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What is an ETF for Bitcoin futures? How is it different from a Bitcoin Spot ETF?

There is a long-running struggle to create an ETF. However, only bitcoin futures ETFs have been approved so far, leaving bitcoin investors with more to look forward to.

But why are investors not satisfied with the Bitcoin futures ETF and still yearning for the spot ETF? More importantly, how does a Bitcoin futures ETF differ from an ETF in the Bitcoin market?

What is an ETF for Bitcoin futures?

The Bitcoin Futures ETF issues publicly traded securities that display the price movements of Bitcoin futures.

Bitcoin futures are agreements between traders to buy or sell Bitcoin at an agreed price on an agreed date, regardless of what happens to the price on or before that date.

The ETF stands for the value of Bitcoin that you can buy or sell based on the terms of the contract. Generally, in cryptocurrency futures trading, futures traders do not own the underlying asset that they are buying or selling.

They simply enter into a contract to buy or sell at a specific date in the future.

Once the contract date is reached, it must be settled based on the terms, and the traders move on to the next contract.

Bitcoin futures contracts are fully regulated by the Commodity Futures Trading Commission (CFTC), and like any other regulated contract, it must be traded on exchanges regulated by the CFTC.

ETFs themselves are regulated by the Securities and Exchange Commission (SEC), and the stocks they issue are regulated by the Securities and Exchange Commission. However, Bitcoin is not regulated by the Securities and Exchange Commission, and some investors are not comfortable investing in it directly due to its high volatility.

Bitcoin futures ETFs give these investors access to trading bitcoin contracts without actually holding bitcoin.

A contract between two parties to exchange a unit of contract, which is currently equivalent to five bitcoins. The underlying assets in Bitcoin ETFs are linked to Bitcoin futures traded on the Chicago Mercantile Exchange (CME).

The Proshares Bitcoin Strategy ETF (BITO) was the first Bitcoin futures ETF to be approved by the SEC and has since been listed and currently traded on the New York Stock Exchange. More have been approved since the first approval in 2021.

What is a Bitcoin Spot ETF?

Despite several bitcoin futures ETFs, the crypto space is still looking ahead to when the SEC will approve the spot ETF. So what is a Bitcoin spot ETF?

Spot Bitcoin ETFs give investors direct access to Bitcoin by selling shares that track the actual price of the asset. Then, they can buy ETFs on a standard stock exchange at the actual price of Bitcoin.

Direct access to Bitcoin is the reason the Securities and Exchange Commission (SEC) is so cautious about this Bitcoin ETF website that exposes investors to the cryptocurrency and its many pitfalls.

Therefore, the regulator is determined to ensure that the cryptocurrency market is regulated so that there are no scams or frauds that can harm investors.

This means that to get the instant Bitcoin ETF approved, cryptocurrency exchanges must provide transparent data to their customers so that any breaches can be easily tracked. However, exchanges like Coinbase are already reporting to the IRS.

However, crypto proponents believe that this violates the idea behind cryptocurrencies in general and Bitcoin in particular, making it difficult to reach an agreement with the Securities and Exchange Commission.

This is not the case with Bitcoin futures ETFs, which explains why there are so many of them while there isn’t even a single spot of ETFs.

How are Bitcoin futures and spot ETFs different?

The main difference between a Bitcoin future ETF and a Bitcoin spot ETF is ownership. In a futures ETF, traders do not own any Bitcoin. Instead, they just need to enter into an agreement on the price of bitcoin at a certain date in the future.

Whereas, the Bitcoin Spot ETF requires investors to actually buy Bitcoin, which they can sell later as they like.

Second, the Bitcoin spot ETF allows investors to buy shares based on the actual price of Bitcoin at the time of trading, while the Bitcoin ETF futures will trade based on the price of Bitcoin futures (i.e. the price when the contract expires and becomes due).

ETF vs Bitcoin Futures vs Bitcoin Spot ETF: Which is Better?

Since spot ETFs confer ownership, investors may prefer them over Bitcoin futures ETFs. However, Bitcoin Futures and Futures ETFs provide investors with some form of access to Bitcoin.

Investors can invest in instant Bitcoin ETFs and track their investments based on the actual market price of Bitcoin. This makes it an easier option to track than Bitcoin ETFs, which are priced based on how futures are traded.

The price of contracts can vary greatly from the actual price of Bitcoin, which makes it not ideal for the average investor without any knowledge of cryptocurrencies.

On the plus side, the Bitcoin futures ETF simplifies the ETF buying process and allows investors to bet on whether the price of Bitcoin will go up or down.

However, the success of a Bitcoin futures investor depends on the ability of the ETF to accurately track the price of Bitcoin, which is not always the case.

For Bitcoin ETFs, investors buy Bitcoin based on the current price. Therefore, there are almost no errors in price tracking, since the price of the asset is the same as in the market.

Another advantage of bitcoin futures ETFs is that since the price is agreed upon in advance, there are no concerns about volatility. Whatever happens to the bitcoin price does not affect the agreement, so this removes the fear of volatility.

For spot Bitcoin ETFs, volatility remains a concern because the investment is based on the live price of Bitcoin, which is subject to fluctuations.

In the end, it is up to the investor to choose. However, crypto proponents believe that the Bitcoin spot ETF is what the industry needs to attract more institutional investors, which is critical to its much-needed growth.

Which one do you prefer?

Now that you know all about Bitcoin futures and ETFs, what would you consider a better option to invest in Bitcoin? Would you like to speculate on the price of Bitcoin, or would you rather own a portion of it with an ETF?

The information on this website does not constitute, and should not be considered, financial advice, investment advice or trading advice. MakeUseOf does not advise on any trading or investment matters and does not advise that any particular cryptocurrency should be bought or sold. Always perform your own due diligence and consult a licensed financial advisor for investment advice.

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