Spot Bitcoin ETFs vs Bitcoin Futures ETFs

Research Lead

Reviewed by: etf.com Staff

Edited by: Ron Day

Unlike existing bitcoin-related ETFs that use derivatives like futures contracts, a spot ETF would hold actual bitcoin as its underlying asset. What does this mean and what are the other key differences between spot bitcoin ETFs and bitcoin futures ETFs?

While investors wait for the Securities and Exchange Commission to approve a spot ETF, it’s a good time to understand how this new type of spot fund works and how it compares to existing crypto funds.

What Is a Spot Bitcoin ETF?

A spot bitcoin ETF is a type of exchange-traded fund that aims to directly track the price of bitcoin itself. If the SEC approves, a spot ETF would allow investors to buy shares of the fund, and the ETF would, in turn, own and store the bitcoin. This structure directly ties the value of the ETF shares to the price movements of BTC.

Investors can then gain exposure to bitcoin without having to directly purchase and store the cryptocurrency.

In other words, when an investor buys shares of a spot bitcoin ETF, they are essentially buying shares of a fund, which, in turn, owns bitcoin digital currency. Therefore, when investors buy shares of a spot bitcoin ETF, they are buying a piece of the fund's portfolio of bitcoin. The price of the investors’ spot ETF shares will then go up and down with the price of bitcoin, and generally more closely than future-based bitcoin funds.

What Is a Bitcoin Futures ETF?

A bitcoin futures ETF is an exchange-traded fund that invests in bitcoin futures contracts rather than holding physical bitcoin as its underlying asset. Bitcoin futures contracts allow investors to speculate on the future price movements of bitcoin without directly owning the cryptocurrency.

The ETF invests in bitcoin futures contracts, which are agreements to buy or sell bitcoin at a future date at a price agreed upon today. Futures contracts have expiration dates, so to maintain exposure, the ETF manager must periodically sell expiring contracts and buy new ones. This process is known as rolling.

Some bitcoin futures contracts involve leverage, which can amplify both gains and losses.

Spot Bitcoin ETFs vs Bitcoin Futures ETFs: Key Differences

While we're still waiting for the green light on spot bitcoin ETFs in the U.S., comparing them to existing futures-based bitcoin ETFs can help investors to understand their key differences and potential benefits.

Here are the main differences between spot bitcoin and bitcoin futures:

Structure: Spot ETFs hold actual bitcoin, providing direct exposure to price movements and implementing a creation/redemption mechanism like other ETFs, whereas bitcoin futures ETFs hold futures contracts to track the price of bitcoin, not the actual asset itself. Futures trading can introduce tracking errors and potential basis risk (difference between futures price and spot price).
Complexity: Spot ETFs offer a simpler and more "pure" bitcoin investment experience, mimicking its price movements directly, while futures-based ETFs may be more complex with potential tracking errors and basis risk, impacting investment returns.
Liquidity and accessibility: Both spot ETFs and futures-based ETFs are potentially easier to buy and sell on exchanges compared to directly buying and storing bitcoin.
Fees: Spot bitcoin ETFs are expected to have expense ratios between 0.80% and 1.00%. For reference, the ProShares Bitcoin Strategy ETF (BITO), which is the largest bitcoin futures ETF, has an expense ratio of 0.95%. To date, Fidelity's spot bitcoin ETF is expected to have the lowest expense ratio among the early issuers at 0.39%.
Volatility: Spot ETFs inherit bitcoin's inherent volatility, potentially amplifying price movements for investors, but futures-based ETFs may experience additional volatility due to basis risk and leverage used in futures contracts.

Are Spot Bitcoin ETFs Better Than Bitcoin Futures ETFs?

Spot bitcoin ETFs offer potentially purer bitcoin exposure and less complexity than bitcoin futures ETFs. The new spot funds would also likely provide tighter tracking of the cryptocurrency with potentially less volatility compared to futures-based funds.

However, investors should keep in mind that spot ETFs still would have higher expense ratios and potentially higher volatility than traditional ETFs that track stock or bond indexes, as bitcoin is a volatile asset with speculative qualities.

Remember, both types of bitcoin ETFs have significant inherent risks. As always, choosing an investment depends on an investor’s individual investment goals and risk tolerance. It’s possible that neither fund type is suitable for your portfolio. Conduct thorough research before making any investment decisions.

Kent Thune

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Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger.

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship.

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.

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