. Milne countered this by highlighting that “BTC holdings will have to be attested to by their custodians and also audited by firms far more reputable and knowledgeable than FTXs. For example, they will require they prove control of the keys for all addresses.”
Spot Bitcoin ETFs represent a significant development in the cryptocurrency market. They offer a direct, real-time reflection of Bitcoin’s value, making them a unique financial instrument. However, they are not without their complexities and misconceptions. As we await the SEC’s decision on these ETFs, it’s crucial to separate fact from fiction. Understanding Spot Bitcoin ETFs is not just about grasping a new financial tool, but about navigating the evolving landscape of digital currency investment. As we continue to explore this exciting frontier, staying informed and dispelling myths will be our guiding principles. The future of cryptocurrency is unfolding, and Spot Bitcoin ETFs could play a pivotal role in shaping that future.