Spot Bitcoin ETFs Pose a Major Challenge to Futures ETFs

BlackRock, among other entities, is awaiting regulatory approval to launch the U.S.'s first spot Bitcoin ETF. Meanwhile, Grayscale Investments is also vying for market dominance, having recently triumphed in its endeavor to convert its Bitcoin trust into an ETF. Notably, this trust boasts a valuation of $16 billion.

The strides made by these industry giants, coupled with Grayscale's legal win against the SEC, have bolstered optimism and confidence that the nod for the mentioned funds may soon be granted.

Currently, U.S. investors seeking a convenient entry point into Bitcoin must turn to index products that mirror BTC futures contracts. These funds first hit the scene in October 2021 and now command a combined market worth surpassing $1 billion press time. 

Yet, it might not be clear to all that rolling out spot funds might imperil the very existence of futures ETFs.

Bloomberg Intelligence analyst, James Seyffart, remarked, “We would expect the assets and volume to coalesce around one or multiple spot-Bitcoin ETFs because they are superior products for most types of investors.” 

He further noted that newer investors, especially those with a long-term view, would probably favor spot products. This is because they often mirror the BTC price more accurately and tend to have lower associated fees than the current futures ETFs.

Bloomberg Intelligence projects that, upon approval, the U.S. spot Bitcoin ETF market could touch a valuation of $100 billion.

Bitcoin futures ETFs, while initially embraced by the market, have shown a noticeable negative correlation with the BTC price this year. This divergence can, in part, be attributed to the overheads of managing these ETFs, which can erode profits. 

Vetle Lunde from K33 Research commented, “The BTC-futures ETFs will probably experience significant outflows if spot-based ETFs are approved.” Lunde emphasized the lower efficiency of futures ETFs due to their inherent complexity and elevated costs.

Spot ETFs, which more accurately mirror supply and demand in real-time, may redirect trading activity and liquidity away from the U.S. BTC futures market. Nikolaos Panigirtzoglou, a strategist at JPMorgan, pointed out the potential liquidity shift if Bitcoin spot ETFs take precedence over their futures counterparts.

Moreover, spot funds are likely to present considerably lower fees than what's currently seen with futures ETF proposals. This perspective is shared by Roxanna Islam, the Associate Director of Research at VettaFi.

The launch of spot Bitcoin ETFs in the U.S. market is a pivotal development in both the crypto and the overarching financial realms. Owing to their inherent benefits and backed by industry stalwarts, these funds could dramatically alter the investment scene, furnishing investors with a more refined and economical route to BTC. This could, in turn, positively sway the valuation of the premier cryptocurrency. Conversely, futures ETFs may lose their allure or be entirely sidelined by investors.