Demystifying Spot Bitcoin ETFs Bitcoin ETF are pooled investments, which trade on stock exchanges, much like stocks, and track the price of Bitcoin directly. With an ETF, you only own shares of a fund that has made investments in Bitcoin rather than Bitcoin itself. One is able to buy and sell throughout the day
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After suffering heavily last year (due to the crackdown by the U.S. SEC, particularly on Binance and Coinbase), the year 2024 started on a good note for the cryptocurrency ecosystem. On January 10, the U.S. Securities and Exchange Commission (SEC), approved 11 spot Bitcoin exchange-traded funds (ETFs) including BlackRock, ARK 21 Shares, Fidelity, Invesco, and VanEck. The BTC ETFs were first proposed in 2013. In 2023, Bitcoin saw a whopping 154 per cent surge in anticipation of the BTC ETF announcement. The BTC price stood at USD16,619.10 on January 1, 2023, while closing the year at USD 42,152.10. The Bitcoin price rose to the high of USD 46,995.10 in the month of January and is patterned to trade above USD 40,000. Crypto experts anticipate that Bitcoin must stick to the current level and above to touch the USD 60,000 mark by the year-end.
What are Spot Bitcoin ETFs?
Among this uproar, it's important to know what Bitcoin exchange-traded funds (ETFs)are. They are pooled investments, which trade on stock exchanges, much like stocks, and track the price of Bitcoin directly. With an ETF, you only own shares of a fund that has made investments in Bitcoin rather than Bitcoin itself. One is able to buy and sell throughout the day.
A Spot BTC ETF is a safer bet in comparison to Bitcoin Futures ETFs. By investing in Spot Bitcoin ETFs, one gets direct exposure to the price movements of Bitcoin while not having the holder buy and store it. It is a convenient option as it does not require owning a crypto wallet or getting an account with crypto exchanges. "The fact that these ETFs are set to trade on major exchanges such as NYSE Arca, Nasdaq, and Cboe BZX Exchange adds further legitimacy to the crypto market. It opens up opportunities for a broader investor base to participate in the crypto space," shares Edul Patel, CEO, Mudrex.
With crypto still being volatile in nature, owning it has its share of benefits and disadvantages. Spot Bitcoin ETF allows for protection against fraud or theft that can occur. Due to the risk averted by the fund house, they tend to charge a fee which can reduce your total returns. "The primary purpose behind creating such ETFs is to make Bitcoin more accessible to traditional investors who prefer the ease and familiarity of trading on regulated stock exchanges. The spot Bitcoin ETF is poised to streamline exposure for traditional players, opening doors for retail investors, simplifying their access to Bitcoin transactions through traditional brokerage accounts," shares Minal Thukral, EVP, Growth & Strategy, CoinDCX.
Taking the first mover advantage, BlackRock's spot Bitcoin ETF became the first in the category to reach USD 1billion in assets under management, all in under a week. "For the first time, investors will be able to incorporate bitcoin in a consistent, convenient, and cost-effective way, alongside other asset classes like stocks and bonds, in their brokerage account," commented Dominik Rohe, Head of Americas iShares ETF and Index Investing business at BlackRock on its IBIT Debuts on Nasdaq.
BlackRock, Fidelity, and Bitwise collectively saw an inflow worth USD 3 Billion Total Spot Bitcoin ETF. BlackRock noted USD 1,085 million in inflows, Fidelity noted USD 884 million in inflows, and Bitwise recorded USD 375 million in inflows. The British multinational bank Standard Chartered has shown optimism and predicted that Bitcoin can reach a value of USD 100,000 by year-end.
Prior to the approval, the Bitcoin price touched USD 46,995.10 on January 8 and was USD 46,376.10 on January 11. The price dipped by over USD 3000 on January 12. Why is this watershed event leading to a dip? "The crypto market is witnessing an unexpected downward trend as Bitcoin faces selling pressure due to heavy outflows from Exchange Traded Products (ETPs) to new spot ETF issuers. We can expect the Bitcoin price to rise once this transition cools down and investors are done with profit booking," shares Shivam Thakral, CEO, BuyUcoin.
While liquidation is driving the crypto market lower, a strengthening US dollar, currently trading at 103.239, is also exerting pressure on the digital currency.
What's in for Indian investors?
What does Spot Bitcoin ETF mean for crypto investors in the country? Presently, the options are limited to engage in Bitcoin ETFs jamboree due to its availability in foreign jurisdictions. Parth Chaturvedi, Investments Lead, CoinSwitch Ventures shares, "This mandates adherence to the Liberalised Remittance Scheme (LRS), coupled with challenges like capital constraints ($250k annual limit) and the additional complexity introduced by the Tax Collected at Source (TCS at 20% for allocations above INR 7 lakh)." Additionally, the current format of Bitcoin ETFs might not align with the preferences of retail investors as they would need to use Indian fintech providers who have partnered with foreign brokerages and would have to bear additional costs associated with fund allocation.
Nonetheless, Indian investors can take part in foreign ETF markets as it has been regulated by the Reserve Bank of India's Liberalised Remittance Scheme (LRS). Under this, investors can also allot funds up to USD 250,000 for crypto investments annually. Furthermore, the 1 per cent TDS will not be applicable as one does not actually purchase crypto and hence, the capital gain tax will be lower.
Currently, the most efficient way to get BTC exposure is to purchase spot Bitcoin using FIU-compliant platforms.
SEC's approval is amplifying positive market sentiment, with expectations of a substantial boost to Bitcoin's value. Thukral shares, "The positive momentum is anticipated to extend beyond Bitcoin to other tokens, signalling a broader resurgence in the overall crypto market. While Bitcoin ETFs are for the U.S. audience, this development reflects the growing acceptance of crypto. Indian investors may not have access to engaging directly with these U.S. financial instruments, but the global momentum in ETFs indicates positive growth for the crypto industry overall."
Back in September, ARK 21Shares and VanEck took a leap of faith and filed for Spot Ethereum Exchange-Traded Fund. BlackRock and Fidelity also followed suit. The landmark approval and market performance have given the asset management giant a further push. "I see value in having an Ethereum ETF," said Larry Fink, CEO, BlackRock.
The SEC has delayed its final decision pertaining to several filings to at least March, with JP Morgan stating that there is no more than a 50 per cent chance of Ark 21Shares's proposal getting approved. Ethereum is the second most popular cryptocurrency with an M-cap of over USD 250B.
Experts at SCB are hopeful that the spot Bitcoin ETF market can swell to attract inflows worth USD 50-100 billion during the year.