We all know that in the world of cryptocurrency, two ETFs are running very fast at present, Bitcoin ETF and Ethereum ETF. But do you know that there are two types of ETFs: Spot ETFs and Futures ETFs?
So in today’s article, we will discuss what are the Spot and Futures ETFs and what is their significance in cryptocurrency.
Spot ETFs Vs. Futures ETFs?
As we talked about in the beginning, whether it is Bitcoin ETF or Ethereum ETF, there are two types of ETFs, one is spot and the other is futures.
What is Spot ETF?
If you buy a Bitcoin or Ethereum spot ETF, it means that your return will directly depend on the price of Ethereum cryptocurrency.
Suppose you have taken a Bitcoin ETF worth $5000 and if the price of Bitcoin cryptocurrency has increased by 10% since the time you took this Bitcoin ETF, then the price of your ETF will also increase by 10%.
One special thing about Spot ETF is that you can keep this ETF until you make a profit. This means that there is no time limit for selling the ETF.
What is a Futures ETF?
As you understand from the name, Futures ETF means that you buy ETF stocks till some expiry date.
As we can hold Spot ETF for an unlimited time until you get the profit. But in Futures ETF You can buy the ETF only till the given expiry date.
If you do not sell this ETF till the expiry date then your money will become zero and you could suffer a 100% loss
For example, let us assume that today is the 1st and you have taken futures on stock till the 30th of this month.
Now you will have to sell this ETF before the 30th or by the 30th in any case. If you do not sell this futures ETF by the 30th, it will become zero, or your broker will sell this ETF stock at any rate.
In this case, you may suffer a huge loss or even a 100% loss.
Risk in Spot and Futures ETF
If we talk about risk, then we all know that the risk in cryptocurrency is very high because it is a very volatile market. In the cryptocurrency market, fluctuations of 10% to 15% are very normal.
This is also a reason why there is a slight difference between the actual cryptocurrency price and the price of Cryptocurrency ETF because the ETF is not able to match the volatility of the actual cryptocurrency price.
Risk in Futures ETF
Now whether it is Bitcoin or Ethereum, there is a rule in both the Futures cryptocurrency ETF that you are given an expiry date within which you have to sell it.
Let’s say you estimate that you will get 20% profit in particular Crypto ETF till its expiry date. But the opposite happens, that ETF goes into a 20% loss but you will have to sell it till the expiry date.
The risk in Futures ETF is very high because it is very difficult to study the cryptocurrency market accurately. If we talk about analyzing it till the given time, then this task becomes even more difficult.
Risk in Spot ETF
Spot ETF has less risk than Futures ETF because there is no time limit in it, it is up to you how much you will hold this ETF.
Suppose we bought the Spot ETF thinking that it could grow by 30% in some time but it falls by 20%.
Now we do not have a time limit in Spot ETF that we have to sell it till this expiry date, so we can hold the Spot ETF for further time.
We will not sell it until we get the profit we want. But cryptocurrency is a risky market and it can fall more for a longer period.
So whether Spot ETF or Futures ETF, make an investment plan only after analyzing the market properly.
Conclusion
In this article, we understood what is the concept of Spot ETF vs. futures ETF. If you follow our opinion then you should invest in Spot ETF instead of Futures ETF.
Because in a volatile market like cryptocurrency, it is very difficult to estimate the correct price. If you buy a Spot ETF, you will avoid restrictions like expiry date.
If you can hold your investment for a long time, then you will be able to get very good returns through Spot ETF.