Investing in bitcoins through an exchange-traded fund (ETF) allows you to invest in the currency’s value. ETFs can be bought, sold, and exchanged on standard stock exchanges instead of using cryptocurrency trading platforms. Through a dependable platform familiar to mainstream investors and speculators, it provides exposure to bitcoin prices to mainstream investors and speculators.
There is nothing new about exchange-traded funds. They are widely used in the financial sector. You can use ETFs to invest in a variety of assets and industries, including currencies and commodities, or you can use them to target businesses that value diversity or the environment.
Despite the fact that investors can now invest in bitcoin futures ETFs, a spot bitcoin ETF has not yet been approved by the United States. Spot bitcoin ETFs are backed by bitcoin (BTC), while bitcoin futures ETFs are backed by derivatives.
With the addition of a bitcoin ETF, American investors would have more options.
Bitcoin futures: how do they work?
It is important to distinguish between bitcoins and bitcoin futures. According to the BITO or futures contract, investors will agree to buy or sell the asset at a predetermined price in the future (similar to stock futures contracts). In this case, Bitcoin derivatives are used instead of actual Bitcoins to back futures contracts. It is not possible for investors to trade Bitcoin directly since it is a digital asset.
What is the structure of this ETF?
BITO offers investors the opportunity to purchase bitcoins without having to buy them through cryptocurrency exchanges or futures contracts. The share price of this fund is driven primarily by bitcoins. ETFs that invest in commodities or gold futures are similar to these futures contracts in that investors don’t actually buy gold or gold bars.
What are the associated costs?
BITO’s expenditure ratio of 0.95 percent now appears to be quite high. Another way of putting it is that if an investor contributes $10,000, $95 will go toward fund operation costs. Index funds with less than 0.30 percent expense ratio are the best for reducing costs.
Due to the fact that this is a new asset class and there may be numerous intermediaries, the futures ETF price is likely to be high until more competition drives down costs. Furthermore, other businesses may follow ProShares’ lead in launching futures-based crypto ETFs in the near future. Fund companies like Valkyrie Investments, VanEck, and Invesco are waiting to welcome investors.
ETFs for bitcoin: what are the advantages and disadvantages?
While anyone can purchase bitcoin through a cryptocurrency exchange or bitcoin ATM, an ETF would have several advantages, including:
- An ETF can be used without opening an account on a crypto exchange or knowing how to use crypto-wallets.
- Through investment instruments and tax regulations that users are more comfortable with, users can gain price exposure without actually owning Bitcoin directly.
- ETFs hold many assets, allowing them to diversify their holdings. A bitcoin ETF might hold bitcoins themselves, equities connected to it, or assets with a connection to it. Investing in Bitcoin gives investors the opportunity to diversify their conventional portfolios.
Although bitcoin ETFs offer these advantages, there are several disadvantages too:
- Fund management costs are often included in ETFs, meaning some pooled funds are used to cover these costs rather than investing. If you choose to invest in an ETF, check its “cost ratio” before you invest; you want it to be as low as possible, ideally around 1%.
- Because bitcoin ETFs only provide price exposure with no actual ownership, investors cannot exchange bitcoin for other cryptocurrencies.
- Unlike cryptocurrencies, trading hours at financial exchanges like the New York Stock Exchange (NYSE) are stricter. They are open from 9:30 a.m. to 4 p.m. ET, Monday through Friday. Consequently, you won’t be able to react to significant changes in Bitcoin’s price until the market opens again in the morning.
- Erroneous pricing: A rise or fall in the price of bitcoin could not be immediately reflected in the value of the ETF, particularly if it holds a variety of assets.
ETFs for bitcoin access
Despite the fact that no bitcoin ETF has been approved in the United States, there are a number of them in other countries. A number of companies have launched bitcoin exchange-traded funds abroad due to the booming cryptocurrency market. Here are a few examples:
A few Canadian Bitcoin companies to watch: CI Galaxy, 3IQ Coinshares, and Purpose Bitcoin
Asia: ETC Group Iconic Funds – 21Shares BTCetc, VanEck Bitcoin ETN, and Physical Bitcoin ETP.
Brazil: WisdomTree’s Bitcoin ETF Jersey: QR Capital’s Bitcoin ETF
The United States currently lacks a spot bitcoin ETF, but it does offer bitcoin futures ETFs and ETFs that focus on businesses with ties to bitcoin. Businesses investing in bitcoin, such as Tesla (TSLA), or supporting mining equipment could be included in these ETFs.
The progress of Bitcoin ETFs in the U.S.
Many people look to the US for inspiration when it comes to bitcoin exchange-traded funds. Since more than a dozen petitions and plans have been rejected by the Securities and Exchange Commission (SEC) in recent years, it has been difficult to obtain permission. Though things seem to have changed somewhat by 2022, it initially seemed as if nothing could be done.
Teucrium’s Bitcoin Futures ETF was approved by the SEC in April 2022, while ProShares’ Bitcoin Strategy ETF was approved by the SEC in October 2021. As of this writing, it does not seem likely that a spot bitcoin ETF will be approved anytime soon, which has renewed the optimism of some cryptocurrency investors.
Neither Bitwise nor Grayscale Investments received approval for their spot bitcoin ETF applications on June 29, 2022. The Bitcoin Trust (GBTC) of Grayscale Investments (which is a CoinDesk sister company) is being converted into a spot bitcoin ETF.
According to the SEC, avoiding market manipulation was one of the reasons for rejecting the request. A lawsuit was filed by Grayscale against the SEC in response, asking the District of Columbia Circuit to review the SEC’s ruling.
Although a few companies have submitted their applications for bitcoin ETFs to the SEC once again, American investors are unlikely to have access to bitcoin ETFs anytime soon.
Is bitcoin ownership preferred to Bitcoin ETFs?
There is no simple answer to this question. Investment goals and requirements are unique to each investor. Even though Bitcoin ETFs do not represent ownership of the cryptocurrency, they provide the necessary price exposure. ETFs may also be more appealing for users who prefer a passive price exposure, those who are unsure of bitcoin, or traders trying to diversify their portfolios.
In contrast, people interested in regular trading, using BTC as money, or diving deeper into cryptocurrencies through trading or other methods may want to consider purchasing bitcoin.
Why are investors investing in Bitcoin ETFs?
In addition to providing easy access to the cryptocurrency realm through a bitcoin ETF, bitcoin itself may be challenging for investors. The bitcoin ETF is one factor that could simplify cryptocurrency investing.
Firstly, storing and protecting bitcoin itself can be challenging. Several times, investors have lost their passwords, preventing them from accessing their bitcoins (sometimes with millions on the line).
Bitcoin was misplaced or trapped in inoperable wallets up to 18 percent, according to data from cryptocurrency research and software company Chainalysis.