For weeks, the crypto as well as investing markets have been inundated with news of Spot Bitcoin Exchange Traded Funds (ETFs), with investors eagerly anticipating the decision of the US Securities and Exchange Commission (SEC). Big investment firms such as BlackRock, Grayscale and Invesco had submitted applications, and the market had anticipated the BTC acquiring frenzy that was expected to follow these applications. With some investors anticipating it a little too much, the X account of the Securities and Exchange Commission had been hacked on Tuesday, with the actual announcement coming out on Wednesday.
As everyone gets caught up in the ETF frenzy, here’s an article on everything you need to know about this historic milestone.
What is a Spot Bitcoin ETF?
A spot bitcoin exchange-traded fund (ETF) is an investment vehicle that allows ordinary investors exposure to the price moves of bitcoin in their regular brokerage accounts. Unlike bitcoin futures ETFs, a spot bitcoin ETF invests directly in bitcoins as the underlying asset, not derivatives contracts based on their prices.
Spot bitcoin ETFs offer a regulated and accessible way for mainstream investors to invest in the digital currency. However, expenses like management fees and brokerage commissions still apply, though these are offset by not having the costs in time and exchange fees to buy and hold bitcoins directly.
How do Spot Bitcoin ETFs Work?
Spot bitcoin ETFs securely hold bitcoins in a secure digital vault, which registered custodians manage.
The purpose of this kind of ETF is to mirror the price of bitcoins in the crypto market. To get started, the ETF buys bitcoins from other holders or through authorized cryptocurrency exchanges. The tokens are then stored in a digital wallet, often using several layers of security, including cold or offline storage, to reduce risks like hacking.
The ETF then issues shares corresponding to a set number of bitcoins it holds. The ETF share price should reflect the prevailing market price of the cryptocurrency, and the shares are available for public trading on traditional stock exchanges. So the ETF shares track the price of bitcoins as closely as possible, and the ETF occasionally rebalances its holdings by buying or selling tokens.
This process of creation and redemption is done by authorized participants (APs). These are typically large financial institutions, which create or redeem shares of the ETF based on market demand. If the ETF shares are trading at a premium or discount to the actual price of bitcoins, then the APs create or redeem ETF shares in large blocks, essentially arbitraging the difference so that the ETF share price alignments with the cost of bitcoins.
For investors and traders, buying a spot bitcoin ETF is like buying shares in any other ETF or security. The market is kept liquid and efficient by market makers who continuously offer to buy and sell shares of the ETF. Their activity is crucial in maintaining a stable market, ensuring that investors can easily buy or sell shares of the ETF when needed.
More broadly, spot bitcoin ETFs can help create more opportunities for institutional and retail investors to speculate on bitcoin without the technical challenges of managing a cryptocurrency wallet or the security concerns of safeguarding private keys.
How will Spot Bitcoin ETFs Affect the Bitcoin Market?
Spot Bitcoin ETFs are expected to greatly boost the liquidity of the bitcoin market by making it available to more buyers and sellers. More liquidity in the Bitcoin market will in turn lead to more stable prices and less volatility, making bitcoin more attractive to the average investor.
Are Spot Bitcoin ETFs the only ways to invest in Bitcoin?
Not at all. Bitcoin ETFs are a new addition to investing in BTC, but not the only way, nor is it the most assured way. Bitcoin can also be invested with multi-asset investing firms such as Tevason, who have a track record of maximizing crypto investments for investors.
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