Bitcoin Spot ETF Trading: Here’s All You Need to Know 

Cryptocurrencies like Bitcoin have gained significant popularity in recent years. As the demand for Bitcoin grows, so does the interest in trading it through various financial instruments. 

One such instrument gaining attention is the Bitcoin Exchange-Traded Fund (ETF), which allows investors to trade Bitcoin on traditional stock exchanges. Effectively, new entrants, and less-tech savvy people all over the world can now trade BTC within existing TradFi structures. 

On January 11th, the US Securities and Exchange Commission (SEC) officially approved the listing of 11 Bitcoin ETFs, marking a significant milestone for both Bitcoin and Wall Street. According to optimist market analysts and Bitcoin maximalists, the approval has created a stamp of mainstream validation and acceptance of Bitcoin as an investment asset. 

In this article, we will delve into the details of Bitcoin ETFs, including the approval process, trading figures, impact on Bitcoin price, where to trade them, and key signals to watch for profitable trading opportunities.

What is a Bitcoin ETF?

A Bitcoin ETF is an investment vehicle that tracks the price of Bitcoin. It allows investors to gain exposure to Bitcoin’s price movements without owning the actual cryptocurrency. ETFs are traded on regulated stock exchanges, making them a more accessible and familiar investment option for traditional investors who may be hesitant to directly invest in cryptocurrencies.

Complicated Approval Process History 

Obtaining approval for a Bitcoin ETF was a complex and time-consuming process. The Securities and Exchange Commission (SEC) in the United States is responsible for evaluating and approving ETF applications.

Over the last 10 years several ETF proposals were submitted to the SEC, but none received approval. The SEC cited concerns such as market manipulation, liquidity, and custody as reasons for delaying approval. 

However, things took a more optimistic turn in June 15 2023, when Blackrock, (NASDAQ: BLK), one the largest investment firms in the world, with $13 trillion in Assets Under Management, officially filed for Bitcoin Spot ETF with the US SEC.

The long-drawn out controversial approval process eventually came to a positive conclusion on Jan 11 2024, albeit after a false statement issued on the SEC’s twitter account was pulled a day earlier. 

Why is Bitcoin ETF a Big Deal? 

After being derided as the wild-wild west of finance for 15-years, Bitcoin is now legally eligible to attract capital from regulated investment firms such as Banks, Family Offices and Retirement funds. 

This significant development, opens up the doors for institutional investors to enter the Bitcoin market, which could potentially lead to increased capital inflows and further adoption of cryptocurrencies. In recent history, GOLD (XAU) price rallied by 2,000% within 10 years of the first Gold Spot ETF in November 2004, as digital trading volumes grew and capital flows skyrocketed. 

Looking into the specifics, the Gold stood at $416 per ounce in 2004. Today, 20 years down the line, it has grown to 392%, trading around $2050 per ounce as of January 2024 with market cap at $13.1 trillion. This represents a cumulative annual growth rate of 9%. With Bitcoin fixed supply, a 9% increase in market capitalization for the next 20% could lead to a far more accelerated price boost. 

How Many ETFs are Trading?

The parties involved in the creation of Bitcoin ETFs, are called the issuers or fund sponsors. The Asset management firms of the approved Bitcoin spot ETFs are:

1. VanEck
2. Bitwise
3. Fidelity
4. Franklin
5. Valkyrie
6. Hashdex
7. Ark Invest
8. Grayscale
9. BlackRock
10. WisdomTree
11. Invesco Galaxy

These issuers have received official approval from the Securities and Exchange Commission (SEC) to launch Bitcoin spot ETFs. It’s important to note that the approval of these ETFs does not mean the SEC endorses Bitcoin or other cryptocurrencies classified as securities.

Bitcoin ETF Custody

Custody is an important part of the effort to bring a spot bitcoin ETF to the U.S. market. Custodians hold onto assets on behalf of someone else. In this case, that means safekeeping the (presumably billions of dollars worth of) bitcoin that ETFs will own, keeping hackers and any other bad actors at bay.

Coinbase, run by co-founder/CEO Brian Armstrong, currently is the custodian for nine of the 12 proposed bitcoin ETFs in the U.S., a level of concentration that makes some uneasy. With Fidelity deciding to custody their own assets and VanEck picking Gemini, that leaves only one application that lists no custodian.

This has created a concentration risk, as hacker groups like North-Korea Lazarus on the prowl. Custodying billions of dollars worth of BTC could incentivize hacker groups to conduct sophisticated attacks on Coinbase storage infrastructure, which could put the industry at risk. 

“Having so much bitcoin concentrated in one custodian is not exactly ideal, and I think it would be beneficial for other quality exchanges to participate as custodians for ETFs,” said Brian D. Evans, founder and CEO of BDE Ventures.

How Much Capital Will ETFs Bring into Crypto and Bitcoin?

The approval of a Bitcoin ETF could potentially bring a significant amount of capital into the crypto market. Institutional investors and traditional investors who are currently on the sidelines may choose to enter the market through regulated ETFs. The exact amount of capital that flows into Bitcoin through ETFs would depend on various factors, such as the popularity of the ETF and investor sentiment towards cryptocurrencies.

How Will ETF Approval Impact Bitcoin Price?

The approval of a Bitcoin ETF by the SEC could have a substantial impact on Bitcoin’s price. When the first Bitcoin futures were introduced on the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE) in December 2017, Bitcoin witnessed a massive price surge. The introduction of ETFs could lead to a similar scenario, as it would increase accessibility and attract more institutional investors, potentially driving up demand and prices.

Where to Buy/Trade Spot Bitcoin ETF

Once Bitcoin ETFs receive approval, they will be available for trading on regulated stock exchanges. Investors would be able to buy and sell these ETFs through their brokerage accounts, just like they would any other traditional ETF. It is advisable to check with your broker or financial institution for specific details on trading Bitcoin ETFs.

The Bitcoin Spot ETFs were approved in the US and will begin trading on U.S. markets run by the NYSE, Cboe Global Markets, and Nasdaq.

Parties involved in Bitcoin ETF 

1. Issuer: This is the entity that creates and issues the ETF. It could be a financial institution, asset management firm, or investment company.
2. Authorized Participants: These are large institutional investors, such as market makers or broker-dealers, who have a direct relationship with the issuer. They are responsible for creating and redeeming shares of the ETF. 
3. Custodian: The custodian is a third-party entity that holds the underlying securities or assets of the ETF on behalf of the issuer. They provide safekeeping, administration, and accounting services for the ETF’s assets.
4. Index Provider (if applicable): Some ETFs track specific indexes, so the index provider is responsible for creating and maintaining the index that the ETF follows. They determine the composition and weighting of the underlying assets.
5. Market Makers: These are entities that facilitate the trading of the ETF on the secondary market. They provide liquidity by quoting bid and ask prices and ensure that there is a continuous market for the ETF shares.
6. Exchanges: ETFs trade on exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ. The exchanges facilitate the listing, trading, and monitoring of ETF shares.
7. Regulators: Regulatory bodies, such as the Securities and Exchange Commission (SEC) in the United States or the Financial Conduct Authority (FCA) in the UK, oversee the ETF industry. They review and approve the issuance of ETFs and ensure compliance with regulations.
8. Shareholders: These are the investors who buy and hold shares of the ETF. They can be individual retail investors, institutional investors, or even other ETFs.

It’s worth noting that the specific parties involved can vary depending on the type of ETF and the jurisdiction in which it operates.

Conclusion

Bitcoin ETFs hold the potential to bring significant capital and increase mainstream adoption of cryptocurrencies. While the approval process has now concluded, analysts opine that adoption will take time and more education for the BTC ETF product to attain mainstream adoption.

Proper research and monitoring of signals such as fund holdings, open interest, and trading volume can help traders make informed decisions and potentially profit from Bitcoin ETF trading.