Do you also want to invest in bitcoin? But you don't want to dip your toes into the technicalities of buying and selling the assets. After solving the similar issues of stock investors, the exchange-traded funds (ETF) stepped in to deliver similar facilities to bitcoin investors.
Investors have been demanding such ETFs in cryptocurrency. As crypto showed significant growth in past years, this attracts investors towards crypto. Apart from the demand, buying, selling, and managing crypto is also not an effortless task. All these factors make the bitcoin crypto happen.
However, not everything about the bitcoin ETF is similar to the stock ETF. It holds a difference in charges and mechanisms due to blockchain technology. Bitcoin ETFs are more accessible than stock ETFs. Let's have a close look to know the bitcoin ETF better.
What is a Bitcoin ETF?
A Bitcoin ETF refers to a Bitcoin’s exchange-traded fund that lets users record Bitcoin's value, thus helping them trade Bitcoin on traditional stock markets. It enables traders to expose their portfolios to the cryptocurrency market without actually getting into any cryptocurrency exchangeIt . Therefore, it makes investing easy and also increases the popularity of Bitcoin.
The emergence of Bitcoin ETFs has facilitated the trading of Bitcoin due to several reasons.About 23% of Bitcoin gets lost or becomes inaccessible from wallets every year. It isn't easy to store your Bitcoin safely. The cases of investors losing their passwords thus, getting blocked from accessing their Bitcoins, are rising. However, with ETF, users trade with Bitcoin right from their conventional brokerage accounts.
As traders don't deal with Bitcoin directly, the security breach is low. The earlier ideas and proposals of Bitcoin ETFs hadn't been approved by the SEC on account of problems related to valuation and liquidity. However, the first Bitcoin ETF, i.e., the ProShares Bitcoin Strategy ETF, existed in October 2021 at the New York Stock Exchange.
Is Bitcoin ETF Regulated?
Canada made the first move in approving the functioning of the world's first Bitcoin ETF, i.e., Purpose Bitcoin ETF. Following this, other companies like Ark Investment Crypto ETF, Fidelity Bitcoin ETF, and others also gained approvals, thus leading to full-fledged and successful functioning.
“We really think the SEC should do the right thing, protect investors, and level the playing field by approving a spot #Bitcoin ETF.” - @Sonnenshein talking to @MelissaLeeCNBC. pic.twitter.com/TKlTDJCiDe
— Jennifer Rosenthal (@jenn_rosenthal) March 28, 2022
However, the recognition and regulation of Bitcoin ETFs in the USA have taken extended time. Earlier, SEC stated that Bitcoin ETFs which have actual Bitcoin could lead to fraud cases and abuse, thus, rejecting them. However, SEC-approved Bitcoin ETF for the first time in 2021. The first Bitcoin ETF, i.e., ProShares Bitcoin Strategy ETF, had the highest trading volume on its first day itself. Since then, many companies have stepped into the arena.
However, SEC takes about 45 days to approve a Bitcoin ETF. Moreover, SEC only supports ETFs dealing with Bitcoin futures, as futures trading takes place in regulated exchanges only.
How Do Bitcoin ETFs Work?
Bitcoin ETF works similarly to the stock ETFs. The investors are only the fund providers, whereas the holder of crypto coins and fund regulators has a different committee. In a simpler way, it is a fund that has direct access to bitcoins. They can operate bitcoin after reading the trends and past records. The investor is indirectly involved in the buying and selling of the crypto.
The ETF provides a safer environment for investors to get involved in bitcoin. The EFT completely analyzes the prices and volatility of bitcoin on behalf of the investors.
The working of bitcoin ETF has a significant difference. As bitcoin is a decentralized currency, there are no dividend charges to the shareholders like the ETF that tracks the S&P 500. But the bitcoin ETF has other charges. The ETF facilities providers charge a fee. The ETF has a fee for the custody and management to execute the hold of bitcoins.
In this section, bitcoin trading is not attached to the crypto exchange. Instead of that, the ETF trades the crypto on market exchange for stocks. But the price of an ETF share will be directly proportional to the actual value of bitcoin.
However, a few bitcoin ETFs are available, and many countries approved the ETFs. The increase in bitcoin or crypto ETFs will spike the competition, and new facilities will be incorporated into the system.
Top 10 Bitcoin ETFs To Invest In
ProShares Bitcoin Strategy ETF
ProShares Bitcoin Strategy ETF, with its ticker Bito, was launched in October 2021. According to BI data, the company raised $1.2 billion within its debut of two trading days, thus becoming the fastest ETF. The annual expense ratio of Bito ETF is 0.95%. Although Bito doesn't have any Bitcoin holdings as its own, it buys futures contracts, thereby mimicking the Bitcoin price changes with time.
Bito trades with CBOE Global's exchange to track the original Bitcoin price. For continuous functioning, Bito must roll over contracts, which increases the expenses on the part of investors. Thus, investors need to know the functioning of future contracts in detail.
Grayscale Bitcoin Trust
GBTC, also known as Grayscale Bitcoin Trust, was started in 2013. It's more like trust and less similar to a fund, and ranked top in the list of the best Bitcoin fund options. Unlike ProShares Bitcoin Strategy ETF, GBTC has actual Bitcoins, where each share is equal to 0.0009 Bitcoin. GBTC has about 3.5% of the total Bitcoin in the world.
The minimum investment of the trust is $50,000. With assets worth $24.2 billion, GBTC has an expense ratio of 2%, thus placing itself among the most liquid and most significant crypto funds. However, it might not be possible for some investors as it's not registered with the SEC and has high premiums and annual fees.
Global X Blockchain & Bitcoin Strategy ETF
Global X comprises two ETFs, namely, BITS and BKCH. The trading of both these ETFs takes place in Nasdaq. BITS, which started one day after XBTF, has assets worth $8.6 million. Its uniqueness, like an ETF, lies in the fact that it deals with both Blockchain equities and Bitcoin futures.
Due to its trading on Blockchain equities, its rollover costs are 2.5%, unlike BITO, which has a rollover cost of 15%. But, BITS is not as much related to Bitcoin as BITO. While the correlation of BITO and spot Bitcoin is 0.99, the correlation of BITS and spot Bitcoin is 0.82. Due to its unique funding structure, BITS will diversify its dealings with actual Bitcoin, thus leading to long-term benefits.
Bitwise 10 Crypto Index Fund
BITW, also known as Bitwise 10 Crypto Index Fund, launched in 2017, has assets worth US$1.7 billion. Unlike other Bitcoin ETFs, Bitwise deals with the top 10 largest cryptocurrencies, which make up 70% of the crypto market. Bitwise analyses the risks involved in funds holdings and measures their weight according to market cap, thus maintaining the balance every month.
The expense ratio of Bitwise is 2.5%. The significant advantage of Bitwise among other Bitcoin ETFs is that it lets investors deal with top cryptocurrencies rather than just Bitcoin, thus, leading to diversification of their portfolio.
Amplify Transformational Data Sharing ETF
Amplify Transformational Data Sharing ETF (ticker: BLOK) was launched in 2018 when bitcoin was the interest of the hour. With assets worth $1.16 billion.
BLOK makes investments in Blockchain technology and transformational data sharing companies. Some such assets of BLOK include IBM, Microsoft, etc. It also has investments in MicroStrategy, a digital analytic company, and Marathon Digital, a bitcoin mining company.
VanEck Bitcoin Strategy ETF
XBTF, also known as VanEck Bitcoin Strategy ETF, was started on November 15, 2021, which deals with the Bitcoin futures of CME (Chicago Mercantile Exchange). It manages assets worth $22.1 million and has the lowest exchange ratio of 0.65% among other Bitcoin future funds.
As XBTF is classified under C-Corporation, its structure is a RIC (Regulated Investment Company) and a fixed tax rate of 22.15%. With the expansion of these tax obligations, investors have long-term growth potential. However, in situations of a rise in Bitcoin's price, XBTF won't perform well.
Valkyrie Bitcoin Strategy ETF
BTF, also known as Valkyrie Bitcoin Strategy ETF, was launched three days after ProShares Bitcoin Strategy ETF by Valkyrie, a well-known crypto asset manager. The company didn't kick-start with a bullish start and accumulated around $60 million in its initial days. It has assets worth $71.9 million.
It's much similar to Bito in its trade with Bitcoin futures, which are under the regulations of the Chicago Mercantile Exchange. However, it comes under the listing of Nasdaq. It also deals with Bitcoin futures and has an annual expense of 0.95%. BTF also acts as trusts for various other cryptos like Algorand etc.
Siren Nasdaq NexGen Economy ETF
BLCN, also known as Siren Nasdaq NexGen Economy ETF, was started on January 17, 2018, and serves as an index ETF, thus, keeping records of the performance of the Nasdaq Blockchain Economy Index. It comprises investments made by companies aiming to develop and implement blockchain in their business sectors.
Popular top holders include PayPal, IBM, Accenture, and GMO Internet. It goes for companies whose market cap is beyond $200 million. Since its launch, BLCN's value has increased by 16.4%. With about 64 asset holdings and assets worth 1 million, more than 45% of its assets lie beyond the USA.
Simplify US Equity PLUS GBTC ETF
SPBC, also known as Simplify US Equity PLUS GBTC ETF, with about assets worth $114.4 million, doesn't make investments directly in Bitcoin or any cryptocurrency. As it gains market exposure through iShares Core S&P 500 ETF holdings and E-mini S&P 500 Futures, its direction is much more than any other ETF.
It makes 10-15% of its investments in Grayscale Bitcoin Trust, which exposes it to equity security investment of US completely. Breaking down the technicalities of cryptocurrency investments, it's ranked first among the ETFs, wherein investors can add Bitcoin to their portfolio in easily scalable methods.
Bitwise Crypto Industry Innovators ETF
Bitwise Crypto Industry Innovators ETF (BITQ) is another brainchild of Bitwise, which comprises 30 stocks involved in mining and trading Bitcoin and other favorite cryptocurrency innovations. It tracks the working, performance, and results of the Bitwise Crypto Innovators 30 Index. BITQ divides companies into two categories: Tier 1 and Tier 2 companies.
Tier 1 includes those companies which generate more than 75% of their revenue from the cryptocurrency ecosystem. They constitute 85% of the total index. Tier 2 consists of those companies that hold cryptocurrency assets worth $100 million. This ETF lets investors get exposure to the crypto market without any actual cryptocurrency assets, cryptocurrency innovation companies, and global cryptocurrency players.
Pros of Bitcoin ETFs
The advantages of investing in Bitcoins from ETFs are:
- Traders don't need to undergo additional steps to trade Bitcoin on unregulated cryptocurrency markets and exchanges. They can quickly deal with a regular brokerage account.
- As Bitcoin ETFs involve regulated companies, the chances and risks of scandals, frauds, hacks, collapses, and failures common to unregulated cryptocurrency exchanges are more minor.
- Trading on Bitcoin ETFs is tax efficient, as they are traditional exchanges that come under SEC regulations.
- Bitcoin ETFs have the privilege of short selling, wherein traders can capitalize on their assets when they expect the prices to fall.
Cons of Bitcoin ETFs
The cons of investing in Bitcoin from ETFs are:
- As Bitcoin belongs to the group of digital currencies, investing in it will not let traders earn dividends.
- The management fees of Bitcoin ETFs are pretty higher than traditional ETFs.
- You can use Bitcoins for transactions and purchases. However, you can't use Bitcoin ETFs for the same purpose.
- The volatility of Bitcoin increases the chances of risks.
- Investing in Bitcoin ETFs means investing in bitcoin futures without having any chance of diversification into other assets.
- Bitcoin ETFs are open only during market hours, unlike cryptocurrency exchanges available 24 × 7.
The opportunity of the bitcoin ETF opens new doors for investors. If we can directly invest in bitcoin, many can question why we should do it through a middle man. The value of the ETF is to do most of the work, for which investors need time and knowledge. It will also free the investors from storage complexity and security protocols mandated for cryptocurrency traders.
In a bitcoin ETF, the investors can diversify their investment, and the most interesting fact is that they execute it without acquiring the assets by themselves.