Investing in Bitcoin ETFs | The motley fool

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Bitcoin (CRYPTO: BTC) was one of the most exciting investments of the 2000s. A Bitcoin was worthless when it was launched in 2009, but each coin is now worth the equivalent of tens of thousands of dollars. The blockchain technology behind the original digital currency has spawned thousands of altcoins and decentralized financial applications along the way, the most successful being Ethereum (CRYPTO: ETH). It’s no wonder that so many investors want to put their money in Bitcoin.

But investing in Bitcoin isn’t always that easy. This is where a Bitcoin ETF (Exchange Traded Fund) could come in. Here’s what you need to know.

Image source: Getty Images.

Investing in Bitcoin ETFs

Investing in Bitcoin and other cryptocurrencies requires additional work on top of what is involved in investing in stocks, bonds, etc. Most traditional brokerage firms do not support cryptocurrency trading, so an account must be opened with a crypto trading exchange. Additionally, there is the issue of storing crypto, which requires the use of a crypto wallet.

A workaround for these problems is to buy a Bitcoin ETF or a fund that trades on an exchange so that your investment in Bitcoin can be held in the same account as your other traditional stocks, bonds, and securities.

What are Bitcoin ETFs?

Bitcoin ETFs are exchange traded funds that attempt to track the performance of Bitcoin. When you buy an ETF, you are not buying the underlying investment directly. Instead, you buy shares of a fund that invests in, or attempts to mimic the performance of a particular security or index – Bitcoin in this case.

To date, no ETF is able to directly own Bitcoin. This is because cryptocurrency and other digital currency exchanges are still not regulated by the Securities and Exchange Commission (SEC). A number of ETFs and investment firms have submitted requests to the SEC to launch ETFs that directly buy Bitcoin (including Cathie Wood’s Ark Invest), but the approval of crypto funds does not appear to be a success. priority for the controller at the moment.

Bitcoin vs. Bitcoin ETFs

Why buy a Bitcoin ETF instead of Bitcoin directly? After all, even the best fund won’t perfectly follow the price of crypto, as there are fees built into ETFs to pay for management.

Besides avoiding the added complexity of opening an account with a crypto exchange and safely storing Bitcoin, one of the main reasons for choosing an ETF is that it is easier to gain exposure to Bitcoin investing in an IRA (individual retirement account). At this point, only a few specialist investment firms support crypto trading within an IRA account. But if you want to keep Bitcoin with the rest of your investment funds, buying a fund could be your ticket.

5 ETFs and Bitcoin funds for 2022

While there is not yet an ETF that buys Bitcoin directly, options are available. Here are five to consider:

ETF Name

Assets

The description

Grayscale Bitcoin Trust (OTC: GBTC)

$ 27.2 billion

This is an investment trust, not an ETF, but it is the first and largest fund that tracks the performance of Bitcoin.

ProShares Bitcoin Strategy ETF (NYSEMKT: BITO)

$ 1.41 billion

A recent ETF launch that attempts to track Bitcoin using Bitcoin futures contracts.

Bitwise 10 Crypto Index Fund (OTC: BITW)

$ 894 million

This fund is made up of 60% of Bitcoin, the balance being invested in other cryptos.

ETF Bitwise Crypto Industry Innovators (NYSEMKT: BITQ)

$ 117 million

This ETF invests in Bitcoin and crypto stocks.

Bitcoin Valkyrie Strategy ETF (NASDAQ: BTF)

$ 51 million

This is a new ETF that invests in Bitcoin futures contracts from a crypto investment company.

Data as of January 12, 2022.

1. Bitcoin trust in grayscale

The Grayscale Bitcoin Trust is not an ETF, but rather an investment trust with over-the-counter units (traded through broker networks rather than a centralized exchange). This means that this closed-end fund is not open to new investments, but units can be bought if they are supported by your broker. However, the fund directly owns Bitcoin.

As with the other ETFs on this list, since Grayscale Bitcoin Trust is not a direct investment in Bitcoin itself, the units of the fund can trade at a significant discount or premium to the actual price of Bitcoin. When stocks are in high demand, units will tend to trade at a premium to the underlying Bitcoin held by the trust, and units will trade at a discount to Bitcoin when demand is low. Additionally, since Grayscale Bitcoin Trust charges an annualized fee of 2% ($ 200 for every $ 1,000 invested each year), it will tend to underperform Bitcoin’s price action over time.

Nonetheless, this is currently the largest fund linked to the fate of Bitcoin, and has been around since 2013. If you want a product that seeks to follow Bitcoin price changes without buying Bitcoin, the Grayscale Bitcoin Trust is a good one. place to start your search.

2. ProShares Bitcoin Strategy ETF

Launched in late 2021, the ProShares Bitcoin Strategy ETF uses Bitcoin futures contracts (a derivatives contract, traded on the CBOE Global (NYSEMKT: CBOE)) to track the price of the original crypto. Although it does not directly own Bitcoin, ProShares’ offering is the first ETF that attempts to track Bitcoin’s stock.

The ProShares Bitcoin Strategy ETF started trading in October 2021, so it has a short history. So far, it has underperformed Bitcoin due to monthly turnover in futures (when a contract about to expire is moved to another, longer term) and annualized fees of 0.95 %. This is a flawed solution, but, over time, this ETF should roughly track daily Bitcoin movements – although this may not be the best option for investors who want to buy and hold for the long term. .

3. Bitwise 10 Crypto Index Fund

The Bitwise 10 Crypto Index Fund is another OTC investment fund like Grayscale’s Bitcoin offering, but with a twist. The fund invests in the top 10 market capitalization weighted cryptocurrencies and is rebalanced monthly. Considering Bitcoin’s size and lead, it represents 60% of the underlying wallet at the time of writing, with Ethereum comprising an additional 28% and the following eight cryptos by size making up the balance.

Like other funds, the Bitwise 10 Crypto Index Fund can trade at an extreme discount or premium to the underlying crypto assets it owns. It also has a high expense ratio of 2.5%. However, if you are looking for a basket of the biggest cryptocurrencies – mainly Bitcoin – this is an interesting option worth checking out.

4. ETF Bitwise Crypto Industry Innovators

The company’s Crypto Industry Innovators ETF is another Bitwise product. The ETF contains 30 stocks, most of which are involved in Bitcoin trading and mining, blockchain technology development, and other crypto innovators. Since it is invested in crypto stocks, this fund will not directly track the price of Bitcoin, but its performance will be sensitive to Bitcoin and the crazy swings in the crypto industry.

The Bitwise Crypto Industry Innovators ETF was launched in May 2021 and charges an annual spend of 0.85%. As of this writing, the fund’s top three stocks – Coinbase Global (NASDAQ: COIN), the top holder of Bitcoin Microstrategy (NASDAQ: MSTR) and banking and crypto trading platform operator Silvergate Capital ( NYSE: SI) – made up almost a third of the portfolio.

5. Bitcoin Valkyrie Strategy ETF

Another ETF that invests in Bitcoin futures contracts is the Valkyrie Bitcoin Strategy ETF. It didn’t start until October 2021, so it has a short history. It was started by crypto asset manager Valkyrie, which sponsors several other crypto investment vehicles.

As with other ETFs that use futures contracts, long-term tracking of the underlying asset could be problematic. Additionally, the Bitcoin Valkyrie Strategy ETF’s annual expense ratio is 0.95%, which will further reduce investment performance over time.

Choose the right Bitcoin investment product carefully

Besides the volatility inherent in investing in Bitcoin, ETFs and Bitcoin funds won’t be a perfect replacement if you want to get exposure to the biggest digital currency. However, there are advantages to selecting an ETF as it can be a workaround to get Bitcoin’s performance in your IRA. Remember to take a measured approach while waiting for the approval of the first ETF that directly holds Bitcoin in its underlying wallet.

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