Since Satoshi Nakamoto first introduced bitcoin in 2009, the coin has attracted many individuals, despite some risks and obstacles in the volatile crypto world. Specifically, bitcoin investors need to have some expertise in trading bitcoin on crypto exchanges with varying fee structures and complicated procedures. However, with the advent of bitcoin-related ETFs, it becomes easier for people to invest in the leading digital currency.
Bitcoin ETFs enable investors to access the potential of the most popular cryptocurrency without the need to store it safely. Bitcoin ETFs can hold Bitcoin futures contracts, equities of firms and other crypto-related ETFs. CoinCulture will provide all investors with information about Bitcoin ETFs in this post.
What Is a Bitcoin ETF?
A bitcoin ETF is an exchange-traded fund that tracks the price of bitcoin-related assets and is traded on U.S. stock exchanges. Rather than holding bitcoins, the funds deal in bitcoin futures, which trade independently on regulated exchanges like CME.
There are two primary kinds of Bitcoin ETFs: futures-based Bitcoin ETFs and “spot” Bitcoin ETFs. With these bitcoin EFTs, investors obtain exposure to digital assets without signing up for an exchange or setting up a crypto wallet. The Australian Securities and Investments Commission (ASIC) oversees any Bitcoin ETFs sold in Australia.
ASIC established recommendations for the development of ETFs that attempt to follow the price of digital assets such as Bitcoin and Ethereum shortly after the introduction of BITO. These rules addressed market security, price transparency, and pricing to safeguard Australian investors.
Australia released the first Bitcoin spot ETFs on May 12, 2022, marking a key milestone for Australian crypto investors. Investors have had access to an Australian ETF that provides exposure to firms supporting the crypto industry since November 2021. BetaShares’ crypto equities ETF, ASX: CRYP, had net inflows of A$39.7 million on its first day of trading.
How Bitcoin ETFs Work
Investors may acquire direct or indirect access to Bitcoin through two distinct methods: spot Bitcoin ETFs and Bitcoin futures ETFs. Below is how each kind of bitcoin FTF works.
Spot Bitcoin ETFs
A spot Bitcoin ETF is supported by actual Bitcoins, which underpin its value. If the value of the digital currency underlying the ETF increases, the value of your investment should also grow. As the price of Bitcoin rises, so does the investment.
A Bitcoin ETF backed by actual coins is the most direct method to invest in Bitcoin without purchasing the cryptocurrency on an exchange and holding it. In this situation, they are held by the fund.
However, there are some disadvantages. For example, investors may only trade ETFs during typical market hours on authorised stock exchanges, but crypto markets are open 24 hours a day, seven days a week.
Bitcoin Futures ETFs
A Bitcoin futures exchange-traded fund (ETF) does not hold any bitcoin as its underlying assets; instead, it owns futures contracts over Bitcoin. A futures contract enables investors to benefit from increasing prices by establishing a fixed price and future delivery date for the asset.
As futures-based Bitcoin ETFs do not hold Bitcoin, they are not directly subject to the risks associated with cryptocurrency storage.
Investing in Bitcoin futures leads to the Bitcoin futures trading at a premium or discount relative to the spot price. This is primarily due to the practice of “rolling” futures contracts at regular intervals to retain investment exposure, resulting in profits or losses for the investor.
The Benefits of Bitcoin ETFs
There are various benefits to investing in Bitcoin via an ETF. The ability to acquire shares via your existing brokerage is significant. You diversify your current portfolio and have bitcoin exposure without opening a new account or managing a particular investment. Everything is handled in one place.
Additionally, investing in a regulated exchange is simple to comprehend. To begin purchasing Bitcoin directly, you must study a great deal about cryptocurrencies and blockchain technology. It would be best to set up a bitcoin wallet that needs identity authentication and protection of the private keys. Since an ETF is a traditional investment tool, the tax consequences and advice on managing profits and losses are far more transparent.
In addition, you can incorporate an ETF in a tax-advantaged account, like an IRA, and avoid paying capital gains taxes if you benefit from the price of actual bitcoins. You do not have to manually monitor your profits and losses to determine your tax obligations, as you would if you were trading actual Bitcoins.
ETFs investment provides a greater level of security. When you acquire bitcoin, you get an asset that you must safeguard under the technology’s rules and constraints. If you keep your bitcoin on the exchange, it may risk being hacked. If you shift your assets to cold storage, you face the danger of sending bitcoin to the incorrect address (the bitcoin would be lost forever) and incur transaction costs.
The Drawbacks of Bitcoin ETFs
Perhaps the most significant disadvantage of a Bitcoin ETF is that it invests in the future of a single asset. Most ETFs feature a basket of assets that comprise the fund’s value and are thus less susceptible to volatility. However, the cryptocurrency market is quite volatile. When you invest in a single-asset ETF, the value of your fund might fluctuate significantly if it closely matches Bitcoin’s spot value.
Conversely, you are unable to capitalise on this volatility as it occurs. ETFs are only exchanged during market hours, but cryptocurrency exchanges are open 24 hours a day, seven days a week. If a price change occurs during off-market hours, you may lose the chance to benefit.
Investing in ETFs incurs expenses, including expense ratios and management fees for brokerages. Though cost ratios for Bitcoin ETFs and ETFs, in general, are often modest, they will accumulate over time.
In addition, because you are investing in shares of the ETF as opposed to real bitcoins, you cannot use Bitcoin as cash. You are still required to trade in dollars and cents since you must sell your ETF shares to fund your purchases.
Bitcoin ETF investment brings regulation into what is known to be a decentralised, peer-to-peer financial system. Having a Bitcoin ETF rather than the actual Bitcoin is an option not commonly recognised in the crypto world owing to the notion, “Not your keys, not your crypto”. If an investor does not own the private keys to their Bitcoin or cryptocurrency assets, they are more subject to being affected by hackers or governmental scrutiny.
Bitcoin ETFs in Australia
There are over 70 Bitcoin ETFs exchanges worldwide. Several cryptocurrency or Bitcoin exchange-traded funds (ETFs) have been launched or are set to launch in Australia and North America.
- BetaShares Crypto Innovators ETF (CRYP). CRYP invests in pure-play crypto enterprises, listed companies with at least 75% crypto assets on their balance sheets, and diversified corporations with crypto-focused business lines.
- Cosmos Global Digital Miners Access ETF (DIGA). Like conventional mining, Diga lets you adopt a pick and shovel approach. You will be exposed to multinational firms whose core business emphasis is the mining and infrastructure of digital assets.
- Cosmos-Purpose Bitcoin Access ETF (CBTC). CBTC is expected to equal EBTC and become the first Bitcoin-only ETF. Again, this is not yet operational, but you will soon be able to invest in Bitcoin via an ETF, with the fund holding the crypto on your behalf.
- Invesco Bitcoin Strategy ETF. Unlike the ProShares ETF, this one will invest in futures and other Bitcoin-related assets, including Canadian ETFs that directly hold Bitcoin.
- ETFS 21Shares Bitcoin ETF (EBTC). EBTC is the first pure-play Bitcoin ETF in Australia. The fund will purchase and hold Bitcoin on behalf of investors.
- ProShares Bitcoin Strategy ETF (NYSE: BITO). BITO was the first Bitcoin ETF permitted for trading in the United States. The ETF contains futures contracts for Bitcoin rather than the cryptocurrency itself.
- Purpose Bitcoin ETF (TSX: BTCC). The fund, launched by Purpose Investments on Canada’s Toronto Stock Exchange (TSX), is intended to provide investors with exposure to the digital currency by investing in Bitcoin that has been physically settled.
- Valkyrie Bitcoin Strategy ETF (NASDAQ: BTF). The Valkyrie Bitcoin Strategy ETF is the second fund based on Bitcoin futures to be licenced for trading on the U.S. market. The ETF holds Bitcoin futures contracts rather than the cryptocurrency itself.
- VanEck Bitcoin Strategy ETF. VanEck’s ETF gives you exposure to Bitcoin through cash-settled BTC future contracts.
Alternatives to Bitcoin ETFs
Purchasing Bitcoin or other cryptocurrencies directly in Australia provides the most exposure to this market. You can establish accounts with an exchange, such as CoinSpot, Coinbase, Kraken, or Gemini.
Alternatively, several fintech companies, including PayPal, Robinhood, and SoFi, are introducing the option to purchase and sell bitcoin inside their current platforms.
Another alternative is to invest in public corporations that actively purchase crypto, invest in blockchain, or mine crypto. Coinbase Global (COIN), MicroStrategy (MSTR), Marathon Digital (MARA), and Hut 8 Mining are a few examples. You can consider investing in industries that engage in the cryptocurrency market on a lesser scale, such as JP Morgan Chase, PayPal, Microsoft, and Samsung for very indirect exposure.
Bitcoin ETFs can establish a balance between conventional investing vehicles and the market’s evolution. Trading shares is straightforward and familiar, similar to purchasing and selling stocks via your favourite brokerage. However, the future of this kind of investment is uncertain. Before investing, make sure you fully understand the associated risks.
FAQs About Bitcoin ETFs
Who are Bitcoin ETFs suitable for?
Bitcoin ETFs are suitable for a wide range of investors, from current stock traders to those who are optimistic about the asset class’s future price.
Investors who purchase a Bitcoin ETF in any existing market product will possess future contracts or firms’ exposure to Bitcoin’s assets, but not the “physical” asset itself. Thus, those who are optimistic about the underlying asset’s price but do not want to possess a bitcoin wallet can choose a Bitcoin ETF.
A structure based on an ETF may also appeal to investors who own other stocks but want exposure to Bitcoin assets. Instead of opening two separate accounts and tracking two distinct asset classes, investors may hold an ETF.
Has the SEC approved Bitcoin ETFs?
Since 2017, the SEC has consistently rejected Bitcoin ETF proposals. The primary claim of the SEC is that the Bitcoin price is susceptible to market manipulation. Even if a Bitcoin ETF solely took prices from the most trustworthy cryptocurrency exchanges, Bitcoin’s price may still be influenced by less reputable exchanges with looser restrictions.
The SEC also often touches on the lack of transparency in cryptocurrency markets and the potential lack of liquidity. All of this occurred under the reign of Jay Clayton. In 2021, Gary Gensler was expected to be the next SEC chair, prompting a new wave of optimism about the SEC’s approval of a Bitcoin ETF. The Security and Exchanges Commission (SEC) has approved the first Bitcoin exchange-traded fund (ETF) in the US, Proshares ETF BITO.
Why do investors want a bitcoin ETF?
Investing directly in bitcoin may be difficult, but investing in a bitcoin ETF would simplify entry into the cryptocurrency market. There are several reasons why a bitcoin ETF facilitates cryptocurrency investments. Bitcoin itself is difficult to keep and safeguard. There have been several occasions in which investors could not access their bitcoin because they had forgotten their passwords.
ETFs may be traded directly from investors’ current brokerage accounts, which is a further advantage. Even while prominent crypto exchanges have facilitated the purchase and sale of digital assets, ETFs are accessible via more conventional investment channels.
Where to purchase Bitcoin ETFs?
Bitcoin ETFs will be accessible through most online brokers that provide conventional products such as equities and bonds. Some brokers may also allow you to invest directly in Bitcoin, whilst others only permit trading in Bitcoin futures.
ETFs are traded on established markets like the New York Stock Exchange and Nasdaq. Suppose you are interested in the largest selection of cryptocurrencies and want to invest directly in digital coins. In that case, you will need an account with a cryptocurrency exchange like CoinSpot, Binance or Kraken.
How do ETFs affect the price of Bitcoin?
Bitcoin ETFs should favourably impact the price of Bitcoin. Bitcoin will get greater attention from institutional investors, such as financial advisors, who would not usually seek exposure to cryptocurrencies. The SEC’s approval of Bitcoin ETFs might help increase investor trust in this alternative asset.
However, some ETFs bet on Bitcoin’s price by purchasing futures contracts. Thus, the ETF’s price will diverge from Bitcoin’s price. In essence, they are Bitcoin futures ETFs and not Bitcoin ETFs.
What are the pros and cons of Bitcoin ETFs?
Below are some of the most significant advantages and disadvantages of the two primary kinds of bitcoin ETFs.
Spot Bitcoin ETFs
Pros:
- Investors obtain direct exposure to Bitcoin without signing up to a crypto exchange or creating a wallet.
- Portfolio diversification.
- Investor security: Investors of spot Bitcoin ETFs reap benefits from investing in a regulated product by a licensed issuer.
Cons:
- Restrictions on trading hours with traditional exchanges, different from crypto exchanges that work 24/7.
- ETF management fees.
Bitcoin futures ETFs
Pros
- Lower management fees because of ease of setting-up, no fees on custody
Cons
- Potential for decay and divergence.
- The ETF does not hold physically-backed Bitcoin.
- Restrictions on trading hours with traditional exchanges, different from crypto exchanges that work 24/7.
The Final Thoughts
The first Bitcoin-linked exchange-traded fund started trading on the NYSE last October, granting traders’ their long-awaited dream. However, due to SEC regulatory concerns, crypto enthusiasts will likely have to wait a little longer for these ETFs to flood the market. However, there are indirect methods to participate in the crypto market through stocks and ETFs tangentially related to crypto or blockchain technology. Additionally, you may invest directly through a cryptocurrency exchange.
