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.
|Bitwise Bitcoin ETF
|ARK 21shares Bitcoin ETF
|Invesco Galaxy Bitcoin ETF
|Ishares Bitcoin Trust
|VanEck Bitcoin Trust
|Franklin Bitcoin ETF
|Wisdom Tree Bitcoin Fund
|Fidelity Wise Origin Bitcoin Trust
|Valkyrie Bitcoin Fund
|Grayscale Bitcoin Trust
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
Tax implication of investing in spot bitcoin ETF for an Indian Investor
Investing in spot bitcoin ETFs offers certain tax advantages for Indian investors compared to directly holding Bitcoin. Here’s a breakdown of the key points:
Capital gains tax
In India, capital gains from crypto assets like bitcoin are taxed at a flat rate of 30%. Additionally, losses from one cryptocurrency cannot be offset against gains from another, and there’s no provision for carrying forward these losses to future years.
In contrast, for investments in spot bitcoin ETFs via the Liberalised Remittance Scheme (LRS), the tax rate on short-term capital gains (less than 36 months) depends on the investor’s tax slab. Long-term capital gains are taxed at 20% with indexation benefits, which is significantly lower than the flat 30% for direct crypto investments. Further, losses booked can be utilized to offset other capital gains.
TDS and TCS considerations
A 1% Tax Deducted at Source (TDS) applies to each transfer of digital assets on domestic crypto exchanges in India. However, this TDS does not apply to bitcoin ETFs in the US, as they do not involve actual crypto purchases.
However, note that a 20% Tax Collected at Source (TCS) applies on LRS deposits above Rs 7 lakh, which applies to investments in spot bitcoin ETFs. Unlike the TDS on Indian crypto investments, this TCS can be offset against other tax liabilities.
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.