Bitcoin Spot Vs Futures ETFs: What’s the Difference?

By Gaurav Roy

In June 2023, Blackrock – the world’s largest asset manager – shook up the world of cryptocurrency when it applied with the US Securities and Exchange Commission (SEC) to launch a Bitcoin Spot ETF. 

Since then, at least 12 other notable financial institutions have filed applications for their own Bitcoin Spot ETFs, including firms such as Grayscale Investments, Fidelity, and Invesco. The months following the news have seen Bitcoin’s price resurge, from hovering around $26,000 in June, to close to around $45,000 as of the first week of January 2024.

While there are some Bitcoin ETFs currently available in the US market, there are key differences between those and a potential Bitcoin Spot ETF. This article will clarify the difference between a Bitcoin Futures ETF and a Bitcoin Spot ETF to help you understand the advantages, disadvantages, and key features of both, as well as explain why they are important for the future of Bitcoin and crypto at large.

What is an ETF?

An  Exchange-Traded Fund, or ETF, is a kind of financial instrument. Specifically, an ETF is a pooled investment fund that is tradeable on an exchange, hence the name. Think of an ETF as a single group of investments (stocks, bonds, etc) that tracks the performance of a group of assets. This allows an investor to gain exposure to certain kinds of assets, without having to trade individual assets.

As an example, take the Vanguard Total Stock Market Index Fund (VTI). This is an ETF that effectively tracks how the overall US stock market is doing. If an investor believed that the stock market as a whole was going to rise, they could buy shares of this ETF rather than individual stocks. This can save investors a ton on fees, while keeping their investment portfolios diverse, thus mitigating risk.

What is a Bitcoin ETF?

A Bitcoin ETF, as you might imagine, is an ETF that tracks the price of Bitcoin (BTC). In other words, when you invest in a Bitcoin ETF, you’re basically betting on whether Bitcoin’s price will rise or fall.

Bitcoin ETFs make it possible to get exposure to Bitcoin without actually having to buy it directly. This could be particularly advantageous to investors who are interested in Bitcoin but have previously abstained from buying, due to its questionable regulatory status and/or the complexity of buying Bitcoin and storing it securely.

In the U.S., you can already invest in what is called a Bitcoin Futures ETF. This class of ETF essentially allows investors to bet on the future price of Bitcoin. A Bitcoin Spot ETF would work differently, however, as it would instead focus on the current price of Bitcoin. This might not seem like an important distinction, but it is very significant for investors, which is why these Bitcoin Spot ETF applications have drummed up so much excitement in recent months.

So what exactly is the difference between the two kinds of ETF, how do they work, and what makes a Spot ETF a bigger deal than a Futures ETF to many investors? 

What is a Bitcoin Futures ETF?

A Bitcoin Futures ETF tracks the price of Bitcoin futures contracts. To explain, a Bitcoin futures contract is an agreement to buy or sell BTC at a predefined price, at a later date. If more people expect Bitcoin’s price to rise, the value of the contract could be higher than BTC’s spot price. On the other hand, if more people are betting on the price of BTC to fall, the value of the futures contract could be lower than the spot price.

Notably, the prices of bitcoin futures and the market price of Bitcoin tend to diverge based on the prevailing settlement of futures traders. In other words, if more people expect Bitcoin’s price to rise, the value of the contract could be higher than BTC’s real-time price on crypto markets. On the other hand, if more people are betting on the price of BTC to fall, the value of the futures contract could be lower than the market price.

The ProShares Bitcoin Strategy ETF became the first Bitcoin Futures ETF available in the US with its launch in October 2021. Other major Bitcoin Futures ETFs include those from VanEck and Valkyrie.

Advantages of a Bitcoin Futures ETF

Eliminates self-custody concerns

Bitcoin Futures ETFs give traders a degree of exposure to Bitcoin’s price movements without having to buy or manage the actual cryptocurrency. This means that the trader doesn’t have to concern themselves with opening accounts on exchanges or securing their crypto assets.

What’s more, these products operate within a regulated environment, meaning they adhere to the standards set by financial regulatory bodies. 

Enables speculation on future price movements 

As this kind of ETF invests in Bitcoin futures contracts, it allows investors to speculate on the future price movements of Bitcoin without ever having to own it directly. 

Disadvantages of a Bitcoin Futures ETF

Less direct exposure

The biggest drawback of a Bitcoin futures ETF is that the fund issuing the ETF does not hold Bitcoin directly. Rather, the fund holds positions in the Bitcoin futures market. This means that investors in a Bitcoin Futures ETF merely own shares in a fund that invests in Bitcoin futures contracts. 

Not only might this make a futures ETF unappealing to those wanting direct exposure to Bitcoin, it also introduces counterparty risk. To clarify, because a Bitcoin futures contract is an agreement to trade Bitcoin at a later date, it is possible that when that time comes, the buyer or seller may fail to uphold their end of the deal.

Price divergence

Additionally, because the price of futures can diverge from the spot price, it can adversely affect the performance of the ETF. That is to say that the ETF may not always move in tandem with the price of BTC.

Reduced returns due to fees

There’s also the matter of additional management fees that could reduce your returns. This may make owning a Bitcoin Futures ETF more expensive than simply trading Bitcoin futures on a crypto exchange.

For some investors, these drawbacks have made investing in a Bitcoin futures ETF untenable. This is partly why there is so much excitement for a potential spot Bitcoin ETF which, as you will see, offers much more direct exposure to Bitcoin.

What is a Bitcoin Spot ETF?

A Bitcoin Spot ETF aims to track Bitcoin’s “spot” price. Basically, the spot price of an asset is the real-time price it is trading for in the marketplace. So, in effect, a Bitcoin Spot will be worth exactly what Bitcoin is trading for in crypto markets.

A Bitcoin Spot ETF holds Bitcoin as its underlying asset. This means that, in contrast to a futures ETF, the fund manager who provides the ETF actually owns and manages a large pool of BTC. To do this, the fund may collaborate with a third-party crypto custodian to manage the asset securely. 

All that is to say, when you buy shares in a Bitcoin Spot ETF, you’re essentially buying a slice of actual Bitcoin without directly holding the cryptocurrency yourself.  

As mentioned previously, there are currently no Bitcoin Spot ETFs in the US market. However, they do exist in other countries. For example, Spot Bitcoin ETFs have existed on the Canadian Stock Exchange for years. 

Since Blackrock launched its application,  at least 12 other applications have come under SEC review. These applications – Blackrock’s in particular – have garnered widespread attention in the crypto world for a few reasons. 

While the SEC has so far rejected all applications for cryptocurrency spot ETFs due to concerns over market manipulation, Blackrock has had an astounding 575 ETFs approved by the SEC. To date,  only one of their applications has ever been denied. 

The fact that an institution with the record and reputation of Blackrock is putting its weight behind Bitcoin Spot ETFs has many proponents confident that at least one if not several Bitcoin Spot ETFs will be approved by the SEC’s deadline of January 10th, 2024

Advantages of a Bitcoin Spot ETF

There are several reasons why the cryptocurrency industry has been a big proponent of a Bitcoin Spot ETF.

Direct price tracking

A spot ETF invests in Bitcoin at its spot price, meaning the fund holds BTC and directly tracks the price of the digital asset. This means the price of the ETF keeps in line with the actual BTC price.

Simple On-Ramp

Bitcoin Spot ETFs allow institutional and individual traders to gain exposure to Bitcoin without actually buying Bitcoin themselves. Thus, it eliminates the process of signing up for an exchange and dealing with crypto wallets. 

No self-custody concerns

As a Bitcoin Spot ETF circumvents the need to buy Bitcoin directly, investors can avoid the complexities of self-custody, such as understanding private keys and crypto wallets and storing your seed phrase. Securing crypto is a big responsibility, and some people prefer an approach that doesn’t require them to learn the ins and outs. 

Regulated environment

Any approved Bitcoin Spot ETF would be regulated, meaning that both the ETF and the fund behind it are audited to ensure they operate fairly. For traders accustomed to the regulations of traditional finance (TradFi), this can be reassuring.

Disadvantages of a Bitcoin Spot ETF

Price Fluctuation 

The value of a Bitcoin Spot ETF fluctuates with the price of Bitcoin and, therefore, shares its potential to be volatile. 

Moreover, and in contrast to the crypto market being open 24/7, financial exchanges have rigid trading hours and don’t operate during weekends or through the night. This means that if there is considerable movement in BTC’s price overnight, Bitcoin Spot ETF investors cannot act on that price movement until the market re-opens.

Fees Involved

ETFs are more costly than buying Bitcoin on cryptocurrency exchanges. This is because of the management fees the fund manager charges. This fee, which is baked into the fund, could be as high as 2.5%, compared to crypto spot trading fees that are usually much lower.

No Actual Ownership

When trading a Bitcoin Spot ETF, you do not own the asset but merely gain exposure to the underlying asset’s price. That’s it. This might not be an issue for institutional investors, but it certainly goes against the concept of self-custody that is important to so many Bitcoin proponents.

Final Thoughts on Crypto ETFs

All things considered, an approval of any Bitcoin spot ETFs would be a momentous occasion for Bitcoin and cryptocurrency at large. Indeed, many view this step as a kind of stamp of approval of Bitcoin by the world’s most powerful financial regulatory board, the SEC. After all, the mere talk of a spot Bitcoin ETF approval is what most pundits point to when discussing the notable resurgence of Bitcoin’s price in recent months.

To many long-time proponents, a Bitcoin spot ETF could be a watershed moment, bringing countless new people and traditional investors into the fold. And of course, with more investors and interest comes additional liquidity. That’s why the approval of these ETFs is so important. Simply, it could signify a change in the market, allowing more new people to enter the ecosystem than ever before. Spot ETFs further the potential for the market to grow: supporting the mass adoption of crypto and blockchain technology. 

Of course, if you too are excited about the future of Bitcoin, you don’t have to wait on the approval of a Bitcoin spot ETF. Thanks to Ledger’s ecosystem of devices and software, and vast library of educational resources, taking the steps to buy Bitcoin yourself and safely store your private keys has never been easier. 

To be sure, investing in a Bitcoin spot ETF could be a great, low-friction way to start your journey. But when you understand the true benefits of crypto and why it exists, nothing beats the sovereignty and individual agency that comes with self-custody. When you’re ready to take the leap, Ledger devices are here to help ensure that only you can access your Bitcoin.