Recently there’s been a huge uproar about not just BlackRock, but almost a dozen other huge Investment companies all submitting to the SEC for a Bitcoin ETF. But what does that mean exactly and why would anyone buy it over just buying normal bitcoin? Let’s find out.
What Is An Exchange Traded Fund (ETF)?
An exchange-traded fund or ETF is a group of securities that behaves similar to a mutual fund, but that can be bought and sold on an exchange just like a stock. For example, the SPDR S&P 500 ETF (with the ticker symbol SPY) tracks the S&P 500 index.
ETFs can track virtually anything such as a specific commodity like gold, all the way up to various sectors like tech or AI and even huge baskets of companies like the S&P 500 does. While mutual funds do a similar thing, ETFs trade on a stock exchange just like regular individual stocks.
This trading capability is also what gives ETFs their name. They are a fund that can be traded on exchanges, hence exchange-traded fund. Just like shares, the price of an ETF will change all throughout the trading day as it gets bought and sold on the market.
What Is A Spot Bitcoin ETF?
What most people refer to when they mention a Bitcoin ETF is one that tracks the spot price of Bitcoin. The spot price in simple terms is just the current market price of bitcoin and a spot Bitcoin ETF should directly hold actual Bitcoin in its portfolio on behalf of the ETF holders.
According to the majority of filed ETFs, most companies that are applying for ones have already chosen Coinbase to do that custody work for them.
Having Bitcoin represented in an ETF would enable investors of all types like pension funds, businesses and institutional investors to quickly and safely gain exposure to Bitcoin and its underlying market without having to deal with taking self custody of it themselves.
USA Bitcoin ETF Vs Other ETFs
There are already many spot Bitcoin ETFs around the world, however currently there are none in the biggest financial market by far, the USA. It’s rumored that there will be a number of them approved early next year, but for now everyone must wait.
As noted above, ETFs are funds that can hold anything. Just because something says “Bitcoin ETF” on the tin, doesn’t mean it actually holds bitcoin. It could instead be for a fund full of all the top Bitcoin Mining companies or just top Bitcoin related companies in general like cryptocurrency exchanges or blockchain companies.
The Security and Exchange Commission has already approved a number of these types of funds, but a true spot Bitcoin ETF, like the ones from BlackRock and the many other investment companies that have applied, remains elusive.
Why Is A Bitcoin ETF Taking So Long?
One of the main reasons the SEC has been hesitant to approve bitcoin exchange traded funds is due to various security concerns like how the users assets would be stored or the specific separation between various involved entities.
For example, one of the biggest issues with FTX was that it allegedly co-mingled customer funds with those from their investment company Alameda Research. It seems reasonable that having all these types of loop holes closed before opening the flood gates for the first Bitcoin ETF is a wise idea.
Should You Buy A Bitcoin ETF Or Bitcoin?
While we’re 100% all for taking full self custody of your bitcoins here, it should be noted that it’s a very different situation for companies and pension funds versus just standard retail investors.
Even if a big company wants to take full custody of the bitcoin they buy, it would likely mean they’d have to go through the entire process of getting this new type of investment strategy approved by their board or other appropriate committees.
They’d also need to then figure out all the details involved with that self custody too, like if they’d use a Multisig Wallet, who would hold the keys, how many keys, what hardware wallets would they use not to mention training everyone on it all.
This process could take months or even years where as with a standard ETF they can just click “buy” like with any other exchange traded products that they have access to.
As you can see, it’s likely much easier for bigger entities to just simply buy the Bitcoin ETF and get exposure to the underlying asset, even they aren’t technically doing the best thing.
However let’s look at some of the pros and cons of buying a theoretical spot Bitcoin ETF in your brokerage account versus simply buying bitcoin from a non-KYC Crypto Exchange and taking full, proper self custody of it yourself.
- Full Property Rights: You get full ownership over the asset and no one can stop you from spending it or taking it with you
- Non-KYC: You can buy bitcoin from a non-KYC source like AgoraDesk or Hodl Hodl and own your asset with full privacy
- No Counter Party Risk: You have no trusted third parties that can go bankrupt, steal or impair the asset
- No Fees: No ongoing management fees are required that will eat away at your asset
- Requires Good Security: You are fully responsible for the security of the asset, meaning if you don’t have proper Bitcoin Security someone may steal it from your
- Time & Effort: If you already have access to buying ETFs through your brokerage account and aren’t familiar with self custody, it will likely take a fair bit more time to learn the new way
For the average person, the biggest benefit is that you’re charged no ongoing fund fees as it’s not actively managed by anyone. The other big benefit is that by sourcing bitcoin directly, you’re in complete control. No one can stop you, lock you out and you can send or take it anywhere, anytime.
The biggest risk is how you setup your self custody. If you’re new, clueless and think storing six figures in a browser extension wallet is totally fine then you’re going to have a bad time. To be clear, a reputable hardware wallet really isn’t that complicated though and will protect your digital assets from the vast majority of security issues.
Just like with learning how to send your first email it can take some practice, but ultimately it’s no harder than installing an app on your phone and pressing a few buttons. We have a full database of the best Crypto Wallets out there to ensure what you buy is the absolute best in security and privacy.
Buying A Bitcoin ETF
- Could Be Quicker & Easier: If you already have access to buying ETFs and aren’t familiar with self custody, it will likely take much less time to just buy the Bitcoin ETF
- Opens New Access: If you have a pension, 401K or many other types of accounts that restrict what you’re allowed to buy with the funds inside, you may now be able to redirect it towards a Bitcoin ETF and get exposure that way
- Secure By Default: You will have institutional grade security and protection of the underlying asset which, for many people, may be better than what they’re capable of setting up on their own
- Easier Taxes: As the ETF would be just another fund in your online account, it will get rolled into the rest of your trading activity and resultant tax statement potentially making your taxes easier to fill out
- Fees: You will pay fees, called expense ratios, due to the additional third party rent seekers that are involved even if you’re just holding for years. Rates of around 1% are common and will slowly eat away at your funds over time. These fees aren’t required if you simply buy it and self custody
- Counter Party Risk: You have many trusted third parties and layers of bureaucracy in the way if you want to move or sell bitcoin in the future. They could go bankrupt, loose access to the funds, steal them or simply freeze your accounts for any number of reasons
- No Privacy: You will have to fully KYC all your funds which greatly reduces your privacy and security
While there’s far higher fees and trusted third parties involved, it’s still not inconceivable that a dedicated Bitcoiner might chose to buy a Bitcoin ETF. Maybe they can redirect the employee match they get in their 401K account towards it and increase their investing returns.
The biggest risk however is that many people forget that third party risks still exist in professional grade institutions. They can and have frozen peoples accounts before, sometimes for legitimate reasons, sometimes for absurd reasons or by accident.
While an ETF is a quick and simple way of getting cryptocurrency exposure, you’re seeding a large amount of control to other parties that can cause huge issues in the future. While most people don’t really have any other choice when it comes to things like shares, Bitcoin is unique and can be easily held by any investor.
How Do You Invest In Bitcoin ETFs?
Just like with any other type of ETF, you can usually access and buy them via trading platforms or other financial institutions. You simply sign up to their platform, transfer money to your new account and then select the ETF you’re going to be investing in.
While some investments like real estate have substantial minimum investment requirements, ETFs typically can be bought in individual share amounts meaning that you can start off with small amounts. Obviously this minimum amount differs from fund to fund too.
Another important point investors should be aware of before they begin buying any crypto ETFs is that they will have transaction fees as well as the above mentioned annual expense ratio fees. As the Bitcoin ETF will be tracking the price of bitcoin, they should also be aware that its price is extremely volatile, having drops of over 70% in the past as per below.
What Are Bitcoin Futures Contracts?
Bitcoin Futures ETFs do not hold the any bitcoin assets directly and instead hold bitcoin futures contracts. These are derivative contracts that are used to buy or sell bitcoin in the future for an agreed upon price. ProShares Bitcoin Strategy ETF (BITO) is a prime example of this and was the first ETF that began trading in October 2021.
What Fees Does A Bitcoin ETFs Have?
While no Bitcoin ETF has been approved in the USA yet, it’s quite standard to have annual fees, also called expense ratios, of around 1%. Unlike other assets, Bitcoin has virtually zero Carrying Costs meaning if you buy and self custody it yourself, you can avoid these very high fees that eat away at your money over time.
Does Bitcoin Have An ETF?
A Bitcoin ETF for the USA market is still pending approval from the SEC. However there have been other Bitcoin related ETFs such as those that track companies that hold crypto, those made up of blockchain stocks or a Bitcoin Futures ETF like CME Bitcoin futures contracts fund.
Are ETFs A Good Investment?
Whether or not specific investment decisions are good for you requires fully assessing your personal financial situation and taking into account many different pieces of information. While ETFs usually have cheaper fees than an actively managed fund, they are only as “good” as the investments that are inside them, which can be literally anything from gold to a mix of 5,000 world wide companies.