What are Bitcoin ETFs?
Bitcoin ETFs are exchange-traded funds that track the value of Bitcoin and trade on traditional market exchanges rather than cryptocurrency exchanges. They allow investors to invest in Bitcoin without having to go through the hassle of using a Cryptocurrency exchange while providing leverage to its price.
How Do Bitcoin ETFs Work?
An ETF (exchange-traded fund) is an investment fund that tracks the price of an underlying asset or index. Today, ETFs are available for several assets and industries, ranging from commodities to currencies.
A Bitcoin ETF would work the same way—the price of one share of the exchange-traded fund would fluctuate with the price of Bitcoin. If Bitcoin increases in value, so does the ETF, and vice versa. But instead of trading on a cryptocurrency exchange, the ETF would trade on a market exchange like the NYSE or TSX.
Advantages of Bitcoin ETFs
Convenience
Investing in a Bitcoin ETF provides leverage to the price of Bitcoin without having to learn about how Bitcoin works, having to sign up for a cryptocurrency exchange, and taking on the risks of owning Bitcoin directly. For example, Bitcoins are held in a wallet, and if an investor loses the password to the wallet, their Bitcoin is lost forever. A Bitcoin ETF simplifies the process of investing in Bitcoin.
Diversification
An ETF can hold more than just one asset. For example, A Bitcoin ETF could comprise Bitcoin, Apple stocks, Facebook stocks, and more—providing investors with the opportunity to mitigate risk and diversify their portfolio. Similarly, by trading on a regulated market exchange, a Bitcoin ETF would provide investors with the chance to diversify their existing equity portfolios.
Tax efficiency
Given that Bitcoin is unregulated and decentralized, the majority of the world’s tax havens and pension funds do not allow for purchases of Bitcoin. On the other hand, a Bitcoin ETF trading on traditional exchanges would likely be regulated by the SEC and eligible for tax efficiency.
Disadvantages of Bitcoin ETFs
Management fees
ETFs usually charge management fees for the convenience they provide. Therefore, owning a significant amount of shares in a Bitcoin ETF could lead to high management fees over time.
ETF inaccuracy
While ETFs track the price of an underlying asset, they can also have multiple holdings in a bid to diversify the portfolio. However, this suggests that a 50% rise in the price of Bitcoin may not be accurately reflected in the value of the exchange-traded fund due to its other holdings. Therefore, while an ETF provides leverage to Bitcoin’s price, it may or may not be an accurate tracker of its price.
Limits to cryptocurrency trading
Bitcoin can be traded for other cryptocurrencies, like Ethereum, Litecoin, XRP, and more. A Bitcoin ETF would not be eligible to trade for other cryptos, as it is not a cryptocurrency but simply an investment fund that tracks the price of Bitcoin.
Do Bitcoin ETFs Exist?
Yes, Bitcoin ETFs are becoming more common as the cryptocurrency space gains popularity. One example of a Bitcoin ETF is ProShares Bitcoin Strategy ETF (ticker: BITO) traded on the NYSEArca. The U.S. Securities and Exchange Commission (SEC) has blocked several other proposals for Bitcoin ETFs on the grounds that the market is unregulated.
Most Bitcoin ETFs use futures to mimic the performance of the cryptocurrency. Another way to gain exposure to Bitcoin without actually purchasing it is to invest in cryptocurrency and blockchain companies, which provide leverage to the crypto market.
The Future of Bitcoin ETFs
Nobody knows what the future of bitcoin ETFs, which are volatile securities, will be. Since inception, bitcoin prices have soared to more than $60,000 per coin. After that, they’ve dropped below $19,000.
Whether cryptocurrencies, and bitcoin in particular, will make good long-term investments, each individual investor can only decide for themselves. You should consider consulting a financial advisor before making investment decisions.
Frequently Asked Questions (FAQs)
Are bitcoin ETFs a good investment?
Every investment comes with its own risks. However, cryptocurrencies such as bitcoin are a very volatile investment class. No investor should ever risk more than they can afford to lose.
What is the best bitcoin ETF?
We’ve included a list of spot bitcoin and bitcoin futures ETFs. Every investor is in a unique position with their own unique investment goals and needs. The best bitcoin ETF for each investor can only be determined through research geared to your unique needs and circumstances.
What to look for in a bitcoin ETF?
As with any ETF, investors may want to look at individual investment strategies and holdings as well as metrics such as expense ratio, total assets under management and past performance to determine any ETFs they choose to invest in. As always, keep in mind that past performance is no guarantee of future results.
Are bitcoin ETFs safe to use?
Every investment comes with risks, and cryptocurrencies such as bitcoin have proven to be extremely volatile. No investor should risk more than they can afford to lose. It’s always a good idea to check with a financial advisor before making any investment decision.
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