What are Bitcoin Spot Funds

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Structurally, the currently discussed Bitcoin-related fund products in the market are usually divided into two categories: one represented by the Grayscale GBTC, which is a Bitcoin Trust Fund product, and the other represented by the iShares Bitcoin Trust applied by BlackRock, which is a Bitcoin Spot Exchange-Traded Fund.

Both of these products are based on Bitcoin spot, tracking the market price of Bitcoin. However, there is a major difference between them. GBTC does not have redemption functionality, while Bitcoin Spot ETFs can be redeemed for Bitcoin at any time.

Bitcoin Trust Fund - GBTC

The Grayscale Bitcoin Trust (GBTC) developed by Grayscale is theoretically the first compliant Bitcoin spot fund product on the market. It is essentially a trust fund.

Simply put, there are two ways to subscribe to GBTC: Physical Creation and Cash Creation.

  • Physical Creation: Investors provide Bitcoin to Grayscale in exchange for a certain amount of GBTC.
  • Cash Creation: Investors provide cash to Grayscale, which is then used by Grayscale to buy Bitcoin and send the corresponding amount of GBTC to the investors.

After subscribing to GBTC, investors will go through a 6-month lock-up period and are not allowed to redeem Bitcoin from Grayscale after the lock-up period expires. In other words, the redemption mechanism of GBTC is one-way; you can only exchange out and not back in. GBTC can only be traded on the secondary market.

This means that GBTC is essentially decoupled from Bitcoin; its price is mainly determined by the trading activity on the secondary market.

When the market is thriving, GBTC can have a positive premium, where the total market value of GBTC exceeds the value of Bitcoin held within the trust. Conversely, when the market is in a downturn, GBTC can experience a negative premium, meaning its total market value falls below the value of Bitcoin held within the trust.

In other words, the market value of GBTC cannot be anchored to the market value of locked Bitcoin in the trust. Therefore, GBTC cannot be considered a Bitcoin Spot ETF, and it is not a "perfect" Bitcoin spot fund product.

Bitcoin Spot ETF

Bitcoin Spot ETF is an Exchange-Traded Fund product closely linked to the Bitcoin price index. It tracks the real-time market price of Bitcoin and allows for the redemption of Bitcoin at any time. In comparison to GBTC, a Bitcoin Spot ETF is less likely to experience premium or discount issues; its price is more closely aligned with the market price of Bitcoin.

Furthermore, the fees for a Bitcoin Spot ETF are generally lower, usually ranging from 0.5% to 1%; in contrast, GBTC has an annual management fee of 2%, nearly twice that of a spot ETF. Additionally, Bitcoin ETFs do not have lock-up periods and can offer stronger liquidity.

In summary, Bitcoin Spot ETFs excel over GBTC in aspects like price tracking, fees, and more. Like GBTC, they also enable investors to compliantly invest in Bitcoin without the need to physically purchase and store Bitcoin.

However, it's worth noting that due to factors such as regulations and risks of price manipulation, the SEC has not yet approved any ETF product holding physical Bitcoin. This means that as of now, there are no Bitcoin Spot ETFs listed within the United States.

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