Bitcoin ETFs: Definition, Pros and Cons
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Bitcoin exchange-traded funds offer exposure to the world's most popular cryptocurrency with the ease of investing in an ETF.
For regulatory reasons, Bitcoin ETFs don't invest directly in Bitcoin. Rather, they are based on financial products, such as Bitcoin futures contracts, or other investments that correlate to the price of the cryptocurrency. (Similar vehicles exist for other coins.)
Nonetheless, the introduction of Bitcoin ETFs has been a milestone for cryptocurrency trading, because it means everyday investors can give their portfolios exposure to the volatile asset without fussing with online exchanges or Bitcoin wallets.
Bitcoin ETF definition
One way to think about how a Bitcoin ETF works is to think about each term separately.
Similar to how a standard shipping container can hold many different types of goods and be interchangeably loaded onto any semi-truck or container ship, an ETF can ”hold” many types of investments and be bought and sold like a stock on nearly every major retail brokerage.
Some ETFs contain stocks and track a common index, like the S&P 500, by buying the stock of companies in that index. Bitcoin ETFs track the price of Bitcoin. But a Bitcoin ETF is not as straightforward as an ETF that holds Bitcoin. “I think it’s easier to say what you’re not buying: You’re not buying the underlying Bitcoin,” says Catherine Valega, CFP, a wealth consultant at Green Bee Advisory.
So what’s inside a Bitcoin ETF? There are a few common approaches financial companies use when creating an ETF that tracks Bitcoin:
Futures contracts. Many Bitcoin ETFs hold futures contracts, which are derivative contracts to buy or sell an asset — in this case, Bitcoin — at some future date and at some agreed price. One example is ProShares Bitcoin Strategy ETF (BITO), which was the first of its kind when it launched in October 2021.
Bitcoin miners. Bitcoin uses a process called mining to add new transactions securely. Miners — which are technically just computers running software — that solve difficult problems are rewarded with freshly minted Bitcoin. Some ETFs, like Viridi Bitcoin Miners ETF (RIGZ), invest in companies that mine Bitcoin.
Companies that hold crypto. Some funds hold stocks of public companies that hold Bitcoin directly. The Amplify Transformational Data Sharing ETF (BLOK) targets companies like MicroStrategy, which owns billions of dollars worth of Bitcoin, in addition to companies that develop crypto-related technologies.
» Learn more: How to buy cryptocurrency
Bitcoin ETF pros
Easy to buy. Many people who have access to a retail brokerage probably already have access to Bitcoin ETFs. In contrast, investing in Bitcoin itself at minimum requires setting up an account with a crypto brokerage, and perhaps looking into wallets for storage, too.
Easier taxes. Crypto sales are subject to taxes, but don’t count on your crypto brokerage to work with your tax software. If you buy and sell ETFs through your traditional brokerage, those sales should get rolled into the rest of your trading activity for the year.
The trust factor. Crypto has been around for more than a decade, but it is still an emerging industry. News of security breaches, poor management or unethical behavior have made headlines more than a few times. Those headlines don’t necessarily represent the norm, and similar issues can plague traditional business sectors, too. But Valega says for some people, trading on a trusted platform is the stamp of approval they need.
» Ready to get started? Here are the best online brokerages
Bitcoin ETF cons
Not a 1:1 match with Bitcoin: Matching the price of Bitcoin is the goal, but it’s not always a perfect match. The variance varies depending on the particular ETF and its holdings.
Ongoing fees. If you own Bitcoin outright, you don’t pay fees. Ongoing fees for Bitcoin ETFs — about 1% annually is common — are high compared to ETFs that track stock indices. If you own Bitcoin outright, you don’t pay these fees, sometimes called expense ratios, though you probably will pay a one-time transaction fee when you buy and sell.
Loss of control. A central theme of many cryptocurrencies is the ability to own it without the need for institutions or governments to intervene. If you own a Bitcoin ETF, you don’t have any control over the holdings.
The future of Bitcoin ETFs
The first attempt to create a Bitcoin ETF was in 2013. The Securities and Exchange Commission, or SEC, conducted a lengthy review of the topic and shared concerns about potential manipulation and fraud that could come with a Bitcoin ETF approval. The first US Bitcoin ETF containing futures was approved in 2021, and now there are more than a dozen widely available.
Foreign exchanges don’t seem to have the hang-ups the SEC has with Bitcoin ETFs, and several products that hold crypto directly have been approved in Europe and Canada. Valega said she believes one day US investors will have access to products like this, too: “I think eventually some kind of spot ETF will come around, and that will be a much easier way to add [cryptocurrency] to your portfolio,” she said. But, although she’s a Bitcoin “believer in the long run,” she said most individual investors don’t need to “rush into it,” and she isn’t too concerned about the unavailability of this kind of product today.
Other ways to invest in cryptocurrency
Cryptocurrency is still relatively new and should be approached with caution. But if you’re excited about crypto and feel like you have space in your portfolio to add an investment with a little more pizazz, here are some ways you can invest:
1. Directly in cryptocurrency. Bitcoin is becoming more common — you can even use it to shop on Amazon. There are many types of cryptocurrencies to choose from. Bitcoin is the largest and most established of all the cryptocurrency players, but that doesn’t make it a safe bet. It’s good to practice caution when adding any new investment to your portfolio.
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2. Crypto trusts. Crypto can be directly held by trusts, unlike ETFs. Grayscale Bitcoin Trust (GBTC) and Osprey Bitcoin Trust (OBTC) are two such examples. This does not necessarily make trusts a better way to track prices than ETFs. The relative gap between GBTC’s price and the price of Bitcoin swelled to around 30% for much of 2022.
3. Crypto-related investments. If you don’t want to navigate a whole new form of currency, you can still invest in the future of money. Coinbase, a major cryptocurrency exchange, went public in April 2021, meaning you can buy its company stock. (Learn how to buy Coinbase stock.) There are also blockchain ETFs. Blockchain is the central technology behind cryptocurrencies, and there are plenty of companies involved in its development and utilization. There are several ETFs made up of those companies, which can give investors exposure to crypto technology without investing directly in the currencies themselves.
Author Kurt Woock did not own BTC at the time of publication. Andy Rosen did own BTC at the time of publication.
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