Do We Really Need a Spot Bitcoin ETF?

Talk of a spot bitcoin exchange-traded fund rages, but many existing crypto ETFs are doing their job.

The potential approval of a spot bitcoin ETF by the Securities and Exchange Commission has been one of the most talked about investing topics in 2023.

Will the agency approve? If so, when? Will the approval be for one issuer at first, or several at once? And is the recent rise in bitcoin’s price due in large part to anticipation of a spot bitcoin exchange-traded fund approval?  

Those questions have many corners of the financial markets buzzing. But here’s another take on it: While the ETF industry would benefit from having a spot bitcoin ETF, and investors would finally be able to buy the cryptocurrency at nearly the spot price, are the current products so bad?  

The push for ETFs to track the spot price of bitcoin, as well as other cryptocurrencies, has led the crypto industry to the brink of victory, with many expecting an approval by early next year. But when we look at the return history of existing bitcoin-related ETFs, it does make a case for leaving well enough alone.  

A Case for Grayscale Bitcoin Trust 

The Grayscale Bitcoin Trust (GBTC), a closed-end unit trust, is the first exchange-traded product that attempted to track the price of bitcoin. It made its debut back in 2014, well ahead of most others. That early-adopter move has helped it reach $23 billion in assets and trade at a daily average volume of $135 million.  

But GBTC has trailed the spot price of bitcoin badly. The margin over the past 36 months has been 120% to 50%. That doesn't qualify as a tracking ETF to many. Yet the assets have ballooned. That one case argues for a spot bitcoin ETF to be available immediately. But wait, there’s more to the story. 

A Case for Futures-Based Bitcoin ETFs 

A trio of lesser-known ETFs, the ProShares Bitcoin Strategy ETF (BITO), the VanEck Bitcoin Strategy ETF (XBTF) and the Valkyrie Bitcoin and Ether Strategy ETF (BTF), use futures to track the price of bitcoin. BITO has $1.4 billion in assets, but the other two combined have only about $100 million. All three have been around since at least Nov. 16, 2021, long enough to assess how closely they correlate to spot bitcoin itself. That time frame also includes a series of rallies and drops in the price of bitcoin, which helps make this a stronger stress test. 

The results are compelling. In that period of just over two years, BTC is down 41%. All three of the ETFs mentioned are down 39%-40%. There have been short periods of time where the ETFs have outperformed the spot price of BTC and vice versa. But all things considered, if an investor wants to own something that correlates with bitcoin’s spot price, these three have done a very good job. 

Spot Bitcoin ETF vs. GBTC 

One of the main reasons ETFs have grown in popularity over the years is that investors know what they are getting. If an ETF aims to track an index, it tracks that index closely. So, until there is a spot bitcoin ETF, there’s no direct tracking of bitcoin. But we do have some ways for investors to track the intermediate-term path of bitcoin closely, albeit with some tracking error along the way. 

Investors have flocked to the GBTC, the bitcoin-tracking ETF that correlates to the spot price of BTC at a rate of more than 25-1 in terms of assets.

GBTC has had a monster run in 2023, up about twice what spot bitcoin is, helping it make up its previous lagging performance. But no doubt there are bitcoin ETFs for investors to choose from if the goal is to get a piece of the cryptocurrency’s potential upside, whether we have a spot ETF or not.