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The crypto market is soaring. Bitcoin has approached record highs, climbing well above $60,000. It’s no wonder that Bitcoin and other cryptocurrencies might be on your investing radar.
If you’re nervous about buying Bitcoin directly, a Bitcoin ETF might be a good alternative for you.
While there are about 70 bitcoin ETFs in circulation around the world, many of these have been inaccessible to regular investors. This has changed with the planned launch of the first US bitcoin ETFs, the ProShares Bitcoin Strategy ETF (BITO), the Valkyrie Bitcoin Strategy ETF and the VanEck Bitcoin Strategy ETF in October 2021.
Buy Bitcoin ETFs in 4 steps
Investors looking to buy any of the Bitcoin ETFs can do so in four simple steps:
- Compare brokers with access to US stocks
- Open your account by providing ID
- Fund your account by transferring money from your bank account
- Search and select the ETF you want to invest in and start trading
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There are around 70 Bitcoin ETFs circulating global exchanges. Most of these are in Europe however a number of cryptocurrency or Bitcoin ETFs have launched, or are scheduled to launch, in North America and Australia in 2021.
- ProShares Bitcoin Strategy ETF (NYSE:BITO). BITO was the first Bitcoin ETF to get approved for the US market. The ETF holds bitcoin futures contracts rather than the actual coin itself.
- Purpose Bitcoin ETF (TSX:BTCC). Launched by Purpose Investments on Canada’s Toronto Stock Exchange (TSX), the fund is designed to give investors exposure to the digital currency by investing in physically settled Bitcoin.
- Valkyrie Bitcoin Strategy ETF. The Valkyrie Bitcoin Strategy ETF is the second Bitcoin futures based fund approved for the US market. The ETF owns bitcoin futures contracts rather than the actual coin itself.
- VanEck Bitcoin Strategy ETF. VanEck’s ETF provides exposure to Bitcoin through cash-settled BTC future contracts.
- Invesco Bitcoin Strategy ETF. Unlike the ProShares ETF, this will invest in futures as well as other Bitcoin-related assets, such as Canadian ETFs that directly own Bitcoin.
- Grayscale Bitcoin Trust. As the name suggests, this is a trust, not an ETF. However, there are pressures for the trust to become an ETF, according to this Barron’s article. The only problem with this one is that it directly owns Bitcoin, which the SEC has yet to approve. The company’s director of communications, Jennifer Rosenthal, tweeted this week that the Proshares ETF launch was an “historic and important moment for Bitcoin” and suggested the company was close to seeking SEC approval for this change.
- Cathie Wood’s ARK ETF. Another Bitcoin futures ETF, this time offered by Cathie Wood, is called ARK 21Shares Bitcoin Futures Strategy ETF (ARKA). This is similar to BITO and will speculate on Bitcoin’s price via futures contracts. It will not directly own Bitcoin.
Crypto ETFs vs. crypto: Pros and cons
- Simplicity. Learning how to buy and store cryptocurrency can be a confusing and daunting process. ETFs make it simple to gain exposure to digital currencies without going through the hassle of owning any coins.
- Create a diverse portfolio. The compartmentalised nature of the crypto industry means that acquiring and holding a large collection of currencies all at once is complicated and time-consuming. You may have to open several wallets and maintain accounts on multiple crypto exchanges. While U.S. choices track only Bitcoin at the moment, in theory cryptocurrency ETFs allow you to track multiple digital coins and tokens all at once, saving you a whole lot of time and effort.
- Avoid the risk of hacking. Cryptocurrency exchanges and wallets are susceptible to hacking attacks and theft. Buying units in a crypto ETF protects you against these risks as you don’t actually own any digital coins.
- Lower fees. ETFs generally have lower fees than traditional managed funds, making it possible to build a diversified portfolio at reduced expense.
- Regulation. Futures markets used by the current Bitcoin ETFs are federally regulated, while Bitcoin has more limited regulation. Some will consider this a benefit, others a drawback.
- Limited choice. There’s currently limited choice available for anyone wanting to invest in cryptocurrency-related ETFs in the U.S.. However, now that the SEC has approved its first crypto ETFs, this will likely soon change.
- Volatility. Cryptocurrencies are famous for their volatility and can experience substantial price fluctuations in a short space of time. If the market moves against you, the value of your crypto ETF units could take a sharp dive.
- Tracking vs. owning. With futures-based crypto ETFs, you’re also looking at a value that tracks the coin indirectly. It won’t match the asset, and you could gain or lose or less than the asset moves in price. It’s a great unknown at this point.
- Lack of risk diversification. Traditional ETFs often include an extensive range of securities to help achieve diversification. They sometimes include government bonds and debt to mitigate market risk. However, most versions of crypto ETFs only provide access to a limited range of digital currencies. When you also consider the correlation between the performance of Bitcoin and the value of altcoins, this only increases the level of risk.
- Crypto-specific risks still apply. Just because you don’t have to deal with any of the risks of owning digital currency, that doesn’t mean these risks cease to exist. Issues such as hacking will still need to be managed by the ETF provider.
- Fees apply. On top of an annual management fee, you’ll need to consider brokerage fees that apply when you buy or sell ETF units.
- International taxes. If you buy ETF units located in another country (such as XBT Provider’s funds), be aware that foreign tax may apply.
How do ETFs affect the price of bitcoin?
Bitcoin ETFs should positively affect Bitcoin price. The main reason for this is that Bitcoin will get more attention from mainstream investors, including financial advisors, who wouldn’t otherwise want to get exposure to crypto. Having Bitcoin ETFs approved by the Securities and Exchange Commission could also boost investor confidence in this alternative asset.
However, the first two Bitcoin ETFs won’t own or invest directly in Bitcoin, and likely no other upcoming crypto ETF would. Instead, the ETFs buy futures contracts to speculate on Bitcoin’s price, meaning the ETFs’ price and the price of Bitcoin will differ. In essence, these are not Bitcoin ETFs but Bitcoin futures ETFs.
Valkyrie Funds CEO Leah Wald told Bloomberg that this might benefit investors, since futures are regulated in the U.S. and Bitcoin is not. Valkyrie has also applied for approval of an ETF directly tied to spot Bitcoin, but Wald said such funds appear unlikely this year.
Who are bitcoin ETFs suited to?
Bitcoin’s ETFs are suited to a number of investors ranging from those who are already stock traders, right through to those who are bullish on the future price of the asset class.
Buying a Bitcoin ETF in any of the current market products, will mean investors do not own the underlying asset themselves directly. In some circumstances investors own the asset as part of a trust, while in others they are trading on the future contracts.
As such, for investors who want to hold the security, but do not want the hassle of owning a crypto wallet, a product such as the Bitcoin ETF could be beneficial to them.
Investors in other stocks, who are bullish on the sector might also be in favour of an ETF structure as it would allow investors to keep their stocks and Bitcoin assets in one spot.
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