A watershed moment for cryptocurrencies has arrived after regulators in the US approved a type of fund that offers retail investors greater access to bitcoin.
The Securities and Exchange Commission (SEC) has now permitted the launch of spot bitcoin exchange traded funds (ETFs). This is a way you can invest in the cryptocurrency without having to buy it directly.
Some of the world’s largest asset managers, including BlackRock, Fidelity and Franklin Templeton, are among 11 firms seeking to launch products imminently.
What are ETFs?
An ETF is a type of fund that is listed on a stock market and often seeks to copy the performance of an investment platform or vehicle, such as the FTSE 100 stock exchange, or the gold price.
An ETF means that investors can gain access to a stock market index without having to buy the shares of all the companies listed on that market.
So, if an investor bought shares of a FTSE 100 ETF, they would own shares of the fund, but would not have had to buy shares in all 100 companies that make up the FTSE.
And because ETFs are listed on stock markets, they can be bought or sold instantly, something that is not possible with conventional funds.
So do I own bitcoin if I buy a bitcoin ETF?
Technically not. The ETFs that have been approved by the SEC will hold bitcoin, and they should track the price of bitcoin closely, minus fees and trading costs.
By investing in a spot bitcoin ETF, you are buying shares in a fund whose objective is to mimic the price of its underlying asset class – in this case, bitcoin.
Why is it called a ‘spot’ bitcoin ETF?
The spot price of an asset is its immediately available “live” price – the price it is trading at “now”.
In 2021, the SEC approved bitcoin futures ETFs in 2021 – these essentially offer a predicted price of an asset at a set time in the future, based on market expectations.
However, now the US regulator has allowed “spot” bitcoin ETFs – which aim to track the actual price of the asset now.
Can I buy a spot bitcoin ETF in the UK?
Not yet. The SEC has approved 11 spot bitcoin ETFs from major asset managers and smaller firms, which will be available to investors in the US.
American exchange-traded funds are not available in Britain because they do not issue a Key Investor Document, something that UK-regulated funds are required to do.
Of course, regulators here could decide to allow spot bitcoin ETFs, but the Financial Conduct Authority (FCA) has criticised cryptocurrency for having no inherent value, being rife with financial crime, and having no financial planning need for investors.
Furthermore, if the FCA were to give them the green light in the UK, fund managers would need to launch products specifically for the UK or European market.
It’s also worth remembering that even though spot bitcoin ETFs have been approved in the US, it doesn’t provide any guarantee about the performance of bitcoin.
How much are spot bitcoin ETF charges?
Financial data firm Morningstar noted that the move by the SEC to approve multiple funds simultaneously meant price competition had been “fierce”.
In its spot bitcoin ETF regulatory filing, fund management firm Bitwise touted a price tag of 0.2 per cent (ie the investor is charged a fee that is 0.2 per cent of the amount they invest in the fund.
Bryan Armour, Morningstar’s director of passive strategies research for North America, noted that was “a far cry” from the largest bitcoin futures ETF, which charges 0.95 per cent – and the two to three per cent charged by the range of trusts offered by fund manager Grayscale.
Bitcoin futures ETFs also charge an extra fee to keep buying new futures contracts when the ones held by the fund expires.
However, spot bitcoin ETFs may have higher trading charges than an ETF that tracks a major stock exchange, such as the FTSE 100 in the UK, or the S&P 500 in the US.
What are bitcoin prices now?
The price of bitcoin has risen 150 per cent in the past year, in sterling terms, to more than £36,883 – quite a way below its all-time high of £51,032 in November 2021.
Part of the recent rise has been attributed to the prospects of the SEC approving spot bitcoin funds.
This is because some investors believe that the funds – and the potential for more to follow – will create increased demand for the cryptocurrency, and therefore push the price up.
However, critics of bitcoin claim it is too volatile, meaning it is likely to suffer large price swings. Steep drops were seen when the bannkruptcy of crypto exchange FTX began in November 2022.