In the past few years, traditional finance and cryptocurrency markets have increasingly intersected. And it's not just because they are interdependent, but also due to the emergence of such investment products as bitcoin ETFs.
A Bitcoin ETF is an exchange-traded fund that trades on a stock exchange and uses Bitcoin as the backbone of its portfolio. It can be bought and sold like shares. By investing in this product, you shift all organizational tasks to the company managing the fund.
To date, most Bitcoin ETFs are based on BTC futures*. This means these funds do not store or own the asset but only own the right to it. However, if the first cryptocurrency goes up or down in value, the investment product follows its trajectory. Also, Bitcoin ETF managers can invest a small percentage of funds in tech stocks or other exchange-traded funds associated with digital currency.
* Futures is a derivative financial contract between a buyer and a seller. The contract obligates the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and price. It is often used to minimize the volatility risk.
The rise of bitcoin ETFs
The first bitcoin ETFs appeared in the US and Canada in 2021. These were ProShares Bitcoin Strategy ETF and Purpose Bitcoin ETF. The American product is built on BTC futures, while the Canadian fund buys bitcoins and stores them in a cold wallet.
In 2022, the US-based Grayscale Investments and Bitwise filed for a spot bitcoin ETF (direct ownership of digital currency). Still, the SEC rejected the applications due to concerns about market manipulation. In addition to these companies, many other investment organizations were refused.
The US Securities and Exchange Commission prohibits exchange-traded funds from using a real asset, as it is decentralized and difficult to regulate. While BTC futures are overseen by the Commodity Futures Trading Commission.
In 2022, Bitcoin ETFs holding cryptocurrency began to appear in Europe, Australia, and Hong Kong. Bloomberg Intelligence analysts believe that the conditions for creating spot bitcoin ETFs in the US will be formed in mid-2023.
Bitcoin ETF pros and cons
Bitcoin ETFs allow traditional investors to invest in BTC, without diving deep into the cryptocurrency market. In this case, they do not need to research a crypto exchange and a wallet. The fund simplifies the process of investing in BTC. The downside is the fees charged for managing the ETF.
Some exchange-traded funds based on BTC are also attractive due to their diversification, reducing possible losses. For example, an ETF may contain tech and crypto stocks, government bonds, and other securities. However, this has a downside. If the cryptocurrency price rises, the percentage increase may be lower due to the inclusion of other assets.
Best Bitcoin ETFs
ProShares Bitcoin Strategy ETF (BITO)
Launched in 2021, the fund has become one of the most traded ETFs ever. It raised $1 billion in funds in just a few days. The ProShares Bitcoin Strategy ETF tracks the Bitcoin price as accurately as possible using BTC futures. In addition to cryptocurrency contracts, it owns treasury securities and fiat funds.
Purpose Bitcoin ETF (BTCC)
A Canadian exchange-traded fund launched by Purpose Investments in 2021 to allow investors easy and efficient access to bitcoin. Traded on the Toronto Stock Exchange. At the end of last summer, a Bitcoin ETF had $639.1 million in BTC under management. The management fee is 1%. BTCC invests in Bitcoin only.
Jacobi Bitcoin ETF
The first European ETF that directly owns BTC. It was registered by Jacobi Asset Management, founded by a former Goldman Sachs investment banker in 2022. It is traded on Euronext Amerstdam. Focused on professional and retail investors from developed countries (Great Britain, the Netherlands, Switzerland, Germany, Sweden, Austria, and others), with management fees of 1.5%.
In general, Bitcoin ETFs benefit traditional investors and those who do not want to take the risks of storing cryptocurrency. Otherwise, it is much cheaper and more profitable to buy BTC on a cryptocurrency exchange on their own.
Previously GNcrypto wrote about cryptocurrency index funds. You can read the article here.
What are the advantages and disadvantages of Bitcoin ETFs?
Bitcoin ETFs offer several advantages and disadvantages. One of the main advantages is accessibility; Bitcoin ETFs allow investors to participate in the cryptocurrency market without having to directly buy and manage Bitcoin. They also provide a regulated environment, which reduces the risk of fraud and provides a higher level of security. Additionally, Bitcoin ETFs can diversify an investment portfolio, potentially reducing risk. However, there are also disadvantages. Bitcoin ETFs usually have higher fees compared to directly holding Bitcoin. They may not perfectly track the price of Bitcoin, leading to potential tracking errors. Lastly, because they are tied to a regulated environment, investors in Bitcoin ETFs may miss out on potential gains due to unresolved regulatory issues.
