What is a spot bitcoin ETF and why it has sparked a crypto rally?

In this episode of Yahoo Finance Future Focus, our host Brian McGleenon explains what a spot bitcoin ETF is and how it differs from other investments. Spot bitcoin exchange-traded funds (ETFs) have emerged as a transformative tool in the crypto market, offering investors a straightforward means to gain exposure to bitcoin’s price movements. Unlike derivatives-based ETFs, spot bitcoin ETFs directly invest in bitcoin, mirroring its current price. With each ETF share corresponding to a specific amount of bitcoin held in reserve, these funds provide a regulated and secure gateway for both individual and institutional investors to participate in the crypto market. The recent approval of several spot bitcoin ETFs by the US Securities and Exchange Commission (SEC) in January has fueled a notable surge in bitcoin’s price. Increased inflows from major fund managers like BlackRock and Franklin Templeton have further bolstered bitcoin’s rally, highlighting the growing significance of spot bitcoin ETFs in shaping the cryptocurrency landscape.

Video Transcript

BRIAN MCGLEENON: Welcome to “Yahoo Finance” Future Focus. Now, the Bitcoin price has rallied since the approval of multiple spot Bitcoin exchange traded funds or ETFs by the US Securities and Exchange Commission in January. But what exactly is a spot Bitcoin ETF? And why has it caused the price of Bitcoin to surge?

So spot Bitcoin ETFs operate in much the same way as a traditional ETF. But instead of tracking a basket of stocks, for instance, spot Bitcoin ETFs track the current price of Bitcoin. Now, each share of the ETF sold corresponds to an equivalent amount of actual Bitcoin held in reserve.

There are currently 11 spot Bitcoin ETFs in existence offered by fund managers, such as BlackRock, Fidelity, and Franklin Templeton. Now, these managers work with authorized participants who purchase Bitcoin for the ETF. The acquired Bitcoin is then held in digital wallets by custodians, such as Coinbase.

Each ETF issued shares representing the purchased Bitcoin, which are matched to the current spot price of the underlying asset. Now, these shares can be bought and sold on traditional stock exchanges, making it easier for both regular investors and big institutions to invest in Bitcoin without actually owning it directly.

For instance, BlackRock’s iShares Bitcoin Trust ETF is listed on the NASDAQ. Whilst, Fidelity’s Fidelity Wise Origin Bitcoin BTC Fund is listed on the New York Stock Exchange. This setup allows investors to gain exposure to Bitcoin without needing to directly manage digital wallets or store private keys, which can be complex and risky for some investors.

Now, all of these dynamics have had an effect on the price of Bitcoin since the SEC’s approval of the ETFs in January of this year. In the short term, increased institutional investment through spot ETFs has driven up demand for Bitcoin, which has caused the digital asset’s price to appreciate.

The recent approval of spot Bitcoin ETFs by the SEC has also marked a shift in how regulators view cryptocurrencies and given a certain level of legitimacy to Bitcoin as an asset class and increased liquidity in the Bitcoin market overall.

Now, the UK’s financial regulator, the Financial Conduct Authority, seems to be following in the wake of its US counterpart after making a recent statement that it intends to allow Bitcoin-backed exchange traded notes or ETNs, specifically, for professional investors.

However, it’s always essential to note that investing in Bitcoin and spot ETFs comes with its risks. Investors should be cautious and aware of the volatility associated with Bitcoin. Additionally, investors don’t actually take custody of the Bitcoin when investing in spot ETFs. Instead, they rely on third party custodians. And as always, investors should be careful to consider their risk tolerance before investing in these recently approved products.

Thanks for joining us.

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