[A thorough explanation of Bitcoin ETF] Features, advantages and disadvantages - When will it be approved?

A Bitcoin ETF (Exchange Traded Fund) is a type of exchange-traded fund that can be bought and sold on a stock exchange and is designed to track the price of the cryptocurrency Bitcoin.

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So what is the difference between regular investment trusts and exchange-traded funds?

ETFs (exchange-traded funds) are said to have the following advantages:

• It changes in real time and can be traded as many times as you like
• Trust fees and transaction fees are lower than general investment trusts
• Purchase methods such as limit orders are also available

ETFs are investment trusts that are traded on the stock exchange in the same way as stocks, but unlike general investment trusts, they refer to exchange-traded funds. Since they are designed to track a specific index, Bitcoin ETFs are basically designed to track the price of Bitcoin. There are also ETFs (basket type) that track the prices of multiple cryptocurrencies.

Other benefits include the following:

Safe and transparent transactions possible

Bitcoin ETFs will be listed on stock exchanges after undergoing certain regulatory scrutiny, allowing for safe and transparent trading.

Increased liquidity

This could increase liquidity as institutional funds are more likely to flow into the cryptocurrency market.

Reduced administration costs

For institutional investors and other large fund managers, investing in physical Bitcoin is expected to involve management costs, such as the risk of hacking. However, Bitcoin ETFs have the advantage of keeping management costs down, as security is guaranteed to a certain extent by securities exchanges and cryptocurrency exchanges.

Bitcoin ETFs have many advantages, but are there any disadvantages? Compared to physical Bitcoin, there are two disadvantages to keep in mind:

Management costs are high

When holding physical Bitcoin, there is a risk of fraud or theft, but there are no costs involved in holding it. However, in the case of a Bitcoin ETF, there is a very small management fee charged to the exchange.

There are restrictions on trading hours

Since transactions are made through exchanges, in principle, transactions cannot be made during times when the exchange is closed. Bitcoin is known to be highly volatile by nature, so unlike spot trading, it is not possible to respond immediately to sudden fluctuations in value.

Strictly speaking, the Bitcoin ETF, which is the subject of much discussion about whether it will be approved in 2023, refers to a "Bitcoin spot ETF." Let's take a look at the difference between the "Bitcoin futures ETF," which has already been approved in several countries, and the "Bitcoin spot ETF," which is currently being applied for mainly in the United States.

Bitcoin Futures ETF

An ETF linked to the futures price of Bitcoin. Each has a set settlement period (expiration date), and reflects expectations for price fluctuations from the current time to the expiring date and storage costs, so the price often differs for each futures ETF.

In general, the longer the period until the expiring date, the higher the price is likely to be because it reflects price uncertainty, and there is often a discrepancy with the spot price.

An ETF linked to Bitcoin futures was approved in the United States in October 2021.

Bitcoin Spot ETF

An ETF linked to the spot price of Bitcoin. Although it has not been approved as of November 2023, BlackRock, the world's largest asset management company, applied for a Bitcoin spot ETF to the SEC (US Securities and Exchange Commission) in June 2023, raising expectations that approval of a spot ETF may be imminent.

This is because, of the more than 500 ETF applications that BlackRock has submitted in the past, only one ETF has been rejected.

Let’s take a look at the current state of Bitcoin spot ETFs.

As can be seen, there are several Bitcoin spot ETFs whose approval deadlines will be reaching again after January 2024. As the approval deadline for the iShares Bitcoin Trust, an application by BlackRock that carries the aforementioned market expectations, is also on January 15th, it seems that the market is predicting that there is a greater than 90% chance that a Bitcoin spot ETF will be approved in the United States within 2024.

History leading up to approval of Bitcoin Futures ETF

It has been about eight years since the Winklevoss brothers applied for the world's first Bitcoin ETF in July 2013. The SEC (US Securities and Exchange Commission) has long rejected Bitcoin ETF applications, citing the need for measures to address the risk of Bitcoin price manipulation.

In 2019, the SEC also rejected a Bitcoin ETF application submitted by Bitwise. At the time, it stated that "an oversight sharing agreement with a sizable regulated market related to the underlying asset is required."

I imagine that the "substantial regulated market related to the underlying assets" referred to here was an indication of the need to share a monitoring agreement with Coinbase, the largest cryptocurrency exchange in the United States.

More than 10 years after the Winklevoss brothers applied for a Bitcoin ETF, the first Bitcoin futures ETF in the United States was approved by the SEC (U.S. Securities and Exchange Commission) on October 15, 2021.

The futures ETF was approved first, but this is thought to be because concerns about Bitcoin price manipulation were deemed to have been addressed by being listed on the Chicago Mercantile Exchange (CME), which is under the supervision of the Commodity Futures Trading Commission (CFTC).

History leading up to Gold ETF approval

Bitcoin is sometimes referred to as digital gold. What is the history leading up to the approval of a gold ETF?

In 1974, gold futures trading began on the New York Mercantile Exchange. The price of gold, which was $35 in the early 1970s, reached a high of nearly $700 in 1980, but the risk of conflict at the time was easing, and the price of gold gradually declined until the late 1990s.

However, in 1999, the European Central Bank signed the Central Bank Gold Accord (CBGA), restricting the sale and lending of gold to the market.

In addition, the first physical gold ETF was approved in the United States in 2004.

In addition to the reduction in the supply of gold, it became possible for institutional investors to trade gold at reduced costs and risks, which led to a reversal of the downward trend.

Subsequent geopolitical risks, the pandemic, recent global inflation and other factors have once again attracted attention as a "safe asset in times of crisis," and as of November 2023, its price is hovering around $1,800/toz.

Future outlook

As mentioned above, at this stage, the SEC has determined that the market for Bitcoin futures listed on CME, which is under the supervision of the Commodity Futures Trading Commission, is sufficiently regulated.

If this is the case, it is highly likely that CME will be approved as a counterparty to the oversight agreement for the listing of a Bitcoin spot ETF, which will clear the issue of the oversight sharing agreement that the SEC has listed as one of the approval requirements.

For these reasons, it is safe to say that the possibility of a Bitcoin spot ETF being approved is extremely high. Barring any surprises, the SEC is expected to approve a Bitcoin spot ETF as the approval deadline draws near. The latest milestone will be in mid-January 2024.

In conclusion, as of November 2023, it will not be possible to purchase it in Japan. However, just as gold ETFs can be purchased in Japan, it is highly conceivable that Bitcoin ETFs will be able to be purchased in the future if Bitcoin spot ETFs are approved in the United States.

Benefits of starting Bitcoin spot ETF handling

How will the factors that actually affect us change if Bitcoin spot ETFs are approved?

Increased demand for Bitcoin

The interpretation of Bitcoin spot ETFs is an exchange-traded investment trust. It is an agreement that allows trading on the securities exchanges of approved countries and, in principle, holds physical Bitcoin as the backing asset. Since Bitcoin is considered a finite digital asset, the opportunity to purchase it will inevitably increase as it becomes possible to trade in the securities market where larger funds are flowing, and it is possible that physical Bitcoin will be purchased.

Reduced tax burden

There will also be progress on the tax side. Under the Japanese tax system, profits earned from investing in physical Bitcoin are currently considered miscellaneous income. In the case of physical Bitcoin, the tax rate varies depending on taxable income, but if you sell it and make a profit, you will be taxed up to 55%. In addition, if you make a loss, you cannot offset the loss with stocks or investment trusts.

However, profits from investing in Bitcoin futures ETFs and spot ETFs may be subject to separate taxation as capital gains, just like stocks and investment trusts. The tax rate is 20.315%. If Bitcoin futures and spot ETFs become available for trading in Japan, there will be the possibility of offsetting losses, which is an expected factor in attracting people who have been concerned about Bitcoin in terms of taxes.

It is believed that approval of a Bitcoin spot ETF is likely to occur in 2024. January 2024 will be a month to watch in particular. If approved, it will effectively allow investment in Bitcoin in the US securities market. This is expected to indirectly attract funds into the Bitcoin and cryptocurrency markets.

In addition, this could have a positive effect on investors in terms of tax, which is currently an issue, so please use this as a basis for investment consideration after understanding the advantages and disadvantages of both spot and ETFs.

Image: Shutterstock

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◉Noriaki Yagi

While attending university, he worked in the food and beverage industry. From that experience, he launched a restaurant consulting business and a human resources dispatch business in the amusement field, and became its representative. At the same time, he started using social media to establish his own brand. After achieving a total of 10,000 followers on social media, his recognition increased and he launched his own apparel brand. In September 2021, he joined J-CAM Co., Ltd. After working on YouTube and Twitter, he became editor-in-chief in April 2022. In March 2023, he launched "Iolite".