Bitcoin Spot vs. Futures ETFs: How do they differ?

Created in 2009, Bitcoin is considered the world’s first and largest cryptocurrency to be based on distributed ledger technology, commonly known as blockchain technology. The flagship cryptocurrency is scarce by design, having been capped at 21 million BTC that are expected to be fully mined by the year 2140. It shares several characteristics with gold leading many to label it as the ‘digital gold’ while acting as an inflation hedge – a statement that was recently put to the test and is under scrutiny.

Investors looking for exposure to the top-rate cryptocurrency can either buy Bitcoin tokens via an online exchange or invest in stocks that offer direct exposure to the digital currency. Alternatively, they can purchase exchange-traded funds that track the performance of Bitcoin.

Bitcoin ETFs – What are they?

The ever-increasing interest and demand for cryptocurrencies has resulted in the introduction of Cryptocurrency ETFs to the market. ETFs tracking the flagship digital token, Bitcoin, have experienced growing popularity and momentum. They trade on regulated market exchanges, like the NYSE, unlike the underlying cryptocurrency, which trades on unregulated markets and consequently prevents investors from signing up to a digital wallet and reduce running the risk of holding Bitcoin directly. The global exchange-traded funds market has witnessed the release of several new Bitcoin ETFs that track Bitcoin’s value using either the spot or the futures price. However, the Securities and Exchange Commission (SEC) is yet to authorize spot Bitcoin ETFs in the United States, prompting some ETF providers to migrate elsewhere to launch new products. More recently, the SEC denied Grayscale its bid to turn its Bitcoin trust into a spot-based ETF, attributing the rejection to a failure by the asset manager to answer questions about market manipulation concerns. Grayscale has since filed a petition with the U.S. Court of Appeals for District of Columbia Circuit in order to challenge the decision.   

Spot and Futures ETFs: How Do They Differ?

Bitcoin Futures ETFs

As their name indicates, futures-based ETFs hold futures contracts instead of the underlying Bitcoin cryptocurrency. Futures contracts are legal agreements between two parties to buy or sell the underlying security, in this case, Bitcoin, at a predetermined price on a prespecified future date. Bitcoin Futures ETFs ensure that financial market participants can gain exposure to the digital token while avoiding the more expensive cryptocurrency exchanges. However, the fact that they hold futures contracts keeps them from reaching greater levels of adoption and popularity. They expire at the end of each month, forcing Bitcoin Futures ETFs to roll their positions before expiration. This is the reason why some enthusiasts might not consider futures-based funds a “real” crypto adoption. Futures-Based ETFs provide synthetic exposure to Bitcoin rather than direct physical exposure.

Bitcoin Spot ETFs 

Bitcoin Spot ETFs benefit investors with lower fees (than those paid through a cryptocurrency exchange), a streamlined buying process, and the ability to invest in the flagship cryptocurrency without resorting to a cryptocurrency exchange. Another advantage that is sometimes overlooked is that this type of ETF allows retail investors to gain exposure to Bitcoin while removing the hassle and complexity of acquiring and storing it in a cryptocurrency wallet. Industry pundits view spot ETFs as a more legitimate and streamlined method of investing since they provide direct (physical) exposure. By buying them, investors own parts of all the underlying holdings.

Bitcoin ETFs available to global investors

Trackinsight's ETF Screener identifies 33 Bitcoin ETFs available to global investors, excluding leveraged and inverse ETFs. Out of these, 24 are spot-based ETFs, while the remaining 9 are futures-based ETFs. 

Bitcoin ETFs attracted USD$19 million of investor money while managing USD$3.48 billion of AUM in 2022. Assets under management for Bitcoin Futures ETFs reached USD$1.5 billion, while investments netted USD$75 million in inflows. In contrast, Bitcoin Spot ETFs manage USD$2 billion of assets with USD$56 million in outflows in 2022.

The ProShares Bitcoin Strategy ETF (BITO), the biggest Bitcoin ETF as measured by assets under management, attracted the most among Bitcoin ETFs, with inflows of USD$210 million since the beginning of the year. 

ProShares Bitcoin Strategy ETF (BITO)

Launched on October 19th, 2021, ProShares Bitcoin Strategy ETF (BITO) is the world’s largest and the first U.S. domiciled Bitcoin ETF with USD$698 million in AUM. This actively managed Bitcoin futures ETF is designed to offer investors exposure to Bitcoin returns in a convenient, liquid and transparent way. It seeks to provide capital appreciation primarily through managed exposure to bitcoin futures contracts. BITO costs 0.95% (TER) a year and has a distributing dividend policy where it distributes generated income to its shareholders.

BTCetc Bitcoin Exchange Traded Crypto ETC (BTCE)

BTCetc Bitcoin Exchange Traded Crypto ETC BTCE was launched on June 8th, 2020. Assets under management have reached USD$350 million in 2022 to date. BTCE is a passively managed Bitcoin Spot ETF designed to provide investors with exposure to the digital cryptocurrency, Bitcoin, and its daily price movements. The underlying index of this fund is the Bitcoin Price. BTCE is more expensive than BITO, charging a TER of 2% while following a no-income dividend policy.  

Bitcoin Futures ETFs vs. Future Based ETFs: Who has the final say?

Bitcoin Futures ETFs bring several advantages to the table, such as streamlining the buying process and allowing investors to bet on the market whether they choose to go long or short. However, some Futures-Based ETFs struggle to accurately track the cryptocurrency’s price, not to mention that they also charge annual fees for holding contracts with the company.

On the other hand, spot-based ETFs allow investors to invest in the cryptocurrency at Bitcoin’s actual price point, leaving no room for tracking error. 

As both types have their pros and cons, it remains at the investors’ discretion to decide whether to speculate on the future price of Bitcoin or to buy it at the spot price.