Why a Bitcoin ETF might be the worst way to get into crypto

[ad_1]

The U.S. Securities and Exchange Commission on Friday rejected VanEck’s proposal for a Bitcoin exchange-traded fund (ETF) that would have held actual cryptocurrency rather than mere Bitcoin futures. Submitted in March, the request was to buy Bitcoin directly from the “spot” market and hold it in an ETF that investors could then buy into. For clarity, a futures ETF invests in indirect contracts to buy or sell an asset on a specified future date.

SEC Rationale for Dismissing Latest Bitcoin ETF

While the SEC allowed two ETFs based on Bitcoin futures to start trading last month, it would not allow an ETF containing real Bitcoin, citing in its 51-page report its frequent concerns about possible manipulation and fraud, etc. in the crypto market. Bitcoin fell to around $ 62,000 when the SEC announcement was released, but has rebounded to over $ 64,000 at the time of writing.

While many investors like the diversity of an ETF, with its flexibility in trading a stock, it is not a great way to invest in Bitcoin or any type of cryptocurrency for that matter. Here are a few reasons:

Avoidable Pitfalls of Bitcoin ETFs Every time you buy or sell a stock, you have to pay a commission, and this is true when you trade with ETFs. Depending on how often you can trade an ETF, you can accumulate high trading fees that eat into your investment earnings. In addition to commissions, ETFs have expense ratios. An expense ratio is a percentage of your holdings that the fund charges you each year as payment for the privilege of letting them manage your money. Ultimately, the higher the expense ratio, the lower the return on your ETF investment. According to IRS rules, cryptos are classified as personal property, which is taxed at short and long term rates depending on how long you hold them. If you hold a digital asset for less than a year, you trigger short-term gains, which range from 10% to 37% depending on income and deposit status in 2020 – long-term rates are lower. Knowing how and when an ETF handles payouts of earnings is essential to avoid tax surprises. One of the most interesting aspects of cryptos is that, because they are not securities, holders can legally practice harvesting tax losses. So if a crypto is going through a particularly volatile time, you can sell it at the bottom of a downturn, record the loss, then immediately buy back what you just sold and move it back up. The Wash-Sale rule does not yet apply to cryptos. However, you lose this tax saving maneuver with an ETF. Additionally, SEC regulations require that currently approved Bitcoin futures ETFs only hold up to 85% of the fund’s net asset value in Bitcoin instruments. The balance should be in another dilutive asset, allowing you to diversify your investment beyond just crypto. The SEC has done us a favor

Ultimately, there are much better ways to dip your toes into crypto with easy-to-use, user-friendly choices like PayPal or Coinbase. The irony of the SEC’s decision to reject the Bitcoin spot ETF is quite consistent and aligned with the philosophy and founding principles of Bitcoin. Bitcoin was created to remove expense ratios, commissions, hidden fees, and middlemen from financial transactions – not inject them into the crypto buying process. So a warm “thank you” in response to the latest SEC ETF.

[ad_2]