Investing in Bitcoin ETFs
An in-depth look at what Bitcoin ETFs are, how they work, and reasons to consider investing in Bitcoin ETFs. Here's what you need to know.
Bitcoin (CRYPTO:BTC) has been one of the most exciting investments of the 2000s. One Bitcoin was worthless when it launched in 2009, but each coin is worth the equivalent of tens of thousands of dollars today. The blockchain technology that underpins the original digital currency has spawned thousands of altcoins and decentralized finance applications along the way, with the most successful being Ethereum (CRYPTO:ETH). It's no wonder so many investors want to stash their money in Bitcoin.But investing in Bitcoin isn't always that simple. That's where a Bitcoin ETF (exchange traded fund) might come into play. Here's what you need to know.
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Investing in Bitcoin and other cryptocurrencies requires some extra work over and above what's involved in investing in stocks, bonds, and the like. Most traditional brokerage firms don't support cryptocurrency trading, so an account needs to be opened with a crypto trading exchange. Additionally, there's the matter of storing crypto, which requires use of a crypto wallet. A workaround for these issues is buying a Bitcoin ETF or fund that trades on a stock exchange so your investment in Bitcoin can be held in the same account as your other stocks, bonds, and traditional investment securities.What are Bitcoin ETFs?Bitcoin ETFs are funds that trade on a stock exchange that attempt to track the performance of Bitcoin. When you buy an ETF, you aren't buying the underlying investment directly. Rather, you're buying shares of a fund that invests in, or attempts to mimic the performance of, a particular security or index -- Bitcoin in this case.To date, there are no ETFs that are able to directly own Bitcoin. That's because cryptocurrency and other digital currency trading is still unregulated by the Securities and Exchange Commission (SEC). A number of ETF and investment firms have submitted applications to the SEC to launch ETFs that directly purchase Bitcoin (including Cathie Wood's Ark Invest), but approving crypto funds doesn't seem to be high on the regulator's agenda right now. Bitcoin vs. Bitcoin ETFsWhy buy a Bitcoin ETF instead of Bitcoin directly? After all, even the best fund isn't going to perfectly track the crypto's price since there are fees built into ETFs to pay for management.Besides avoiding the added complexity of opening an account with a crypto exchange and safely storing Bitcoin, one big reason to opt for an ETF is that it's easier to get Bitcoin investment exposure in an IRA (individual retirement account). At this point, only a few specialty investment companies support crypto trading within an IRA account. But if you want to keep Bitcoin with the rest of your investment funds, buying a fund might be your ticket. While there aren't any ETFs yet that directly purchase Bitcoin, there are options available. Here are five to consider:
Data as of Jan. 12, 2022.
Grayscale Bitcoin Trust (OTC:GBTC)
This is an investment trust, not an ETF, but it's the first and largest fund tracking Bitcoin's performance.
ProShares Bitcoin Strategy ETF (NYSEMKT:BITO)
A recent ETF launch that attempts to track Bitcoin using Bitcoin futures contracts.
Bitwise 10 Crypto Index Fund (OTC:BITW)
This fund is 60% Bitcoin, with the balance invested in other cryptos.
Bitwise Crypto Industry Innovators ETF (NYSEMKT:BITQ)
This ETF invests in Bitcoin and crypto stocks.
Valkyrie Bitcoin Strategy ETF (NASDAQ:BTF)
This is a new ETF that invests in Bitcoin futures from a crypto investment firm.
The Grayscale Bitcoin Trust isn't an ETF, but rather an investment trust with units trading over-the-counter (traded via broker-dealer networks rather than on a centralized exchange). That means this closed-end fund isn't open to new investment, but units can be purchased if supported by your broker. However, the fund does directly own Bitcoin.As with other ETFs on this list, since the Grayscale Bitcoin Trust isn't a direct investment in Bitcoin itself, units of the fund can trade at a steep discount or premium to the actual Bitcoin price. When shares are in high demand, units will tend to trade at a premium to the underlying Bitcoin owned by the trust, and units will trade at a discount to Bitcoin when demand is low. Additionally, because Grayscale Bitcoin Trust charges a 2% annualized fee ($20 for every $1,000 invested each year), it will tend to underperform Bitcoin's price action over time. Nevertheless, this is currently the largest fund tied to Bitcoin's fate, and it's been around since 2013. If you want a product that seeks to follow Bitcoin's price changes without buying Bitcoin, the Grayscale Bitcoin Trust is a good place to start your search.2. ProShares Bitcoin Strategy ETFLaunched in late 2021, the ProShares Bitcoin Strategy ETF uses Bitcoin futures (a derivatives contract, traded on CBOE Global's (NYSEMKT:CBOE) exchange) to track the price of the original crypto. Although it doesn't own Bitcoin directly, ProShares' offering is the first ETF that attempts to follow Bitcoin's action. The ProShares Bitcoin Strategy ETF started trading in October 2021, so it has a short history. So far, it has underperformed Bitcoin due to monthly rollover of the futures contracts (when a contract getting ready to expire is moved to another, longer-dated one) and an annualized fee of 0.95%. It's an imperfect solution, but, over time, this ETF should roughly follow the daily moves of Bitcoin -- although it may not be the best option for investors who want to buy and hold for the long-term.3. Bitwise 10 Crypto Index FundThe Bitwise 10 Crypto Index Fund is another investment fund that trades over-the-counter like Grayscale's Bitcoin offering, but with a twist. The fund invests in the top 10 cryptocurrencies weighted by market cap and is rebalanced monthly. Given Bitcoin's size and lead, it makes up 60% of the underlying portfolio as of this writing, with Ethereum comprising another 28%, and the next eight cryptos by size making up the balance. Like other funds, the Bitwise 10 Crypto Index Fund can trade at an extreme discount or premium to the underlying crypto assets it owns. It also has a hefty expense ratio of 2.5%. However, if a basket of the largest cryptocurrencies -- predominantly Bitcoin -- is what you're after, this is an interesting option worth a look. Another product from Bitwise is the company's Crypto Industry Innovators ETF. The ETF contains 30 stocks, most of which are involved in the trading and mining of Bitcoin, development of blockchain technology, and other crypto innovators. Since it's invested in crypto stocks, this fund won't directly track Bitcoin's price, but its performance will be susceptible to Bitcoin and the crypto industry's wild up-and-down swings.The Bitwise Crypto Industry Innovators ETF was launched in May 2021 and charges annual expenses of 0.85%. As of this writing, the three top stocks in the fund -- Coinbase Global (NASDAQ:COIN), top Bitcoin holder Microstrategy (NASDAQ:MSTR), and bank and crypto trading platform operator Silvergate Capital (NYSE:SI) -- made up almost one-third of the portfolio.5. Valkyrie Bitcoin Strategy ETFThe Valkyrie Bitcoin Strategy ETF is another ETF that invests in Bitcoin futures. It was only started in October 2021, so it has a short history. It was launched by crypto asset manager Valkyrie, which sponsors several other crypto investment vehicles.As with other ETFs that utilize futures, long-term tracking of the underlying asset could be problematic. Additionally, the annual expense ratio for the Valkyrie Bitcoin Strategy ETF is 0.95%, which will further reduce investment performance over time. Choose the right Bitcoin investment product carefullyBesides the inherent volatility involved with investing in Bitcoin, Bitcoin ETFs and funds won't be a perfect replacement if you want exposure to the largest digital currency. However, there are benefits to selecting an ETF since it can be a workaround for getting Bitcoin's performance inside your IRA. Just remember to take a measured approach while awaiting approval of the first ETF that directly owns Bitcoin in its underlying portfolio.
Nicholas Rossolillo has positions in Bitcoin, Coinbase Global, and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Cboe Global Markets, Coinbase Global, and Ethereum. The Motley Fool recommends Silvergate Capital. The Motley Fool has a disclosure policy.
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