The U.S. Securities and Exchange Commission (SEC) approved 12 and 9 Bitcoin and Ether spot exchange-traded funds (ETFs), respectively, this year. Understanding the distinctions between futures and spot cryptocurrency exchange-traded products (ETPs) is crucial for investors to navigate the ever-evolving world of crypto investments.
In traditional finance, often called “tradefi,” a crypto spot ETF is designed to directly hold the underlying digital currency, such as Ether or Bitcoin. When investors buy shares in a spot ETF, they are essentially purchasing a stake in the actual cryptocurrency. This framework replicates the real-time pricing of the crypto without requiring investors to handle the digital assets themselves. This streamlines the investment process by removing the need for investors to create an account on a crypto exchange or learn how to use a noncustodial wallet.
The Spot ETFs are traded on well-known stock exchanges such as CBOE, NASDAQ and NYSE. These platforms offer greater liquidity and come under stringent regulatory oversight, making them attractive to institutional investors that may be cautious about directly holding cryptos due to the associated risks.
Currently, there are 12 Bitcoin spot ETFs available in the United States, including tickers such as BTCO, DEFI, BTCW, EZBC, BRRR, HODL, BITB, ARKB, FBTC, BTC, GBTC and IBIT. Ether’s spot ETFs include CETH, QETH, EZET, ETHV, ETHW, FETH, ETHA, ETH and ETHE.
On the other hand, futures crypto ETFs operate differently. These ETFs do not hold the cryptocurrency itself. Instead, they invest in futures contracts, which are agreements to sell or buy an asset at a predetermined price on a specified future date.
Futures ETFs track the expected future price of the crypto rather than its current market value. This difference can lead to variations between the ETF’s price and the actual spot price of the cryptocurrency. These disparities could result from things such as contract roll fees and certain market circumstances that impact the performance of the futures contracts, including backwardation or contango.
Some of the leading Ether and Bitcoin and futures ETFs in the U.S. include BETE, EFUT, EETH, BITS, XBTF, BTF and BITO.
When choosing between futures and spot ETFs, investors must consider the varying cost structures and risk profiles of each. Spot ETFs offer direct exposure to the crypto’s market value but require trust in a custodian to securely manage the assets. While futures ETFs eliminate these custody issues, they nevertheless carry the associated complications of the futures market, such as the possibility of tracking errors and additional expenses for rolling contracts.
The choice between these two categories of ETFs ultimately comes down to an investor’s financial objectives and risk tolerance. For investors who are squeamish about directly or indirectly owning crypto, stocks of other industry players, such as mining companies, including Marathon Digital Holdings Inc. (NASDAQ: MARA), can be studied as another way to benefit from this growing industry.
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