Bitcoin is a recent addition to the exchange-traded fund market (ETFs). Investors may access the alluring potential of bitcoin via bitcoin exchange-traded funds (ETFs) without having to keep it securely.
Currently, Bitcoin ETFs can only hold equities of firms or other ETFs that have exposure to cryptocurrencies, along with Bitcoin futures contracts. The Security and Exchange Commission (SEC) is still determining
The six Bitcoin ETFs that the SEC has authorised for trading have been examined. Currently, 25 more Bitcoin ETF registrations, some of which are for funds that actually hold Bitcoin, are awaiting SEC clearance. We will provide a more thorough technique that chooses the best from a broader pool of Bitcoin funds as the world of Bitcoin ETFs expands.
Why Are Bitcoin ETFs Not Bitcoin Owners?
None of the six ETFs on our list own real Bitcoin, as was already mentioned. Instead, they own Bitcoin futures contracts and, sometimes, stock in other cryptocurrency-related firms and ETFs.
Because the SEC is worried that BTC being traded on unregulated cryptocurrency exchanges, Bitcoin ETFs do not yet own any Bitcoin. According to SEC Chair Gary Gensler, relying on the established and strictly regulated futures market is a far safer strategy for Bitcoin exchange-traded funds given the new nature of cryptocurrencies.
A futures contract is a pact between two parties to sell a certain item at a later time. They commonly use leverage, or borrowed money, allowing traders to make predictions about market movements with little initial commitment.
As an example, consider the ProShares Bitcoin Strategy ETF (BITO). The fund purchases contracts for one-month Bitcoin futures on the CME. The fund progressively sells the contracts as they get close to expiry and replaces them with longer-dated futures.
If the price of BTC is increasing, BITO leverages its profits to increase the amount of money stored in Treasury bonds and cash. When BTC prices drop, money is taken out of the pool to cover the losses on futures contracts.
The majority of the Bitcoin ETFs listed here follow a similar approach. It should be noted that the ProShares Short Bitcoin ETF (BITI) adopts a somewhat different approach by looking to profit from price movements that are the opposite of those of BTC.
All of these methods are not ideal. The managers incur additional fees when they roll the futures contracts they are purchasing, and tracking the price of Bitcoin does not necessarily reflect the performance of the underlying market.
Why Would I Purchase a Bitcoin ETF as Opposed to a Bitcoin?
Some investors may feel more secure acquiring a professionally managed ETF than they do holding genuine BTC when it comes to gaining exposure to Bitcoin in their portfolios.
Given the recent widespread acceptance of Bitcoin as an investment, some individuals may be worried about their investment being hacked or losing the passwords or private keys required to access it while it is kept in a safe Bitcoin wallet.
Furthermore, not everyone has discovered that purchasing Bitcoin via a cryptocurrency exchange is right for them. For instance, although practically anybody may create a Coinbase account, not everyone feels comfortable doing so. For a variety of reasons, some people could be prohibited from purchasing and selling stocks via standard brokerage accounts.
A 401(k) plan or an individual retirement account (IRA) are popular places for individuals to put money down for retirement. Owning shares of a Bitcoin ETF isn’t a horrible alternative for retired investors who want to have a little bit of exposure to Bitcoin without establishing an account at a crypto exchange or a Bitcoin IRA.
Fees for Bitcoin ETF
The cost of owning a Bitcoin ETF may be higher than the cost of buying bitcoin directly from an exchange. This is why: The cost to buy Bitcoin on cryptocurrency exchanges is often one-time, but the cost to acquire a Bitcoin ETF is an annual expense ratio fee.
Consider the scenario when you wish to purchase Bitcoin on Binance.US, one of the top cryptocurrency exchanges with cheap fees. You would probably have to pay a charge of 0.1% of your buying price. This is far less than the annual cost you may incur if you invested in a Bitcoin ETF, which all charge at least 0.65% annually.
But there are other considerations in addition to this trading charge. Consider if you want to move your Bitcoin from your exchange to a different hot or cold crypto wallet as well. In such situation, you’ll probably be responsible for paying withdrawal costs, which are normally rather low but vary per exchange.
These cost $0.0005 each Bitcoin withdrawal transaction at Binance.US. This may or may not be significant, depending on how much Bitcoin you are sending, but it is still something to be aware of.
You should also think about your departure plan. Even HODLers, or Bitcoin investors who are hanging on for dear life and want to continue with the digital currency for the long run, will probably want or need to sell some of their holdings at some point. This entails paying another trading cost when you sell.
When buying and selling Bitcoin on Binance.US, you may usually anticipate to pay 0.2% of its entire worth in total, and a little bit more if you transfer it off the exchange at any time. However, because to the ease that ETFs provide, fund holders who retain a fund for a shorter period of time may not mind the relatively higher fees they pay.