Investing in bitcoins through an exchange-traded fund (ETF) allows you to invest in the currency’s value. ETFs can be traded, purchased, and sold on standard exchanges rather than through cryptocurrency exchanges. Its dependable platform allows mainstream traders and investors to gain exposure to bitcoin prices.
There is nothing new about exchange-traded funds. Financial institutions use them extensively. You can use ETFs to invest in various industries and assets, including currencies and commodities, or you can use them to target businesses that value diversity or the environment.
Even though bitcoin futures ETFs can now be purchased, there has not yet been any approval for a spot bitcoin ETF in the United States. This is because bitcoin futures ETFs are backed by derivatives, while spot bitcoin exchange-traded funds are backed by bitcoins (BTC).
What Is Bitcoin ETFs?
An exchange-traded fund (ETF) based on Bitcoin trades on a conventional stock exchange rather than a cryptocurrency exchange. In addition to providing Bitcoin with price leverage, they also allow investors to invest in Bitcoin without worrying about the hassle of using a cryptocurrency exchange.
Accessing Bitcoin ETFs
The United States has yet to approve bitcoin ETFs, although other countries have done so. In addition, a number of companies have launched bitcoin exchange-traded funds abroad thanks to the booming cryptocurrency market. Here are a few examples:
There is currently no spot bitcoin ETF offered in the United States, but a number of bitcoin futures ETFs are available, and options to invest in ETFs that target businesses related to or invested in by bitcoin. In addition to bitcoin, these ETFs may include businesses supporting mining equipment or other technologies, such as Tesla (TSLA).
Pros and cons of Bitcoin Future ETFs
Pros of Bitcoin ETFs
1. Convenience
Investing in a Bitcoin ETF means you are not required to learn how Bitcoin works, register for a cryptocurrency exchange, or assume the risks of holding Bitcoin directly, making it one of the biggest benefits of bitcoin etfs. For instance, Bitcoins are stored in wallets; if a shareholder forgets the password to the wallet, their Bitcoin is irretrievably lost. A Bitcoin ETF streamlines the process of investing in Bitcoin.
2. Diversification
An ETF may hold more than one asset. For instance, a Bitcoin ETF may include Bitcoin, Apple, Facebook, and other companies, allowing investors to diversify their holdings and reduce risk. Similar to that, a Bitcoin ETF would allow investors to diversify their current equity portfolios by trading on a regulated market exchange.
3. Tax effectiveness
Most tax havens and pension funds throughout the globe do not permit the purchase of Bitcoin due to its decentralised nature and lack of regulation. On the other hand, a Bitcoin ETF that traded on conventional exchanges would be subject to SEC regulation and qualify for tax benefits.
4. Portfolio diversification
There may be more than one asset in an ETF. Actual bitcoins, equities connected to the cryptocurrency, and other assets might all be included in a bitcoin ETF. Investors get the possibility to enhance their conventional portfolios, even if it solely owns BTC.
5. Tax implications are much clearer
As a conventional investment instrument, ETFs have fewer tax implications and explicit instructions for managing profits and losses. You can also invest in an ETF in a tax-favoured account, such as an IRA, to avoid paying capital gains taxes associated with gaining value from real Bitcoins. You don’t need to manually record your profits and losses to determine your tax obligations, like when you trade genuine Bitcoins.
Cons of Bitcoin ETFs
Although Bitcoin ETFs offer many benefits, they are limited in what they can do. There will always be some disadvantages. Here are some of the drawbacks of Bitcoin ETF you should know:
1. Management costs
ETFs often charge management fees in exchange for the convenience they provide. As a result, holding many shares in a Bitcoin ETF may result in expensive management costs.
2. ETF accuracy error
ETFs can hold various assets in an effort to diversify the portfolio, even though they follow the price of the underlying asset. This, however, shows that the exchange-traded fund’s value may not truly represent a 50% increase in Bitcoin’s price owing to its other assets. Therefore, while an ETF gives the price of Bitcoin leverage, it may or may not be a reliable price tracker.
3. Trading cryptocurrency restrictions
Ethereum, Litecoin, XRP, and other cryptocurrencies can be exchanged for bitcoin. A Bitcoin ETF, which is only an investment fund that monitors the price of Bitcoin, would not be permitted to trade for other cryptocurrencies.
4. Not owning any Bitcoin
Bitcoin acts as a safeguard against centralised financial institutions, fiat money, and stocks. Bitcoin offers a solution to lessen financial system risks since central banks do not regulate it. By ensuring anonymity via the Bitcoin blockchain, Bitcoin also protects investors and consumers. These advantages would be lost if there were a government-regulated Bitcoin ETF.
5. A more rigid trading schedule
While it is possible to buy and sell cryptocurrencies around the clock, stock exchanges (such as the NYSE) are only open from 9:30 a.m. to 4 p.m. ET, Monday through Friday. As a result, if the price of Bitcoin significantly changes throughout the night, you won’t be able to react to it until the market reopens.
Best Bitcoin ETFs
In order to better understand this novel area of the ETF market, we have profiled all of the top Bitcoin ETFs.
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ProShares Bitcoin Strategy ETFc (BITO)
Bitcoin futures contracts are available from BITO as a way to gain exposure to the market. In these derivatives, you are betting on the price of bitcoin in the future. Since BITO monitors the spot price of Bitcoin less accurately than it might, it’s still close enough for swing traders and investors who buy and hold.
- Market Price: $12.18
- Trading Volume: 5,542,943
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Grayscale Bitcoin Trust (GBTC)
It is technically incorrect to call GBTC an ETF. GBTC is instead a closed-end trust. In order to provide exposure to Bitcoin, the fund keeps deposits in cold wallets and stores them offline. With approximately 13 billion dollars in assets and 692 million outstanding shares, the fund manages approximately $13 billion.
- Market Price: $12.38
- Trading Volum: 2,457,587
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Global X Blockchain & Bitcoin Strategy ETF
BITOS futures-based strategy is combined with limited investments in blockchain startups through BITS. At the end of July, 47% of the Global X Blockchain ETF (BKCH) was held as Bitcoin futures collateral. BKCH is backed by equities, including Marathon Digital Holdings In, and measures the performance of the Solactive Blockchain Index.
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- Market Price: $7.09
- Trading Volume: 1,120,000
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Purpose Bitcoin ETF
Regulators in Canada have approved a number of cryptocurrency exchange-traded funds. In this case, the Bitcoin deposits are held by a custodian in safe offline storage along with matching, verified Bitcoin deposits. Its initial competitor was BTCC, which has since become one of the most liquid and popular options.
- Market Price: $3.83
- Trading Volume: 720,608
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CI Galaxy Ethereum ETF
In addition to being available as a spot ETF, Ether is the second largest cryptocurrency by market capitalisation. It represents the Ethereum blockchain, which is flexible. Ethereum’s network can be used for a wide range of things, including smart contracts, non-fungible tokens, and decentralised banking. There is a lower price per token as well as a greater degree of volatility as an investment with this cryptocurrency.
- Market Price: $7.09
- Trading Volume: 428,088
Is a Bitcoin ETF better than owning Bitcoin?
The answer to this question is impossible to give in a definitive manner. Investing is a personal experience, and every investor has their own preferences and demands. A bitcoin ETF, for instance, can provide price exposure even in the absence of ownership. Investing in ETFs can also be advantageous if you are concerned about bitcoin, want to diversify your portfolio quickly, or want passive price exposure.
However, holding bitcoins is advantageous for individuals who wish to engage in routine trading, use BTC for money, or explore cryptocurrencies in more depth. While spot bitcoin ETFs have not yet received SEC clearance, anybody can purchase bitcoin via an exchange, broker, or ATM after proving their identity. In addition, while there are futures-based ETFs for bitcoin, some people may need more than just price exposure.
Conclusion
Cryptocurrency ETFs can provide investors with a balance between conventional investments and the developing cryptocurrency sector. It’s easy and convenient to trade shares, just as you would buy and sell the stock with your favourite brokerage. However, it is not clear what the future holds for this type of investment. The environment may change sooner rather than later as new proposals for Bitcoin ETFs based on spot trading and futures-based ETFs are granted. So make sure you are aware of the risks associated with investing before deciding.
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