Investing in Bitcoin Could Be Boosted by Exchange Traded Funds

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NEW YORK (AP) – Interested in Bitcoin but don’t want to open a crypto trading account? Wall Street has got something for you.

ProShares on Monday announced plans to launch the country’s first Bitcoin-linked exchange-traded fund. The ETF with the ticker symbol “BITO” is expected to start trading on Tuesday, unless opposed by regulators.

This is the latest milestone for Bitcoin and for the ETF industry in general. In a statement, ProShares CEO Michael Sapir compared the launch of a crypto-linked ETF to the 1993 launch of the first equity ETF and the 2002 launch of the initial bond ETF. The US market for ETFs has grown to more than $ 5.4 trillion and they are owned by about 9% of all households nationwide, according to the Investment Company Institute.

Cryptocurrencies, meanwhile, have exploded into a nearly $ 2.5 trillion industry after thousands of digital currencies were created. Bitcoin is the biggest of all, with a total value of almost $ 1.2 trillion. But like many in the crypto world, the Bitcoin-linked ETF is a bit complicated.

The fund will not invest directly in Bitcoin itself. Instead, it will focus on Bitcoin-related futures, a market overseen by US regulators and which can be complicated on its own. This means that investors should be especially aware of what they are buying and their likely return.

Here is an overview of what the ETF does and does not do:

WHY IS THIS A BIG DEAL?

A Bitcoin-linked ETF would offer investors a new way to get involved in the rapidly growing field of cryptocurrency. The price of Bitcoin has more than doubled this year, and a growing number of investors see it as a way to offer some protection to their wallets.

The hope is that the price of Bitcoin will move in a way that is not as tied to the expectations of the economy as stocks and other investments. If so, it could help support portfolios when everything else is down or when inflation is high. However, it doesn’t have a perfect track record: When the U.S. stock market fell nearly 34% at the start of the pandemic in 2020, Bitcoin lost about that much.

Some investors may not want to open a new cryptocurrency trading account. Instead, they can buy the ETF through old-fashioned brokerage accounts that they may already be using for their stocks or IRA.

WHAT IS AN ETF?

An exchange-traded fund makes it easy for investors to buy a whole basket of investments. Some of the more popular ETFs track things like the S&P 500 index of large US stocks, the price of gold, or high yield bond indices.

Unlike a traditional mutual fund, which is priced only once a day, investors can buy or sell an ETF throughout the trading day. This is especially important for cryptocurrencies, whose prices can fluctuate greatly from minute to minute, let alone day to day.

SO THIS NEW ETF WILL FOLLOW THE PRICE OF BITCOIN?

No, and that’s one of the most important distinctions. The fund will invest in Bitcoin futures, which are essentially bets on how the price of Bitcoin will move in each of the coming months.

The Bitcoin futures market is overseen by the Commodity Futures Trading Commission, which can offer investors more protection. But it also doesn’t perfectly track the price of Bitcoin.

“It is not a substitute for direct possession of bitcoin,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA.

WHO IS BEST FOR?

Because it will be invested in futures contracts instead of actual Bitcoins, the ETF is less than ideal for a Bitcoin believer who wants to invest in it for the long term, Rosenbluth said.

Instead of a buy and hold investor, he said he was more likely to be popular with short-term traders looking to make money from his volatility, at least initially. There are certainly a lot of opportunities for this.

In the space of about three months earlier this year, Bitcoin has more than halved, from almost $ 64,900 to less than $ 30,000. From that low point in July, it has climbed back to nearly $ 61,800.

HOW MUCH WILL IT COST?

BITO will have an expense ratio of 0.95%. This means that $ 95 of every $ 10,000 invested in the fund will be used to pay its annual operating expenses.

Such fees could be a hard sell for Bitcoin fans, many of whom see cryptocurrencies as a way to cut middlemen out of industries.

IS THIS THE FIRST AND LAST ETF IN TEL ETF?

No, several other fund companies have their own applications for ETFs linked to Bitcoin futures. Some may try to separate by charging a lower fee.

Beyond simply extending the reach of Bitcoin, ETFs will help create a greater ecosystem in the financial world around it, said Ben Johnson, director of global ETF research at Morningstar.

With an ETF linked to Bitcoin, skeptical investors will have something they can sell short. In such a trade, they can bet on the fall in the price of the ETF by borrowing a stock and selling it back, hoping to buy it back later at a lower price. ETFs could also allow options trading around them.

“The money made on all of these business activities is going to eclipse the money made just from collecting fees for these products,” Johnson said.

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