How does Bitcoin Spot etf work?

In essence, an investor purchasing shares of a Bitcoin Spot Exchange-Traded Fund (ETF) is purchasing a portion of the Bitcoin held by an asset management and investment company, such as 21 Shares and Ark Invest Companies.

This means that investors do not own bitcoin themselves, but instead own a share of the ETF that represents a certain amount of bitcoin.

Thus this means that a Bitcoin spot etf once passed will enable you to buy shares of Bitcoin.

The price of your shares will go up and down with the price of bitcoin, and you can sell your shares at any time.

It’s kind of like buying gold from a bank.

They own gold but sell you shares of it.

They do not sell you the actual physical gold.

To watch this topic PLUS a live illustration of a Bitcoin Spot ETF, watch my video below.

How are Bitcoin Spot ETFs created and priced?

When it comes to investing and trading ETFs its interesting to know how they are priced in the day.

The ability to trade ETFs at constantly updated prices throughout the day is a benefit that many investors value.

Some, though, are still getting used to the idea of being able to buy and sell a fund at any time of the day.

Knowing the real mechanism behind how ETF share prices are determined is the first step in this process.

We will discuss the variables that can affect prices and spreads in this section, including the closing of the market to which a fund offers exposure.

ETFs are typically priced around "fair value," which is determined by two things:

The value of the underlying assets.

The price of mitigating exposure to them.

Prices in competitive markets are typically kept near to fair value; discounts or premiums are typically promptly arbitrarily dismissed.

The amount of expenses, the precision with which an ETF is priced, and other variables all affect how much of a spread it has, market conditions, and the exposures to which market makers can hedge.

ETF FAIR VALUE

An ETF share will be priced in the vicinity of its fair value under typical market circumstances.

Each share has an intrinsic value, according to the idea of fair value, which is mostly determined by the value of the underlying securities that the ETF owns.

Throughout the day, this fair value will fluctuate as the underlying securities' value fluctuates.

ETF shares are created in exchange for a basket of securities.

An authorised participant (AP) which in most cases is a financial institution creates and redeems ETF shares and acquires the underlying assets for the ETF issuer.

The formulae for creating an etf share is as follows:

ETF share=securities divided by number of shares created.

For example to create a Bitcoin etf share the formula would be:

$1000000 worth of Bitcoin may generate 100,000 shares as an example.

Thus one ETF share will be worth $10 without putting into account any expenses incurred.

ETF shares are created once per day, at the end of the day.

The cost of producing those shares is effectively locked in by the AP at the time it buys the underlying securities.

This is referred to as hedging, and it means that, provided it is aware of the cost of the hedge, the AP will always be able to predict the price at which it can create shares at the end of the day.

The fair value of the underlying basket of securities is determined by adding the costs of the hedge and the underlying securities.

This is the price at which an ETF share is valued and quoted by a market maker during the trading day.

Which investment companies applied for the Bitcoin spot etf?

The 12 Bitcoin Spot ETF applications are from:

1. BlackRock Investment Management Company.

2. 21Shares & Ark Invest

3. Grayscale Bitcoin Trust Company

4. Bitwise Asset Management Inc.

5. VanEck Company

6. Wisdomtree Fund Management Company

7. Invesco & Galaxy Investment Management Companies

8. Fidelity Investments

9. Valkyrie Asset Management Firm

10.Global X ETFs Fund Management Company

11.Hashdex Investment Company

12.Franklin Templeton Investments Holding Company.

When will Bitcoin Spot etf be passed?

According to experts, including Bloomberg Intelligence analyst James Seyffart, the “window” for Bitcoin Spot etf approval is between January 5th and 10th, 2024.

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