Buy this instead of a Bitcoin ETF

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To describe Bitcoin (2.78% BTC), and many other cryptocurrency assets for that matter, as dynamic trading has been an understatement for the past year or so. In that single 12-month window, Bitcoin’s value tripled in the first four months, fell over 40% over the next three months, then climbed 90% before reversing again. these last weeks.

So while many Bitcoin investors may think of long term possibilities, it is clear that there are many factors behind its short term volatility. This is important to know for investors looking to gain exposure to the largest cryptocurrency. Some may think that an easy and less volatile way to gain this exposure is to use a Bitcoin exchange-traded fund (ETF). But a look under the hood may cause these investors to rethink this strategy.

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Invest in the future

There were probably a lot of retail investors who welcomed the launch of the first Bitcoin ETF in October 2021. Many probably thought that buying the ProShares Bitcoin Strategy ETF would be an easy way to own Bitcoin without having to open a new account to trade cryptocurrencies or understand the logistics of buying tokens and storing holdings in digital wallets.

But the ProShares ETF does not invest directly in Bitcoin. Instead, he maintains exposure to it through futures contracts. And futures trading adds a whole new level of risk to investing. Like options trading, futures contracts are a form of financial derivative instrument. But there are also some distinct differences, and even investors comfortable with options should know how they work to use the Bitcoin ETF for exposure to cryptocurrency.

A different approach

That’s not to say that investing in futures is necessarily a bad thing. One potential benefit is a higher trading volume, and therefore more liquidity, than buying the token in cash. One of the first days after the launch of the ProShares ETF, for example, Piper Sandler analysts Richard Repetto and Patrick Moley pointed out in a report from Kiplinger that the Bitcoin futures market had a volume of $ 62 billion. dollars, while the Bitcoin spot market traded only $ 37 billion.

But it’s different to invest in Bitcoin itself, and that might not be what some investors wanted. In a simplified description, the ETF seeks to provide capital appreciation in the crypto space. Those who are considering buying it may seek to achieve the same goal by investing directly in cryptocurrencies. This will not necessarily reduce volatility, but the risk would be better understood.

Image source: Getty Images.

Other options

It could simply mean buying Bitcoin using an account on an exchange like Coinbase Global. Or one could spread their bets across the crypto space by adding other high-value tokens including Ethereum and Binance Coin, which were the only other two with a market cap above $ 100 billion at the time of writing. article.

There is also no shortage of altcoins that run on the Ethereum blockchain. And there are other cryptocurrencies that use different blockchain technology. However, by investing directly in a crypto token, one can at least dictate the level of risk oneself. The ProShares Bitcoin ETF adds uncertainty through its investments using derivatives, and it charges an expense ratio of 0.95% to boot.

It would be best to spend some time and effort researching and deciding which token or combination of crypto investments would make the most sense for your risk tolerance and individual goals.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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