Digital currencies play a vital role in today’s economic landscape, and a host of new entrants are looking to cash in on this trend in the coming years. While it seems as though there’s been little change in how cryptocurrencies are traded, that’s far from true. In fact, there have been several significant developments that are likely to impact your investment strategy moving forward.
Cryptocurrency investing is a hot topic at the moment. Investors are flocking to exchange-traded funds that track cryptos, hoping to get exposure to this new asset class before it’s too late. But what are these funds, and should they be your first stop?
Crypto-based financial institutions have been working hard to create products that investors want, and in the fall of 2021, a much-anticipated Bitcoin futures exchange-traded fund (ETF) was launched.
Traders can now speculate on Bitcoin without purchasing cryptocurrency or opening an account with a cryptocurrency exchange, thanks to the new ProShares Bitcoin Strategy ETF (BITO). It is easy to get started because investors only need to buy and sell the fund, like any other stock that is traded on an exchange.
Although many fund providers would love to acquire a piece of the substantial fees that may be paid for operating an ETF based on the hot asset, analysts say the road to more cryptocurrency ETFs looks rough.
This article explains what Bitcoin ETFs are and how they work. It also lists the best Bitcoin ETFs and cryptocurrency funds available in today’s markets.
What are Bitcoin ETFs?
Bitcoin ETFs refer to exchange-traded funds that track the price of Bitcoin traded on conventional stock exchanges rather than cryptocurrency exchanges. They boost the price of Bitcoin and allow investors to purchase Bitcoin without using a cryptocurrency exchange.
How Does a Bitcoin ETF Work?
Spot Bitcoin ETFs and Bitcoin Futures ETFs are two ways for investors to get direct or indirect access to Bitcoin. Here’s how each product works:
Spot Bitcoin ETFs
Physical Bitcoins serve as the foundation for the value of a spot Bitcoin ETF. Generally speaking, you can anticipate an increase in the value of your investment if the value of the digital coins that support the ETF increases. In other words, the value of the investment should increase if the price of bitcoin increases.
The most direct option to invest in Bitcoin without purchasing it on a cryptocurrency exchange and holding the coins is through a physically-backed Bitcoin ETF. In this case, they are held by the fund.
However, there are some drawbacks. For example, unlike cryptocurrency markets, which trade continuously, investors can only trade an ETF during regular market hours on authorized securities exchanges.
Bitcoin Futures ETFs
A Bitcoin futures ETF invests in bitcoin futures contracts rather than the actual currency; it does not own any bitcoin as the underlying asset.
A futures contract is an agreement that sets a fixed price and a future date for the delivery of an asset or its cash equivalent. This can help investors profit when prices go up.
A Bitcoin ETF that is based on futures is not directly exposed to the risks of storing cryptocurrency because it does not own any bitcoin.
Investing in Bitcoin futures can cause Bitcoin futures to trade at a premium or discount compared to the spot price. This is due to the process of regularly “rolling” futures contracts at specific intervals to preserve the exposure of an investment, which can cause an investor to gain or lose money.
Top Bitcoin ETFs
ProShares Bitcoin Strategy ETF
Being a part of the first US Bitcoin-linked ETF involves investing in the ProShares Bitcoin Strategy ETF (BITO). This product is also known as a Bitcoin futures ETF.
A few weeks after its October 2021 launch, the fund soared to the top of the list of the market’s most popular ETFs, generating an asset management value of more than $1 billion. The fund doesn’t make direct Bitcoin investments but provides investors with managed exposure to Bitcoin futures contracts.
It invests in bitcoin futures contracts with the shortest maturities and cash settlements. BITO includes cash and Treasury banknotes as well.
This actively managed fund, which tracks the price of bitcoin, is distributed once a month. By investing in this product, investors agree to pay a 0.95% expense ratio, which is the fund’s annual management cost.
The futures contracts for BITO are governed by the Commodity Futures Trading Commission and are traded on the Chicago Mercantile Exchange (CME). The fund also makes repurchase agreement investments and occasionally uses leverage.
Considering Bitcoin’s all-time high of $69,000 in November 2021 and subsequent decline, the fund’s total assets have decreased. However, it retains a significant market share, and the acceptance of BITO was a huge step forward for cryptocurrencies and ETFs.
Simplify US Equity Plus GBTC ETF
The Grayscale Bitcoin Trust and U.S. stocks are both investments in the Simplify U.S. Equity Plus GBTC ETF, or SPBC. The Grayscale Bitcoin Trust only has a 10% stake in the total capital. The fund invests in stocks and trusts in exchange for shares that investors can trade on open stock markets in the United States.
The iShares Index Fund, GBTC, and S&P500 Emini FUT are the top investment portfolios. However, it has only had a U.S. domicile since the introduction of the Bitcoin ETF.
By the end of the year, investors do not receive a K-1 tax reporting form. The fund is also actively managed, with the exposure to Bitcoin and the premium/discount dynamics of GBTC being actively rebalanced. When fees and costs for acquired funds are added to the management charge of 0.5%, the expense ratio rises to 0.74.
Grayscale Bitcoin Trust
The Grayscale Bitcoin Trust (GBTC) is characterized as a closed-end grantor trust rather than an ETF. The main distinction of a bitcoin trust is that when it goes public, it issues a fixed number of shares. Investors can purchase these shares over the counter.
Another way a bitcoin trust differs from an ETF is in its investments. The majority of a typical Bitcoin ETF’s holdings are in bitcoin futures. Meanwhile, GBTC only invests in Bitcoin. It is a passive investment that grows in value as the price of bitcoin rises.
The Grayscale Bitcoin Trust is the best option for investors looking to gain exposure to Bitcoin as a security. The advantage of using Grayscale is that investors won’t need to bother about purchasing, storing, or protecting Bitcoins. Grayscale takes care of all of that.
A minimum investment of $50,000 is required to invest in GBTC. The trust charges one of the highest annual management fees in the industry, at 2%.
Valkyrie Bitcoin Strategy ETF
This is an actively managed fund that primarily invests in bitcoin futures. It is available on Nasdaq and attempts to track the value of the CME.
BTF uses bitcoin futures contracts rather than direct investments in the cryptocurrency to ensure that the notional value of the bitcoin underlying the futures contracts is as close to 100% of the fund’s net assets as possible. One of the primary advantages of investing in this fund is that U.S. investors do not need to file a K-1 form with the IRS.
The Commodity Futures Trading Commission oversees trading because it trades futures through a subsidiary in the Cayman Islands.
Investors investing in the Valkyrie Bitcoin Strategy ETF must pay an annual management fee of 0.95%. The fund’s net assets were just over $20 million as of the end of May 2022. However, this is far less than the price of some Bitcoin ETFs.
Valkyrie has labelled the fund as non-diversified, making it unsuitable for investors seeking direct exposure to the price of bitcoin. Furthermore, the company offers trusts for various cryptocurrencies, including Polkadot and Algorand.
Pros of Bitcoin ETFs
Convenience
Investing in a Bitcoin ETF gives the price of Bitcoin leverage without having to get familiar with how Bitcoin functions, register for a cryptocurrency exchange, or assume the risks associated with directly owning Bitcoin.
For instance, Bitcoins are stored in wallets; if a shareholder forgets the password to the wallet, their Bitcoin is irretrievably lost. Investing in Bitcoin is made easier by a Bitcoin ETF.
Tax Efficiency
Most tax havens and pension funds throughout the world do not permit the purchase of Bitcoin due to its decentralized nature and lack of regulation. On the other hand, a Bitcoin ETF that traded on conventional exchanges would probably be subject to SEC regulation and qualify for tax benefits.
Diversification
More than one asset may be held by an ETF. For instance, a Bitcoin ETF might include Bitcoin, Apple, Facebook, and other companies, giving investors the chance to diversify their holdings and reduce risk. A Bitcoin ETF would allow investors to diversify their current equity portfolios by trading on a regulated market exchange.
Cons of Bitcoin ETFs
Lack of Bitcoin Ownership
Bitcoin acts as a safeguard against centralized financial institutions, fiat money, and stocks. Because it is not regulated by central banks, it provides a solution to reduce financial system risks.
Bitcoin protects investors and consumers by ensuring anonymity through the Bitcoin blockchain. These benefits would be lost if there was a government-regulated Bitcoin ETF.
Inaccuracy
ETFs can hold a variety of assets to diversify the portfolio, even though they track the price of the underlying asset. This, however, suggests that the exchange-traded fund’s value may not truly reflect a 50% increase in Bitcoin’s price due to its other assets. Therefore, while an ETF gives the price of Bitcoin leverage, it may or may not be a reliable price tracker.
Management Fees
ETFs typically charge management fees in exchange for the convenience they offer. So, holding a lot of shares in a Bitcoin ETF could lead to expensive management costs in the long run.
Restrictions on Cryptocurrency Trading
Litecoin, Ethereum, XRP, and other cryptocurrencies can be exchanged for bitcoin. A Bitcoin ETF, which is merely an investment fund that tracks the price of Bitcoin, would not be permitted to trade other cryptocurrencies.
In Conclusion,
- Traders who had been eagerly anticipating a Bitcoin ETF finally got their wish last fall when the first Bitcoin-linked ETF started trading on the NYSE.
- However, given the SEC’s regulatory concerns, cryptocurrency enthusiasts will probably have to wait a little longer before these ETFs flood the market.
- There are ways to participate in the cryptocurrency market via stocks and ETFs that are only loosely related to cryptocurrencies or blockchain technology. Investors can also invest directly via a cryptocurrency exchange.
Disclaimer: This article is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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