Investing in Spot Bitcoin ETFs from India: Everything you need to know

The approval of a spot bitcoin ETF by the US Securities and Exchange Commission (SEC) is a landmark achievement for the cryptocurrency industry, especially for investors and crypto enthusiasts. This decision is significant as it potentially bridges the gap between traditional finance and the evolving world of cryptocurrency, making bitcoin more accessible to general investors. A bitcoin ETF, long considered a milestone for bitcoin, is expected to enhance its legitimacy and could increase its demand and value.

This blog delves into the nuances of spot bitcoin ETFs, aiming to provide a comprehensive understanding of what this development means for investors. From its implications on the cryptocurrency market to how it fits into a diversified investment portfolio, we aim to cover everything an investor needs to know about this new and exciting investment opportunity.

What is a spot bitcoin ETF?

A spot bitcoin ETF is an exchange-traded fund that tracks the current market price of bitcoin, also known as its spot price. Unlike ETFs that are based on bitcoin futures contracts, a spot bitcoin ETF invests directly in bitcoin. 

This approach provides a more regulated and straightforward way for mainstream investors to include bitcoin in their portfolios. While management fees and brokerage commissions are applicable, these costs can be more economical than the expenses and complexities involved in directly purchasing and holding bitcoin. This type of ETF simplifies the process of investing in bitcoin, making it more accessible to a broader range of investors.

The past: Initial SEC stance on spot bitcoin ETFs

For several years, the US Securities and Exchange Commission (SEC) initially resisted the approval of spot bitcoin ETFs. 

Their primary concern revolved around the regulation of bitcoin markets. The SEC argued that the bitcoin market was too unregulated and susceptible to manipulation, posing a risk of fraud to average investors. They believed that the lack of sufficient monitoring and surveillance capabilities in the bitcoin spot market compared to the more regulated bitcoin futures market made spot bitcoin ETFs a less secure option for investors.

The present: Shift in SEC’s position

The SEC’s change of heart regarding spot bitcoin ETFs came after a federal court ruling, which criticized their earlier rejections as inconsistent. 

The court pointed out the contradiction in approving bitcoin futures ETFs while denying spot bitcoin ETFs despite the close price correlation between the futures and spot markets. This ruling and evolving market circumstances led SEC Chairman Gary Gensler to acknowledge a change in conditions. 

Consequently, Gensler stated that the commission’s previous rationale no longer applied, leading to the approval of spot bitcoin ETFs. However, Gensler clarified that this decision was specific to bitcoin and did not imply a broader acceptance of other crypto-related products or a general change in the SEC’s stance on cryptocurrencies.

List of approved spot bitcoin ETFs

Below is a list of these approved spot bitcoin ETFs (see Figure 1), providing various options for those looking to incorporate bitcoin into their investment strategies.

Source : Bloomberg News, SEC

Note: Bitwise, ARK to waive fee for first six months and/or $1 billion in assets. Invesco to waive fee for first six months and/or $5 billion in assets. Ishares to lower fee to 0.20% for first 12months and/or $5 billion in assets.

Advantages of spot bitcoin ETFs

For investors considering spot bitcoin ETFs, these funds offer several compelling advantages:

• Ease of Access: Spot bitcoin ETFs provide an accessible entry point into the cryptocurrency market. Investors can bypass the complexities of managing digital wallets, navigating crypto exchanges, and handling cryptographic keys. This simplification aligns well with traditional investment practices.
• Enhanced Liquidity: Trading spot bitcoin ETFs is akin to trading stocks or traditional ETFs, offering familiar and straightforward liquidity through regular brokerage accounts.
• SEC Secured: Unlike direct bitcoin purchases, spot bitcoin ETFs operate under established regulatory frameworks. This means enhanced transparency and investor protections that may not be as robust in the direct crypto market.
• Tax Efficiency: Spot bitcoin ETFs offer tax advantages over direct cryptocurrency holdings in India. The tax norms for ETFs are well-established, providing clarity on potential tax obligations. Specifics are covered in the dedicated section on tax implications of investing in spot bitcoin ETF for an Indian Investor.

Risks associated with spot bitcoin ETFs

Investing in spot bitcoin ETFs, like any investment vehicle, involves certain risks:

• Market Volatility: The primary concern is the inherent volatility of bitcoin prices. While spot bitcoin ETFs simplify ownership and storage, they do not shield investors from the market’s unpredictable nature, which can result in substantial financial losses. However, this is true for any ETF
• Security Risks: The substantial holdings of spot bitcoin ETFs make them potential targets for cyberattacks. Despite robust security measures like encryption and cold storage, the risk of theft remains, and recovering stolen digital assets is challenging.
• Tracking Error: Discrepancies can arise between the ETF’s share price and the actual value of bitcoin. Tracking Error in spot bitcoin ETFs arises primarily due to the non-overlapping trading hours between these ETFs and the actual bitcoin market. Bitcoin is traded 24/7, while spot bitcoin ETFs are limited to standard market trading hours. This time difference can lead to discrepancies between the ETF’s share price and bitcoin’s real-time market value, potentially affecting the ETF’s accuracy in mirroring bitcoin’s price movements.

How to invest in a spot bitcoin ETF via Vested

This process is designed to be intuitive and user-friendly, making it easy to include spot bitcoin ETFs in your investment portfolio. To invest in a spot bitcoin ETF via Vested, follow these steps:

Step 1: Access your Account: Log into your Vested account and navigate to the US stocks and ETFs section (see Figure 1).

Figure 1: Access your account

Step 2: Search for ETFs: Look up the spot bitcoin ETFs you’re interested in (see Figure 2).

Figure 2: Search for ETFs

Step 3: Investment Options: Decide whether to ‘Buy’ for a one-time investment or set up a “Recurring Investment’ for ongoing investments (see Figure 3).

Figure 3: Decide on your investment option

Step 4:Place Order: Enter the number of shares you wish to purchase and confirm your order (see Figure 4).

Figure 4: Review and place order

Figure 5: Order placed successfully

Unlock Tax Benefits with Crypto ETFs

Bitcoin ETFs are taxed at just 12.5% compared to 30% tax on direct Eth investments. Bitcoin ETFs can offer significant tax advantages for Indian investors compared to directly holding Bitcoin. Here’s how investing in Bitcoin ETFs can help you reduce your tax bill. 

Capital Gains Tax

Capital gains refer to the profit made from selling an asset at a higher price than you bought it. The tax rate on this profit varies based on the asset and the holding period.

• Direct Bitcoin Investment:
  • Any profit made from selling Bitcoin is considered a capital gain.
  • India levies a flat 30% tax on all cryptocurrency capital gains, regardless of how long you’ve held the asset. This means that whether you hold Bitcoin for a year or ten years, the profit will be taxed at 30%.
  • Another significant drawback is that any losses incurred on Bitcoin cannot be offset against gains from other investments or income.
• Spot Bitcoin ETF Investment:
  • The tax treatment depends on how long you hold the ETF.
  • Short-Term Capital Gains (STCG): If you sell the ETF within 12 months of buying it, the profit is considered short-term capital gain. It’s taxed based on your income tax slab, which can be lower than the flat 30% rate for direct Bitcoin investments.
  • Long-Term Capital Gains (LTCG): If you hold the ETF for more than 12 months, the profit is considered long-term capital gain. The tax rate is 12.5% without indexation, which is significantly lower than the 30% tax on direct Bitcoin.
  • Loss Offset: A key advantage of ETFs is that losses incurred on ETF investments can be offset against other capital gains, reducing your overall tax liability.

Tax Deducted at Source (TDS) and Tax Collected at Source (TCS)

• Direct Bitcoin Investment:
  • A 1% TDS (Tax Deducted at Source) is applied to every cryptocurrency transaction within India. This means 1% of the transaction amount is directly withheld as tax.
• Spot Bitcoin ETF Investment:
  • There’s no TDS on ETF investments.
  • However, if you invest in a spot Bitcoin ETF through the Liberalized Remittance Scheme (LRS) by sending money abroad, a 20% TCS (Tax Collected at Source) is levied on outward remittances exceeding Rs. 7 lakh in a financial year. This tax is collected at the time of remittance and can be adjusted against your overall tax liability.

Liberalized Remittance Scheme (LRS)

• LRS allows Indian residents to invest in foreign assets, including spot Bitcoin ETFs, up to a limit of USD 250,000 per financial year.
• When using LRS, you must comply with the scheme’s regulations and report the investment to the Reserve Bank of India.

Tax Advantages of Spot Bitcoin ETFs

Lower Tax Rates

• Potential for lower tax bills: Unlike direct Bitcoin investments which are taxed at a flat 30% regardless of holding period, spot Bitcoin ETFs offer a more favorable tax treatment.

Loss Offset

• Tax Harvesting: If you incur losses on your spot Bitcoin ETF investment, you can offset these losses against any capital gains you’ve made from other investments. However, you can do this if you invest in Crypto currency directly.
• Tax savings: By offsetting losses, you effectively reduce your overall tax liability. This can be particularly beneficial in years when you have substantial capital gains from other sources.

Note: Before investing consult your tax advisor to understand the impact of buying Bitcoin ETFs on your tax bill.

What next?

The potential of the spot Bitcoin ETF, projected by Bloomberg Intelligence to grow to $100 billion in the next five years, signifies a pivotal development in integrating digital assets into mainstream finance. Galaxy’s forecast of inflows escalating rapidly in the initial years further bolstered this optimistic outlook. Historical precedents, like the $1 billion inflow into ProShares Bitcoin Strategy ETF (BITO), support the high expectations surrounding spot bitcoin ETFs. For investors spot Bitcoin ETFs provide an easy way to add crypto exposure to their portfolios.