A bitcoin exchange-traded fund (ETF) gets exposure to Bitcoin via traditional stock markets, without needing to directly buy or sell the digital asset on a cryptocurrency exchange.
So rather than going down a dicey unregulated route exposure is now available via a quasi regulated one.
Are Bitcoin ETFs a Good Idea? On the surface it seems so.
By launching ETFs in October 2021 some sort of certainty or guarantee has been offered to the crypto investing market and and there’s just a less ‘wild west’ feel to holding something with some regulatory protection in place – rather than none.
The newly launched ETFs in the US (October 2021) are based on futures contracts that have been kicking around for a couple of years now, so at least there’s a bit of regulated history.
The BITO ETF (more below) holds futures traded on the Chicago Mercantile Exchange (CME) and this is a fully CFTC regulated trading venue.
Peace of mind? Yeah, heaps of it!
What is BITO?
The BITO ETF began trading on 19 October 2021. The product has been tracking the CME’s futures contract.
It’s a derivative of a derivative.
It tracks Bitcoin futures and not the actual physical token price.
Early investment showed that only around 15% or so was from retail investors so the bulk has been from institutional investors, which is a good thing.
What is BTF?
BTF is the main rival (with many more to come) to BITO and began trading on the NASDAQ just over 3 days after BITO.
BTFs edge for US investors is that it invests in front month CME Bitcoin futures through a Cayman Islands subsidiary – so no need to file K-1 form with IRS.
What are the charges for BITO and BTF?
Management fees of 0.95% apply.
What’s the justification for such hefty charges?
Apparent ability in managing the rolling of futures rather than setting automatic parameters to do so prior to expiry is what punters are paying for.
Rolling over futures incurs costs and getting a comparative price in a sometime diverging futures contract can be costly. This is especially true if bad timing makes the divergence larger.
What is going to happen to the Greyscale Bitcoin Trust?
IF permission is granted to convert to a spot ETF then fees may decrease from current (whopping) 2%. As Greyscale (GBTC) own nearly 4% of all Bitcoin they are well positioned and may continue to yield better returns than BITO and/or BTF as there’s no need to rollover futures contracts.
Time will tell.
What about the WisdomTree Bitcoin ETP?
What about it? As an Exchange Traded Product rather than Exchange Traded Fund, this is physically connected to Bitcoin rather than based on derivative futures contracts.
Why have US regulators softened on mainstream investment into Bitcoin?
In August the new SEC chairman Gary Gensler, signaled the SEC may be more open to a futures-backed bitcoin ETF under the Investment Company Act of 1940. Significant investor protections are in place for mutual funds so this means the same for BITO and BTF.
What is the Valkyrie Bitcoin Strategy ETF (XBTF)
This is yet another ETF that’s followed closely on the heels of BITO and BTF. Again tracking derivatives of bitcoin (futures) this has the competitive advantage of lower fees (just 0.65%).
Can UK investors pile into the Bitcoin ETFs?
No. The FCA is maintaining its reserved stance stating a while back that “Significant price volatility, combined with the inherent difficulties of valuing crypto assets reliably, places retail consumers at a high risk of suffering losses from trading.”
As such UK investors are still herded to unregulated spaces.
“Do as your told” is the mantra that keeps investors protected (unless they still go down the unregulated route) and the whilst UK investors miss out on potential crypto investing opportunities this is offset by protections provided.
Can digital coins be registered as securities?
Good question! Have to come back on that one once the legal wrangling is over.
What happens next?
There will be further ETF launches and the UK will follow suit eventally follow suit.
Should I invest inti a Bitcoin ETF?
That’s up to you. You are the captain of your ship but if you need help get an advisor via the SEC website.