What Is The Difference Between Bitcoin Futures And Spot ETFs?

While the year 2021 has been nothing short of spectacular for the crypto industry, marked by several significant developments such as Tesla accepting Bitcoin for payments, El Salvador declaring BTC legal tender, and other leading institutions adding cryptocurrencies to their balance sheets, nothing can match the excitement of the crypto space when the US Securities and Exchange Commission (SEC) approved the first Bitcoin futures exchange-traded fund (ETF).

Bitcoin ETF Approval

The approval of the first Bitcoin ETF in the US not only marks a regulatory win for the premier digital currency but also shows the growing trust in the orange coin among the financial regulators the world over.

While crypto based, regulated financial products have been trading for years around the world, the US SEC approving a BTC ETF is a watershed moment for the industry as it paves the way for trillions of USD sitting in traditional investment vehicles such as pension funds, real estate, and others to gain exposure to the upside of the top crypto asset.

That being said, the crypto industry should consider containing its excitement over the BTC futures ETF approval as skeptics say that a futures ETF could, in fact, be detrimental to the price of BTC. Instead, a BTC spot ETF could have done wonders for the top crypto-asset’s price over the long-run.

In this article, we will explore the difference between a Bitcoin futures and spot ETF. What are the benefits of one over the other, what are their constituents, and so on. So, without further ado, let’s jump right in.

What is a Bitcoin Futures ETF?

The first SEC approved Bitcoin ETF in the US, the ProShares ETF launched earlier this month and witnessed an explosive start as the fund recorded more than $1.01 billion worth of shares change hands on the first day.

In simple terms, a Bitcoin futures ETF allows the investors to gain exposure to the price movements of the leading cryptocurrency without directly holding the digital asset. Essentially, every share of the futures ETF is backed by Bitcoin futures contracts.

For the uninitiated, a futures contract is a financial instrument that allows the engaging parties to buy or sell the underlying commodity or asset at a later date at an already agreed upon price. In simple words, a futures contract is a derivative instrument that allows its holders to gain indirect exposure to the asset underpinning the futures contract.

Accordingly, for Bitcoin futures contracts, the underlying asset is BTC. The stock allows traders to buy or sell Bitcoin at a predefined price at a later date as agreed upon while entering into the contract.

When a Bitcoin futures contract expires i.e., on its expiry date, whichever of the two parties agreed to buy the underlying BTC would have to purchase it at a premium or a discount regardless of what the price of the cryptocurrency ends up being on that day.

As you might have figured out by now, there are several reasons why an investor would want to own a Bitcoin futures contract instead of pure BTC cryptocurrency. For instance, trading a futures contract currently is a lot more convenient in the US than trading an actual cryptocurrency. Further, as Bitcoin futures ETF does not exactly use real BTC as collateral, it gives the investors the luxury to not worry about storage and security problems associated with crypto assets.

Finally, and most importantly, an ETF allows the investor to short sell shares if they believe the price of the underlying asset (in our case, Bitcoin) will go down in the future. And this is exactly why a lot of Bitcoin evangelists are not particularly happy with the approval of a futures ETF for the premier cryptocurrency.

Could a Bitcoin Futures ETF Be Detrimental to Its Price?

While the approval of the first US-based Bitcoin ETF is nothing short of a watershed moment for the infant industry, skeptics argue that the approval of a spot BTC ETF would have been a lot better for Bitcoin’s future price action vis-a-vis a BTC futures ETF.

Firstly, a spot BTC ETF would not allow the investors to artificially manipulate the market to push Bitcoin’s price down.

For instance, the world’s largest digital assets custodian, Grayscale Investments Trust, had recently applied with the US SEC for a spot BTC ETF. For the uninitiated, a spot BTC ETF requires the shares to be collateralized with physical Bitcoin that would, in turn, put demand pressure on the top cryptocurrency, further pushing its price upwards.

However, at present, the US financial watchdog is reluctant to approve a spot ETF for cryptocurrencies given the regulatory uncertainty and price volatility associated with digital assets.

That being said, it remains to be seen what the long-term implications of a Bitcoin futures ETF would be, especially on the digital asset’s price.

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