Jan 9, 2024

As the crypto industry anticipates a spot bitcoin exchange-traded fund approval in the U.S. this week, CoinDesk managing editor for global policy and regulation Nikhilesh De explains the fundamentals of the ETF products from what it is, to how you can invest in them.

Video transcript

All eyes are on crypto markets as the industry awaits the highly anticipated spot Bitcoin ETF approval in the United States. That's all we've been talking about on this show. Amongst all the noise, you might find yourself asking what is a spot, Bitcoin ETF. Now, I have the perfect person to explain this to you. Coin desk's managing editor for global policy and Regulation. Nick Day joins us. Now, welcome back to first mover, Nick. Hey, good morning, good morning. You are going to break down spot Bitcoin ETF S for us. Why don't you start off by just telling us what is it spot Bitcoin ETF is really just, you know, any other kind of uh financial trading instrument. So uh you know, if you go to your brokerage account, Schwab or whatever, you know, U BT D Ameritrade, um you can buy shares of an ETF uh you know, things like tied to I DS 500 or other company stocks or whatever. So any retail investor can access any traditional financial firm can trade in them all the spot. Bitcoin ETF is, is a way of creating this kind of retail accessible trading vehicle for Bitcoin so that if you as a retail investor or as a financial institution want to get access to Bitcoin's price. You don't need to worry about the wallet. You don't need to worry about setting up an account at a crypto exchange or dealing with uh you know, private keys or anything like that. Just go to whatever brokerage account you used or whatever market maker and trading firm you use and say, hey, I want exposure to Bitcoin's price and an ETF should allow you to gain access to that and talk to us about the difference between a spot Bitcoin ETF which is yet to be approved and a futures ETF which has already been approved. Yeah, it's really just, you know what the underlying asset is. So spot Bitcoin ETF will have direct exposure to Bitcoin itself, the companies that are issuing these products or that want to issue these products will have the actual Bitcoin that they're holding. It's going to be, you know, the digital asset itself for futures ETF in the US, most of these tend to be based on Bitcoin's expected price based on uh Bitcoin futures price for these contracts that are trading on exchanges like CO and uh NYC and all that and those products are, you know, obviously slightly different. It's not Bitcoin itself, it's what Bitcoin's future price might be to bet on the future price. So it's not exactly a direct exposure to the digital asset price also a lot of the Bitcoin futures contracts that trade in the US right now are cash settled, uh, especially the ones that the ETF are exposed to. So, it's kind of, uh, an investment vehicle based on the future, uh, a bet on the future price of Bitcoin that isn't actually going to be settled in Bitcoin or it's, you know, a little bit abstracted away so it's not direct exposure the same way as spot between ETF could be. Ok. I want to get into the pros and cons now, what are the benefits or the pros of a spot? Bitcoin? ETF? Yeah, you know, if you're a Bitcoin advocate and you're wondering why get into or sorry if you're trying to convince people to get into spot Bitcoin ETF, you might say something like it. Uh, you know, regulated financial instrument, the SEC is overseeing the ETF itself. And as we've seen over the past couple of weeks, especially the SEC has asked issuers making a number of sessions or modifications to their applications that would, uh, make the regulator more comfortable with approving this product. So the ETF itself is a regulated structured product. It's a very familiar product too, to the US financial system. People know what an ETF is. People have, you know, some understanding of, you know, how much exposure they might get. The cons, of course, are, you know, Bitcoin is a very volatile asset we've seen, you know, even over the past couple of days price swings in excess of 5%. And uh that's the kind of thing that might make traders and investors a little bit more uncomfortable with uh you know, so investing in any asset really, but Bitcoin, of course, that is a known unknown. We know that it's probably gonna be a little bit volatile. What that means for traders and investors after the ETF S go live, assuming they are indeed approved this week. Uh is, you know, something that remains to be seen besides volatility, any other drawbacks or cons? Well, I mean, obviously, you know, you're not investing in Bitcoin directly, you're investing in a financial instrument that's exposed to Bitcoin uh through, you know, third parties. So uh if you're truly crypto curious, then this is perhaps not the right vehicle for you. If you're seeing that, you know, there are all these headlines about, you know, crypto going up in price and people making crazy returns, but you don't want to, uh you know, as I said, go through the, you know, hassles of setting up your own wallet or having to take care of your own private keys, then you know, an ETF might make more sense, but it does mean that you are not, you know, you don't own your keys, you don't own the Bitcoin. It's not really, you know, investing in a digital asset, just kind of investing in, you know, financial instrument that is, you know, Tyson the price of this digital asset. It's baby steps. Maybe you start with the ETF and then you move on to a centralized exchange and then from there, the world is your oyster. So maybe if you're maybe if you're crypto curious, you start here. Yeah, you know, it depends on how you're looking at it. If you know you're purely an investor, maybe this is fine for you. This is all you're looking for. Uh if you're interested in the, you know, broader philosophy under Bitcoin, then yeah, as you said, it could just be a opening gateway. OK. Nick, I want to ask you about spot Bitcoin ETF s that already exist. Two of the countries they exist in are Brazil and Canada and I believe the eu as well, what can we learn from those product launches? I that one is actually a really hard question to answer, I think because the investing communities in those regions and countries are not quite the same as the one in the US. So those products, as you say have been trading uh for a while and they've gotten some interest and we saw this with futures as well, you know, Bitcoin Futures. Uh ETF launched in Canada prior to launching in the US and we weren't really able to get a whole lot from, you know, those particular launches, the futures, ETS launches. Uh they just happen, but you know, it's a different amount of investing capital that's, you know, playing around with these uh vehicles. Um, but the only thing we can say for sure is that, you know, they're so far, don't appear to have been any major mishaps on the, uh, you know, Canadian Brazilian or even the European Union spot between ETF S that we've seen. So that may be a good sign for the US uh counterparts, but it's really hard to draw a direct, you know, conclusion at this point. OK, Nick, we're gonna have to leave it there. Thank you very much for joining first move for this morning. Thank you. That was Coin Desk's managing editor for global policy and Regulation. Nick Day.

Learn more about Consensus 2024, CoinDesk’s longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to coindesk.consensus.com to register and buy your pass now.