Spot Bitcoin ETFs may outshine crypto ETPs in 2024

Exchange-traded products (ETPs) are financial instruments that track the performance of an underlying asset or index, such as stocks, bonds, commodities, or cryptocurrencies. Crypto ETPs, such as Bitcoin ETPs or Ethereum ETPs, allow investors to gain exposure to the price movements of these digital assets without having to buy, store, or manage them directly.

However, crypto ETPs are not the same as crypto exchange-traded funds (ETFs), which are a specific type of ETP that must comply with certain regulatory standards and offer more investor protection. Crypto ETFs are still not available in most jurisdictions, especially in the United States, where the Securities and Exchange Commission (SEC) has repeatedly rejected or delayed the approval of such products.

One of the main reasons for the SEC's reluctance to approve crypto ETFs is the lack of a regulated spot market for cryptocurrencies, where the actual assets are traded and delivered. The SEC has expressed concerns about the potential for fraud, manipulation, and custody issues in the crypto spot market, which could affect the accuracy and reliability of the crypto ETFs' prices.

To address these concerns, some crypto ETF providers have opted to base their products on the futures market, where contracts for future delivery of cryptocurrencies are traded on regulated exchanges. Crypto futures ETFs, such as the ProShares Bitcoin Strategy ETF and the Valkyrie Bitcoin Strategy ETF, have recently launched in the U.S., offering investors a way to access the crypto market through a regulated vehicle.

However, crypto futures ETFs have some drawbacks compared to crypto spot ETFs, which would track the actual prices of cryptocurrencies on the spot market. Crypto futures ETFs are subject to the risks and costs of rolling over the futures contracts, which may not always reflect the spot prices. Crypto futures ETFs may also face regulatory uncertainty, as the SEC has indicated that it may review its stance on these products in the future.

Crypto spot ETFs, on the other hand, would offer a more direct and transparent way to invest in cryptocurrencies, as they would track the prices of the underlying assets on the spot market. Crypto spot ETFs would also eliminate the need for investors to deal with the complexities and risks of buying, storing, and securing cryptocurrencies themselves or relying on third-party custodians or intermediaries.

Crypto spot ETFs could also contribute to the legitimization and mainstream adoption of cryptocurrencies by bringing them within the framework of traditional financial markets. It could potentially lead to greater acceptance and integration of cryptocurrencies into existing economic systems, as well as more innovation and competition in the crypto industry.

However, crypto spot ETFs are not without challenges, as they would require the SEC to approve the crypto spot market as a reliable and regulated source of price discovery for the crypto ETFs. It would entail addressing the issues of market fragmentation, liquidity, volatility, and oversight in the crypto spot market, as well as ensuring the compliance and security of the crypto ETF providers and custodians.

Moreover, crypto spot ETFs could have some negative implications for the crypto industry, as they could reduce the demand and incentives for investors to interact with the crypto spot market directly or to use decentralized platforms and protocols that offer more autonomy and innovation. Crypto spot ETFs could also create more dependency and centralization in the crypto industry, as they would rely on the intermediation and regulation of traditional financial institutions and authorities.

Therefore, crypto spot ETFs are a double-edged sword for the crypto industry, as they could offer more opportunities and challenges for both investors and innovators. Crypto spot ETFs could be a game-changer for the crypto market, but they could also leave behind the crypto ETPs that are based on the futures market or other derivatives.