Spot Bitcoin ETFs vs Bitcoin: A Comparison

Bitcoin is the talk of the town nowadays with its prices soaring past US$70,000. One of the key drivers behind the recent upswing is the launch of spot Bitcoin Exchange Traded Funds (ETFs) on 11 January 2024. After trading for just over two months, the spot Bitcoin ETFs have significantly influenced the cryptocurrency market. Let’s take stock of the performance and understand if ETFs are a good alternative to buying Bitcoin on a crypto-currency exchange. 

Spot Bitcoin ETFs have minimal tracking error with Bitcoin price

Prior to the introduction of spot Bitcoin ETFs, Bitcoin ETFs were tied to futures contracts or closed-end fund structure. These earlier forms of Bitcoin ETFs often came with high fees and tended to have large tracking error relative to Bitcoin’s actual price movements. This posed challenges for investors who seek accurate market exposure of Bitcoin. 

The launch of spot Bitcoin ETFs has been the game changer. Backed by physical Bitcoin, these ETFs are able to mirror the price movements of Bitcoin with minimal tracking errors. Since the launch, the spot Bitcoin ETFs have demonstrated their capability to track the returns of the Bitcoin closely.  

Returns of the Spot Bitcoin ETFs in the first two months 

Source: Google Finance, 11 March 2024 

In addition, most of the spot Bitcoin ETFs offer low fees, ranging from 0% to 0.25%. All these characteristics position Bitcoin ETFs as a highly effective tool for investors looking to express their views on Bitcoin without the hassle of opening a crypto brokerage or wallet account.

The AUM of spot Bitcoin ETFs have surged 

Carried by a significant wave of investor enthusiasm, the assets under management (AUM) of spot Bitcoin ETFs have experienced a remarkable surge since inception. In under two months, the spot Bitcoin ETFs offered by industry giants like BlackRock and Fidelity Investments have drawn in approximately US$10 billion of net capital inflows. This impressive influx of capital, combined with Bitcoin’s rising prices, has propelled the ETFs’ AUM to unprecedented heights. This milestone underscores the growing confidence and interest in cryptocurrency as a legitimate asset class, further cementing the status of spot Bitcoin ETFs as a pivotal development in the financial markets.

AUM of Spot Bitcoin ETFs (ex-GBTC) 

Source: Trackinsight, 12 March 2024 

Pros and cons of holding spot Bitcoin ETFs 

Investing in a spot Bitcoin ETF versus directly holding Bitcoin involves different strategies and considerations. Here are some pros and cons of holding Bitcoin ETFs compared to investing in Bitcoin directly. 

Pros of spot Bitcoin ETFs

  • Accessibility: Similar to stocks, Bitcoin ETFs can be bought and sold through traditional brokerage accounts. Investors do not have to go through the hassle of opening crypto brokerage or wallet accounts. 
  • Security: Investors don’t have to worry about the security issues such as hacks and scams related to crypto brokerage platforms. 
  • Regulation: ETFs are regulated financial products. Spot Bitcoin ETFs are backed by reputable financial institutions such as BlackRock and Fidelity.

Cons of spot Bitcoin ETFs 

  • No direct ownership of Bitcoin: Investing in spot Bitcoin ETFs does not give investors full ownership of the underlying Bitcoin.
  • No trading 24/7: Bitcoin market is open 24/7, but spot Bitcoin ETFs are bound to stock exchange trading hours. If certain events happen outside of the stock exchange trading hours, investors in Bitcoin ETFs may not be able to respond promptly.

Top 5 Spot Bitcoin ETFs by AUM 

Source: Bloomberg, 11 March 2024 

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