Bitcoin ETFs are gaining massive traction as more and more people explore the unique opportunities within the crypto industry. Just so you know, Bitcoin ETFs, also known as exchange-traded funds, are designed to track the value of Bitcoin. Bitcoin ETFs are traded on traditional market exchanges rather than your typical cryptocurrency exchanges.
With Bitcoin ETFs, investors have the opportunity to invest in Bitcoin without having to use traditional cryptocurrency. Also, Bitcoin ETFs provide leverage to its price.
Bitcoin ETFs: How does it work?
As we mentioned right from the get-go, an ETF, or exchange-traded fund for short, is an investment fund uniquely designed to track the price of an index or underlying asset. In today’s financial space, ETFs are available for multiple assets and industries, including commodities and currencies.
A Bitcoin ETF works pretty similarly to a traditional ETF, especially when you consider that the price of one share of the exchange-traded will act or fluctuate according to the price of Bitcoin. What this means is that if the value of Bitcoin increases or decreases, a Bitcoin ETF will act the same way. But instead of being traded on a crypto exchange, an ETF trades on a conventional market exchange like the TSX or NYSE.
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What are the advantages of Bitcoin ETFs?
Bitcoin ETFs have a lot of advantages. Read on as we take you through some of them.
Convenience
Bitcoin ETFs offer convenience, little wonder why a lot of investors are adding them to their investment portfolios. In case you don’t know, investing in a Bitcoin ETF provides leverage to the price of Bitcoin. And the best part is that you don’t need to have a thorough understanding of how Bitcoin works, sign up with a crypto exchange or go through the hassles of owning Bitcoin directly.
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Take, for instance, Bitcoin and other digital assets are stored in a wallet. Should an investor lose his/her password to the wallet, it means that their Bitcoin is lost forever. With a Bitcoin ETF, you never have to worry about directly owning bitcoin in your wallet. To this end, it simplifies the process of investing in the number one digital asset by market cap.
Diversification
With an ETF, an investor can hold more than one digital asset. Confused? Well, read on as we make some clarifications. For instance, a Bitcoin ETF could be made up of Bitcoin, Amazon stocks, Apple stocks, Facebook stocks and more. This provides investors with a unique opportunity to mitigate risk and diversify their portfolios. Also, by trading on a regulated market exchange, investors have the chance to diversify their current equity portfolio.
Tax efficiency
Considering the fact that Bitcoin is decentralized and unregulated at the moment, most of the world’s leading tax havens and pension funds do not allow investors to buy bitcoin. On the flip side, with a Bitcoin ETF trading on traditional exchanges, especially one regulated by the SEC, Bitcoin ETF is eligible for tax efficiency.
What are some of the disadvantages of Bitcoin ETFs?
While Bitcoin ETFs offer a lot of advantages that will appeal to investors, it has some drawdowns we would also love to highlight. Here, check out some disadvantages of Bitcoin ETFs.
Management fees
For the unique service they offer, nearly all Bitcoin ETFs usually charge investors management fees. What this simply means is that owning a significant share of a Bitcoin ETF will result in high management fees over time. But we doubt if this will be a problem, especially if you’re making profits.
ETF inaccuracy
While an ETF is designed to track the price of an underlying asset, ETFs can also feature multiple assets. This helps investors to diversify their portfolios. The not-so-cool thing about this is that a 50% increase in the value of Bitcoin may not be accurately reflected in the overall value of an exchange-traded fund, and that’s because of other holdings. So while an ETF will provide leverage to Bitcoin’s price, at the end of the day, it may not be an accurate tracker of Bitcoin’s price.
Limits to crypto trading
If you have been into cryptocurrency for a while, you’ll agree that Bitcoin can be traded for other digital assets like Ethereum, Bitcoin, BnB, XRP and more. Unfortunately, a Bitcoin ETF isn’t eligible to be traded for other digital assets because it isn’t a cryptocurrency per se. Instead, it is an investment fund that keeps track of the price of Bitcoin.
Lack of Bitcoin ownership
Without mincing words, Bitcoin serves as a hedge against fiat currencies and equities issued by the world’s leading central banks. Since Bitcoin isn’t controlled by the central banks, it provides investors with a unique opportunity to mitigate risks associated with the financial system. Bitcoin is also superb because it protects users and investors as it provides them with the privacy provided by the Bitcoin blockchain. Unfortunately, since a Bitcoin ETF is regulated by the government, it means that these benefits are no longer available.
Do Bitcoin ETFs exist at the moment?
Sure, Bitcoin ETFs are becoming pretty popular in the crypto space. One of the popular examples of a Bitcoin ETF is the famous ProShares Bitcoin Strategy ETF (ticker: BITO) which currently trades on the NYSEArca. While there are other Bitcoin ETFs waiting to be listed, we would like to add that the U.S. Securities and Exchange Commission (SEC) has consistently worked to block several other proposals. Their argument is that the crypto space is still largely unregulated.
Most Bitcoin ETFs use futures to mimic the performance of the digital asset. Another smart way to get some exposure to Bitcoin without buying the digital asset is to invest your money in cryptocurrency and blockchain companies.
