By Edul Patel
In a groundbreaking move, the US Securities and Exchange Commission (SEC) has recently given its nod to 11 spot Bitcoin
What are Spot Bitcoin ETFs?
A spot Bitcoin ETF is essentially an Exchange-Traded Fund that tracks the current market price of Bitcoin, commonly known as its spot price. Unlike ETFs based on Bitcoin futures contracts, a spot Bitcoin ETF directly invests in Bitcoin at its current price. While management fees and brokerage commissions are applicable, these costs are often more economical compared to the complexities associated with direct Bitcoin purchases and holdings. This approach aims to make Bitcoin investment more accessible to a wider range of investors.
With the SEC’s green light, attention turns to the approved spot Bitcoin ETFs and their potential impact on global market sentiment. The move is seen as a vote of confidence in the legitimacy and maturity of the crypto market, likely boosting investor confidence in Asia and India
Which Spot Bitcoin ETFs are Approved?
The SEC has approved 11 spot bitcoin ETFs including Bitwise Bitcoin ETF, ARK 21shares Bitcoin ETF, Invesco Galaxy Bitcoin ETF, iShares Bitcoin Trust, VanEck Bitcoin Trust, Franklin Bitcoin ETF, Wisdom Tree Bitcoin Fund, Fidelity Wise Origin Bitcoin Trust, Valkyrie Bitcoin Fund, and Grayscale Bitcoin Trust.
Advantages of Spot Bitcoin ETFs:
-Direct exposure to bitcoin price movements: Spot Bitcoin ETFs provide investors with direct exposure to the current market price of Bitcoin, commonly known as its spot price. This direct connection allows investors to participate in the real-time price movements of the cryptocurrency
-Liquidity and Market Stability: The approval of spot Bitcoin ETFs by regulatory authorities, such as the US Securities and Exchange Commission (SEC), can attract institutional investors. Increased institutional participation is likely to enhance liquidity and contribute to greater market stability, potentially reducing the extreme price volatility associated with cryptocurrency markets.
-Diversification Benefits: Spot Bitcoin ETFs can serve as a tool for portfolio diversification. Investors can include Bitcoin alongside traditional assets within a diversified investment portfolio, potentially mitigating risks associated with the volatility.
Challenges of Spot Bitcoin ETFs:
-Market Volatility: The cryptocurrency market, particularly that of Bitcoin, is known for its inherent volatility. Spot Bitcoin ETFs directly mirror the market price of Bitcoin, making them susceptible to sudden price fluctuations. Investors in spot Bitcoin ETFs may face challenges in managing and mitigating the impact of rapid market movements.
-Security Concerns:The security of digital assets is a persistent concern in the cryptocurrency space. While spot Bitcoin ETFs don’t involve direct ownership of cryptocurrencies, the underlying assets are still exposed to potential cybersecurity threats. Issues such as hacking, fraud, or other security breaches could adversely affect the value of the ETF and investor confidence.
Tax
In India, capital gains from crypto assets like Bitcoin are taxed at a flat rate of 30%. However, investments in spot Bitcoin ETFs via the Liberalised Remittance Scheme (LRS) offer more favorable tax treatment. Short-term capital gains are subject to the investor’s tax slab, while long-term capital gains are taxed at 20% with indexation benefits—considerably lower than the flat 30% for direct crypto investments. Losses booked can be used to offset other capital gains.
It’s worth noting that a 1% Tax Deducted at Source (TDS) applies to each transfer of digital assets on domestic crypto exchanges in India. However, this TDS does not apply to Bitcoin ETFs in the US, as they don’t involve actual crypto purchases. On the flip side, a 20% Tax Collected at Source (TCS
Conclusion
The approval of spot Bitcoin ETFs by the SEC is a significant development with potential implications for global markets. While the move is poised to attract institutional investors and enhance market stability, it also brings forth considerations regarding tax implications in specific jurisdictions, such as India. As the crypto landscape continues to evolve, investors and regulators alike will closely monitor the outcomes of this groundbreaking decision.
The author is co-founder and CEO, Mudrex
