What to Know before getting into Bitcoin ETFs
Bitcoin may have started as a digital currency, but it is now commonly used as an investment vehicle. As the price has proved how much it can rise, we have not only seen more individuals entering the crypto markets as investors, but it is also gaining a lot of interest from large financial institutions.
Beyond investing in cryptocurrencies directly, there are efforts to create securities based on these digital coins. One idea that has gathered a lot of steam in recent years is that of a Bitcoin exchange-traded fund (ETF).
Along with Bitcoin, the ETF might also track things like the Dogecoin price or other assets, for example Ether and Dash, and a particular index, sector, or commodity.
Many believe that cryptocurrency ETFs would be a great way for investors to gain exposure to the benefits of Bitcoin without some of the issues that have kept them away from the markets.
While it has been a struggle to this point, the first Bitcoin ETF was launched in Canada, in 2021. From then, many investors hoped that was a sign that it was only a matter of time before the SEC started approving crypto exchange-traded funds for U.S. markets.
Recently, in November 2022, the ProShares Bitcoin Strategy ETF (BITO) became the first Bitcoin ETF authorized to trade in U.S. markets.
How does an ETF work?
Before understanding how this investment product would work with Bitcoin, you should learn about conventional exchange-traded funds. As said before, these types of securities track a market index, commodity, or some other kind of asset.
They can be structured to track the price of a single asset or follow a group of assets. Also, they can be bought and sold on stock markets.
With conventional exchange-traded funds, a management team creates security. They buy assets to hold in the fund and then sell shares representing partial ownership of the assets.
Applying this same practice to Bitcoin would be a security that tracks the digital currency’s price. Investors would also be able to buy and sell the security on a conventional stock exchange, offering a way to benefit from the price of Bitcoin without having to get directly involved with the crypto markets.
In many cases, ETFs will follow a group of related assets. For example, you might find an automotive fund that covers a range of assets like auto manufacturers and parts suppliers. This principle could also apply to securities that track crypto.
Bitcoin ETF advantages
Creating new security based on the price of Bitcoin could be a way to attract more capital into crypto. Much of this would be due to some advantages of putting Bitcoin into an ETF.
One of the first advantages is that it could offer a way to benefit from the value of Bitcoin without having to deal with some of the issues that come with buying and holding cryptocurrencies. The investor would not have to open a crypto wallet, find an exchange for trading or hold and manage the coins. The fund managers would handle most of this for the investors.
Diversification is another reason. As was mentioned earlier, these funds can hold several assets at once. An ETF is an easy solution if you want exposure to a group of assets. You can just buy shares in the fund and balance the growth of your portfolio over several assets instead of just one.
Security could be another issue attracting people to this type of investment. When you own Bitcoin, you must be responsible for securing your assets. If your account is compromised, you could lose your investment. With an investment fund, it would not be so simple for a criminal to steal your shares.
Paying taxes on Bitcoin can also be complicated. While some of the tax issues have been sorted out in recent years, they can still be quite problematic for some investors. Yet, ETFs have been around for a while, and the tax laws are settled and straightforward.
Bitcoin ETF Disadvantages
This type of investment vehicle has advantages, but you must give some things up to gain these advantages. If you were to invest in Bitcoin, it could be an excellent introduction to the cryptocurrency markets. You could start with Bitcoin and then learn about and invest in other coins. It could potentially open a range of new investment opportunities.
Another issue is that the fund might hold more assets than Bitcoin. This can be a positive aspect when considering things like diversification and stability, but it might mean that the fund does not track as close to the price of Bitcoin as some would like. With other assets under management, that might indicate that you will see times when the Bitcoin price takes a sharp increase, but the fund’s share price only goes up a little.
Investors also need to consider management fees. The fees tend to be reasonable with this type of investment vehicle, but they could eat into your profits. While you would have to do more work to invest in Bitcoin directly, you would not have to pay any management fees.
Top Bitcoin ETFs in the U.S.
Crypto exchange-traded funds have been a hot topic among investors for a few years. This is especially true as it concerns backing these funds with Bitcoin. With that said, it has been a long and challenging road to make them a reality.
Investors have made several attempts to get approval for funds. As for the U.S., few crypto ETFs have been approved by the SEC.
In the list above, there are the top six November 2022 Bitcoin ETFs approved for trading:
- ProShares Bitcoin Strategy ETF (BITO)
- Valkyrie Bitcoin Strategy ETF (BTF)
- VanEck Bitcoin Strategy ETF (XBTF)
- AdvisorShares Managed Bitcoin Strategy ETF (CRYP)
- Global X Blockchain & Bitcoin Strategy ETF (BITS)
- ProShares Short Bitcoin ETF (BITI)
The six ETFs on the list don’t hold any Bitcoin. Instead, they have Bitcoin futures contracts. Furthermore, there are already 25 additional Bitcoin ETF files awaiting SEC approval, some of which are for funds that directly own Bitcoin.
Bitcoin ETFs could be an attractive investment option. It offers a way to benefit from Bitcoin investment without holding the tokens. It could also be a great way to attract more capital to crypto markets since they provide exposure to digital currencies in a more conventional investment vehicle.