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The New Bitcoin ETFs: What You Need to Know

Published
December 13, 2021
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    The ProShares Bitcoin Strategy ETF (NYSE: BITO) became the first Bitcoin exchange-traded fund ("ETF") to trade in the United States on October 19, 2021. On its first day of trading on the NYSE, the fund raked in $550 million from investors desperate for crypto exposure, making it one of the most successful initial public offerings for an ETF.

    Soon after, the VanEck Bitcoin Strategy ETF (NYSE: XBTF) and the Valkyrie Bitcoin Strategy ETF (NASDAQ: BTF) launched following a similar strategy, garnering millions more in assets from investors.

    Let's take a look at the lead-up to the launches, whether investors should buy these funds, and some alternatives to consider.

    The ProShares Bitcoin Strategy ETF's success underscores the demand for crypto exposure in investment portfolios.

    A Brief History

    The launch of the ProShares Bitcoin Strategy ETF comes eight years after the Winklevoss twins initially proposed the idea of a Bitcoin ETF. While several crypto ETFs have sprung up worldwide, U.S. regulators have been notoriously conservative, saying they had concerns about the lack of regulation and potential for fraud in the crypto markets.

    Bitcoin ETFs
    The ProShares Bitcoin Strategy ETF’s performance since inception. Source: Barchart.com.

    Most Bitcoin ETF applications have focused on the spot market where the funds would purchase the cryptocurrency directly. However, in August, SEC Chairman Gary Gensler suggested the agency might be more open to a futures-backed Bitcoin ETF. ProShares and a handful of other issuers focus on futures-based strategies rather than direct ownership.

    The SEC has already approved more futures-backed Bitcoin ETFs, but a spot market ETF remains elusive. In November, the agency rejected an application from VanEck to launch a Bitcoin Trust ETF, saying it failed to prove that the Bitcoin spot market wasn't subject to manipulation and to implement measures to monitor Bitcoin and report irregularities.

    The good news is that the approval of a Bitcoin futures-based ETF all but guarantees the launch of an Ethereum futures-based ETF. Bloomberg analysts believe that the first Ethereum fund could be available in the first quarter of next year. The move could help investors diversify beyond Bitcoin into Ethereum, which supports a wide range of altcoins.

    Should You Invest?

    The new Bitcoin ETFs track the price of BTC futures contracts to provide investors with exposure to the cryptocurrency. However, the futures market is very different from the spot market. Spot prices tend to be reactionary in the near term, whereas the futures market prices react over a more extended period, creating a difference in price behavior.

    There are several crucial things to keep in mind when selecting the right fund for your portfolio if you choose to invest in a Bitcoin ETF:

    • The ProShares Bitcoin Strategy ETF (NYSE: BITO) is the first and largest newly-minted ETF. As a result, active traders looking for the highest levels of liquidity may want to consider the fund to ensure they’re minimizing slippage.
    • The Valkyrie Bitcoin Strategy ETF (NASDAQ: BTF) offers an experienced management team with a history in digital assets and alternative finance, making them uniquely qualified to run the actively managed fund.
    • The VanEck Bitcoin Strategy ETF (NYSE: XBTF) is the lowest cost option with an expense ratio of 0.65% versus 0.95% for the other funds. In addition, the fund is structured as a C Corporation, providing unique tax advantages for long-term investors—investors can allocate their losses between years of high and low return.

    Expense ratios play a significant role in the long-term performance of these funds. For instance, a 0.95% expense ratio means that you’re paying $950 for every $100,000 you’ve invested in the fund per year. These expenses subtract from annual returns and, even if annual returns are positive, prevent the compounding effects of those fees over time.

    Alternative to Consider

    The new crop of Bitcoin ETFs makes it easy for everyday investors to gain exposure to Bitcoin through an easy-to-buy ETF. However, futures-backed ETFs aren't the only way to gain exposure. Many other exchange-traded funds and individual stocks provide exposure to cryptocurrencies through non-futures-based methods.

    Stocks & ETFs

    Crypto-adjacent ETFs provide significant exposure to cryptocurrencies without owning the underlying assets. For example, the Amplify Transformational Data Sharing ETF (BLOK) holds companies like PayPal, MicroStrategy, and Square, which have exposure to cryptocurrencies through payment processing or their own crypto reserves.

    Some popular crypto-adjacent ETFs include:

    You can also purchase individual stocks that have significant crypto exposure. For instance, the Grayscale Bitcoin Trust (NYSE: GBTC) holds about $40 billion in Bitcoin, and MicroStrategy Inc. (NASDAQ: MSTR) has about $7 billion in Bitcoin, making them great proxies for Bitcoin prices (albeit with varying levels of expense and ancillary businesses).

    Buying Crypto

    The rise of Coinbase and other exchanges has made it easy for anyone to buy Bitcoin or other cryptocurrencies. In many cases, you can deposit cash into an account using a credit card or bank transfer and exchange cash for cryptocurrencies in just a few minutes. In addition, you have a huge selection of cryptocurrencies with minimal fees.

    Of course, there are a few drawbacks to buying actual cryptocurrencies. Many crypto exchanges don't have the same level of investor protection as stock exchanges (e.g., insurance). The process of calculating and paying capital gains taxes is also a lot more challenging since exchanges don't automatically do it for you as they do with stocks.

    The Bottom Line

    The ProShares Bitcoin Strategy ETF (NYSE: BITO) made history as the first cryptocurrency ETF to list on a U.S. exchange in October 2021. Since then, two other futures-based Bitcoin ETFs have launched in the U.S., offering retail investors an easy way to gain exposure to the world's largest cryptocurrency without buying it directly.

    That said, futures-based ETFs aren't perfect, and there's a low barrier to purchasing Bitcoin and other cryptocurrencies directly. In addition, many stocks provide exposure to Bitcoin and other cryptocurrencies directly rather than using the futures market. Investors should consider these options before committing to an ETF.

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