Spot BitCoin ETFs vs BitCoin ETF: Whats the Difference?

The USA’s Securities Exchange Commission (SEC) approved eleven Spot Bitcoin ETFs on 10 January 2024. But , So, anyone can buy and sell these ETF units. However, unlike usual ETFs, there are slight changes regarding the distribution of benefits/profits by the Funds to the investors. This post will explore and explain the newly approved Spot Bitcoin ETFs from the taxation point of view.

What are Spot Bitcoin ETFs?

The purpose of Spot Bitcoin Exchange Traded Funds (ETFs) is to mirror the price of bitcoins in the crypto market. So, they invest in real Bitcoins purchased through other holders or an authorized cryptocurrency exchange and hold them in authorized and managed digital wallets. Since it holds Bitcoin directly, the value of the ETF is closely tied to the real-time price movements of Bitcoin.

When you invest in the ETFs listed by these Bitcoin-owning ETFs (Spot Bitcoin ETFs) , the firm that manages these funds issues shares of its holdings in the form of ETF units. Thus, even though you buy financial units (ETFs) on a stock exchange, you are indirectly investing in the underlying asset, Bitcoin.

This is so because these approved Spot Bitcoin ETFs are not allowed to have one specific type of redemption, i.e., in-kind redemption. They are permitted cash-only redemption, which means when you sell on an exchange, you get a Dollar bill and not the actual Bitcoin equal to the redemption value.

List of 11 Spot Bitcoins Approved by SEC on 10Th January 2024

The Securities Exchange Commission (SEC) has approved the following list of spot Bitcoin ETFs

1. ARK 21Shares Bitcoin ETF (NYSE:ARKB)
2. Bitwise Bitcoin ETF (NYSE:BITB)
3. Blackrock’s iShares Bitcoin Trust (NASDAQ:IBIT)
4. Franklin Bitcoin ETF (NYSE:EZBC)
5. Fidelity Wise Origin Bitcoin Trust (NYSE:FBTC)
6. Grayscale Bitcoin Trust (NYSE:GBTC)
7. Hashdex Bitcoin ETF (NYSEARCA:DEFI)
8. Invesco Galaxy Bitcoin ETF (NYSE:BTCO)
9. VanEck Bitcoin Trust (NYSE:HODL)
10. Valkyrie Bitcoin Fund (NASDAQ:BRRR)
11. WisdomTree Bitcoin Fund (NYSE:BTCW)

What are Bitcoin ETFs?

Often, when people refer to a “Bitcoin ETF” without the “spot” qualifier, they are referring to a fund that invests in Bitcoin futures contracts rather than directly holding Bitcoin. These ETFs track the price of Bitcoin futures traded on commodities exchanges. So, their underlying asset is not the actual Bitcoins .

Spot BitCoin ETFs vs Bitcoin ETFs

Here’s a comparison between Spot Bitcoin ETFs and Bitcoin ETFs (often futures-based)

1.Both have different underlying assets

Spot Bitcoin ETFs have actual Bitcoin as underlying assets . They get money from investors and invest in actual Bitcoins . But , Bitcoin ETFs only invest in Futures Contract on Bitcoin .

2. Price Tracking Accuracy

Since Spot Bitcoin ETFs , actually invest in bitcoin, their investment value reflects almost correct price of Bitcoins . This not so in case of Bitcoin ETFs which are dependent on speculative price of Bitcoins furures contract.

3. Regulatory supervision

The actual investment in Bitcoin increases the risk factor in case of Spot Bitcoin ETFs. So , the SEC and other regulators will keep an eagle eyes on the day to day working of Spot Bitcoin ETF firms. In contrast , the futures contract ETF (Bitcoin ETF) faces less hurdles

4. Risks of Liquidity

In case of Spot Bitcoin ETFs, there can be issue of liquidity ,if investor desire a very large redmption of their holding of ETFs .This is because when ETF wants to sell large numbers of its holding in Bitcoins , it my jst not find buyers for all the saleable numbers instantly . If the market is down , this may agravate the situations.

In case of futures contract based Bitcoin ETF , this is not a problem at all , because the holding is binding contracts.

Hope you liked the article. visit my US tax blog .

You can also ask tax qusetion on US tax in comment section . I will find out time to answer it.