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Understanding Spot Bitcoin ETF and Its Potential

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In the midst of the ongoing crypto winter, characterized by disillusionment and skepticism in the cryptocurrency market, a potential game-changer emerges—the Spot Bitcoin ETF.
 
As we progress through the crypto winter in 2022 and 2023, the prospect of Spot Bitcoin ETF gaining approval in the United States has sparked renewed interest in the crypto space. This article delves into what Spot Bitcoin ETF entails, its key differentiators from Bitcoin Future ETFs, and the potential impact of its approval on the broader regulatory landscape.
 
Spot Bitcoin ETF vs. Bitcoin Futures ETF
 
Spot Bitcoin ETF operates akin to traditional Exchange-Traded Funds (ETFs), with a crucial distinction—the underlying asset is Bitcoin. However, to fully understand the “spot” designation, it is essential to contrast Spot Bitcoin ETF with Bitcoin Futures ETF – while both involve Bitcoin, their operational mechanisms diverge significantly.
 
Spot Bitcoin ETFs denote direct ownership and exposure to Bitcoins, which are securely stored in digital vaults. In contrast, Bitcoin Futures ETFs derive their value from Bitcoin futures contracts, introducing complexities like contango and backwardation. Contango is a futures market occurrence marked by futures contract prices rising above spot prices, whereas backwardation is when the current price of an underlying asset is higher than prices trading in the futures market. Investors choosing Bitcoin Futures ETFs may exploit market nuances, but those seeking direct correlation with Bitcoin’s market price movement will opt for Spot Bitcoin ETFs.
 
Advantages of Spot Bitcoin ETF
 
The key question then arises: Why invest in Spot Bitcoin ETF when one can directly purchase Bitcoin from the market? 
 
“Convenience” emerges as a compelling answer for one to opt for Spot Bitcoin ETFs – Spot Bitcoin ETFs offer a hassle-free alternative to managing wallets, navigating crypto exchanges, and safeguarding private keys, rendering it easier for adoption by traders accustomed to conventional trading. Investors can gain exposure to Bitcoin’s price movements without operational intricacies by simply paying management fees and brokerage commissions, making it an appealing option for those prioritizing ease of access. However, it is equally crucial to consider potential limitations compared to direct ownership, including counterparty risk, lack of control over private keys, and other fees involved. Concentration of large amount of the underlying assets – Bitcoin in this case, in one digital vault may also make it a high-value target for mouth-watering cybercriminals.
 
Current Status and Implications
 
As of the time of writing, Spot Bitcoin ETF approval in the United States is still pending SEC review, while attracting applications from reputable global issuers like BlackRock, Ark Investment, WisdomTree, Invesco, and VenEck. Even though the outcome remains uncertain, industry players and all regulators around the globe are closely monitoring this development, as the approval of Spot Bitcoin ETFs could reshape the global regulatory landscape, signifying stronger recognition for Bitcoin and other cryptocurrencies, potentially leading to increased institutional investment and thereby shoring up trading activities in general as well.
 
Conclusion
 
In conclusion, the evolving landscape of Spot Bitcoin ETFs presents both challenges and opportunities for investors. While awaiting regulatory approval in the United States, industry participants, especially those in the financial sector, are advised to closely observe, strategize and prepare for potential shifts in the regulatory framework to leverage the advantages offered by Spot Bitcoin ETFs as and when its approval comes through, as it could mark the beginning of a new era in cryptocurrency investment. The key lies in staying informed, adaptable, and proactive in navigating the evolving cryptocurrency ecosystem.
 
For comprehensive guidance and legal insights regarding the dynamic landscape of cryptocurrency and/or Fintech, our team of experts is ready to assist you. Feel free to reach out to us for further assistance and a tailored approach to navigating the complexities of this decentralized future. We look forward to being your trusted partner on this transformative journey.
 


This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.

About the authors

Ong Johnson
Partner
Head of Technology Practice Group
Transactions and Dispute Resolution, Technology,
Media & Telecommunications, Intellectual Property,
Fintech, Privacy and Cybersecurity
johnson.ong@hhq.com.my
 
Lo Khai Yi
Partner
Co-Head of Technology Practice Group
Technology, Media & Telecommunications, Intellectual
Property, Corporate/M&A, Projects and Infrastructure,
Privacy and Cybersecurity
Halim Hong & Quek
ky.lo@hhq.com.my

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