How Are Bitcoin Spot ETFs Influencing BTC Price?

Exchange-traded funds officially entered the Bitcoin investment market in February 2021. Purpose Investments is a Canadian company that launched the first Bitcoin ETF. It immediately attracted investor attention since it saw fantastic inflows upon its release. During only the first day, it traded over $165 million!

You can still buy Bitcoin with a credit card if you prefer direct BTC acquisition. ETFs offer an alternative where it’s possible to access the crypto market without opening a BTC wallet or using a digital exchange. Spot Bitcoin ETFs are specific because they own BTCs in an effort to track the coin’s current worth. If that sounds intriguing, here’s everything to know about these funds.

Spot Bitcoin ETFs: How They Function

A spot ETF is an exchange-traded fund that acquires the underlying asset and stores it in a safe place. If we focus on a spot Bitcoin ETF, that means the fund acquires actual bitcoins. They place these coins away in a secure vault and reach an agreement on who the managers would be. Those custodians are then in charge of bitcoins. ETF management usually uses multiple security levels to ensure maximum BTC coin safety. Most funds use offline or cold storage to minimize the risk of cyberattacks.

After the fund acquires bitcoins, it can create shares that correspond to the quantity of assets in the vault. Once shares are ready, the ETF makes them available on regular stock exchanges. Shares have the goal of mimicking Bitcoin’s price at the highest degree possible. If it’s necessary, the manager can sell or purchase tokens to rebalance the ETF.

From an investor’s perspective, acquiring a Bitcoin spot ETF is identical to the process of buying any other security or share. Market makers play a vital role here since they ensure market efficiency. Their role is to place offers to purchase or sell shares.

The main advantage of spot Bitcoin ETFs is convenience and a familiar turf. Investors who never entered the crypto market now have these investment opportunities available at stock exchanges. They can use familiar brokerages to gain exposure to Bitcoin investments. It’s also worth noting that investors are aware of tax implications since those related to ETFs haven’t changed in a while.

As for the downsides, using an ETF means you pay a management charge. That wouldn’t happen if you invested in BTC directly. Potential tracking errors and security risks might also compromise your investment and potential profit.

Spot Bitcoin ETFs Against Other Bitcoin ETFs

You can find different types of crypto ETFs in the market. The two main categories for Bitcoin exchange-traded funds include spot and derivative-based ETFs.

We already explained the spot ETF concept of owning Bitcoin, which is quite straightforward. Derivative-based Bitcoin ETFs take a different approach. They use various financial instruments to follow the coin’s price. For example, futures contracts are a commonly used instrument.

Here’s a quick comparison of the spot and derivative-based Bitcoin ETFs in critical categories:

• Price tracking. Spot ETFs directly follow the price of its underlying asset, which would be Bitcoin in this case. Unlike that, derivative-based funds indirectly track the price and try to mimic BTC’s performance.
• Asset custody. Spot ETF managers hold Bitcoins in secure wallets, and they are responsible for the assets. The problem is that investors don’t have actual control of BTC, and they can only hope it’s in safe hands. Unlike that, derivative-based ETFs don’t have direct Bitcoin custody since they use other instruments and do not actually acquire the coins.
• Investor simplicity. Experts argue that spot ETFs are simpler for investors since they offer direct exposure. It’s easy to understand how spot Bitcoin ETFs work. Derivative-based funds require certain knowledge about finances and an understanding of the indirect BTC exposure.
• Transparency. It’s hard to find an investment that is more transparent than a spot ETF. The fund stores actual Bitcoins, which isn’t the case with derivative-based ETFs. Their transparency could be at different levels and largely depends on the instruments used.
• Regulatory framework. Some would say that derivative-based ETFs have a standard regulatory framework and a bigger reputation than spot funds at the moment. However, the spot ETF regulation keeps improving and will only get better.

The Ripple Effect on Bitcoin’s Price Dynamics

When following the price movements of a cryptocurrency, investors use different tools and technical indicators available. Expert articles focusing on Bitcoin’s post-halving outlook can also help.

Bitcoin ETFs might not be capable of directly influencing BTC’s value. However, here’s how they can play an important role in the development of the coin:

• Opening the BTC market for a larger investor pool. Many investors hesitate to enter the crypto market due to it being under-regulated or the fact that some tech knowledge is necessary to own a crypto wallet. Exchange-traded funds increase Bitcoin exposure, which could spell more investors and extra capital, which has a positive effect on BTC’s value.
• Better reputation among mainstream investors. In January, the SEC licensed 11 Bitcoin spot ETFs. That means the traditional financial system is slowly accepting BTC as a mainstream asset. It increases Bitcoin’s reputation, which could boost the coin’s value.
• Increased trading volume. As a result of more investors pursuing Bitcoin via ETFs, the coin will have additional trading volume. While that could increase Bitcoin’s volatility, it might also improve its price.
• Lower fees. SEC approved over ten Bitcoin spot ETFs to encourage competition via fees. It’s worth noting that this investment option might be more attractive to institutional entities. ETFs might have lower charges than private funds and trusts they have previously used.

Future of Bitcoin Price After Bitcoin ETF Acceptance

It seems quite obvious that Bitcoin value could only benefit from ETF acceptance. The primary reason is that investors who refused to enter the crypto market now have BTC investments available in traditional exchanges. That spells additional capital and more investors interested in the coin. It would be a wonder if that didn’t have a positive influence on the Bitcoin price. With all the factors considered, the odds are that BTC might reach a new all-time high soon.