Bitcoin ETFs: What are they and how can I trade them?
For some investors, navigating cryptocurrency exchanges directly can be a challenging part of trading this asset class. Plus, depending on their level of risk tolerance, the volatility associated with crypto may be too risky.
However, spot Bitcoin ETFs may simplify the investment process — as investors can now gain exposure to the world's largest cryptocurrency without directly holding it.
In January 2024, the U.S. Securities and Exchange Commission (SEC) approved 11 Bitcoin Exchange-Traded Funds (ETFs) that invest directly in the cryptocurrency. This investment instrument provides a new way for investors to gain exposure to Bitcoin's price movements, through their regular brokerage accounts.Despite the SEC approval, SEC Chair Gary Gensler emphasized the importance of caution, stating, "Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto."
Read on to learn more about Bitcoin ETFs, what they are, and how they can be utilized.
What Are Exchange-Traded Funds (ETFs)?
Exchange-traded funds (ETFs) are investment vehicles that gather funds from numerous investors to invest in a diverse range of stocks, bonds, or other assets. Unlike mutual funds, ETFs are traded on exchanges, which means their share prices vary throughout the day as investors buy and sell them.
ETFs offer investors a versatile and cost-efficient means to access different asset classes, sectors, or investment themes. They typically feature lower expense ratios than traditional mutual funds and involve fewer brokerage commissions than purchasing individual stocks. These attributes make ETFs attractive to a wide range of investors, from beginners looking to diversify their portfolios to seasoned investors seeking targeted exposure to specific market segments. Despite this, investors should note that there remain risks associated with these investment products.
What is a Bitcoin ETF?
Bitcoin ETFs are investment funds that allow people to indirectly invest in Bitcoin without actually owning the cryptocurrency. They operate similarly to gold ETFs, which allow people to invest in gold without having to store or protect the gold bars themselves.
A spot Bitcoin ETF pools investor funds to directly acquire Bitcoin. Managed by an investment firm, the Bitcoin ETF is listed on a conventional stock exchange, such as the Nasdaq. It's like buying a share in a fund that holds Bitcoin, so when Bitcoin's value goes up or down, the value of your investment generally does the same.
Despite a decline from its November 2021 peak, Bitcoin witnessed significant growth in anticipation of the spot Bitcoin ETF approvals in January 2024 by the SEC. This surge in price sparked interest from both individual and institutional investors seeking ways to participate.
According to LSEG data, US-listed bitcoin ETFs saw $4.6 billion worth of shares trade hands in its first day of trading.
Didn’t Bitcoin E.T.F.s already exist?
Yes and no.
ETFs investing in Bitcoin futures contracts have been available on U.S. exchanges since 2021. These funds track the price of Bitcoin futures contracts rather than holding actual Bitcoin. Essentially, investors in Bitcoin futures ETFs are speculating on the future price movements of Bitcoin, rather than owning the cryptocurrency directly.
In contrast, spot Bitcoin ETFs, which were approved by the SEC in January 2024, offer a different approach.
Spot Bitcoin ETFs hold actual Bitcoin rather than derivatives. This means that investors in spot Bitcoin ETFs directly own a portion of the underlying cryptocurrency itself.
The primary distinction between the two investment vehicles lies in their underlying assets.
Bitcoin futures ETFs rely on futures contracts, which are agreements to buy or sell Bitcoin at a predetermined price on a future date.
Spot Bitcoin ETFs provide investors with direct exposure to Bitcoin without the need for futures contracts, allowing investors to participate in the cryptocurrency's price movements more directly.
Investors interested in Bitcoin exposure now have the choice between these two types of ETFs, each with its own characteristics and level of risk. While Bitcoin futures ETFs may offer certain advantages such as enhanced liquidity and some regulatory oversight, spot Bitcoin ETFs provide a more straightforward way to invest directly in the cryptocurrency itself.
What does this mean for investors?
The introduction of spot Bitcoin ETFs is a significant milestone for investors, offering an accessible avenue into the world of Bitcoin without the intricacies of purchasing and securely storing the cryptocurrency. For retail investors, this means they can now participate in the potential gains of Bitcoin's price movements through their brokerage accounts. This eliminates the need for specialized knowledge or technical expertise (knowledge about cold wallets, for instance), or having an account with a crypto trading platform.With spot Bitcoin ETFs, investors can also diversify their portfolios and potentially capitalize on the growing interest in digital assets without the hassle of managing the assets directly.
What are the US-listed Bitcoin ETFs?
As of January 2024, the SEC has approved 11 US-listed Bitcoin ETFs.
Following the approval of these 11 spot Bitcoin ETFs, it's likely more firms will apply for approval of their own Bitcoin ETF products over the coming months.
Bitcoin ETFs vs. Other ETFs
Bitcoin ETFs, unlike regular ETFs, focus exclusively on the cryptocurrency, providing investors with a convenient investment product to track and gain exposure to Bitcoin's price movements. Rather than holding a mix of assets, spot Bitcoin ETFs aim to mirror the price of Bitcoin itself.
When investors buy shares of spot Bitcoin ETFs, they are investing in a fund that aims to track the price movements of Bitcoin. However, it's important to note that the prices of different Bitcoin ETFs can vary. This variation occurs due to factors such as differences in management fees, tracking methodologies, trading volume, and regulatory considerations among ETFs. Consequently, while these ETFs generally aim to reflect the value of Bitcoin in the market, the actual prices of the ETF shares may differ from the exact current value of Bitcoin due to these factors. This straightforward approach allows investors to participate more directly in the fluctuations of Bitcoin's price without the complexities of owning and storing the cryptocurrency themselves.
In contrast, regular ETFs encompass a broader range of assets, tracking or seeking to outperform an underlying index. These ETFs, traded on stock exchanges, offer investors the diversification of a mutual fund combined with the flexibility of a stock.
Regular ETFs include equity ETFs such as international ETFs, sector ETFs, dividend ETFs, and market-cap index ETFs. Additionally, non-equity ETFs encompass bond ETFs, commodity ETFs, and currency ETFs.
It's important for investors to understand the specific risks associated with Bitcoin ETFs. Cryptocurrency still lacks the level of regulatory structure that is afforded to instruments like stocks. This means that investors have less protection than they do in traditional securities markets.
Spot Bitcoin ETF Pros & Cons
Potential pros
Convenience: By investing in a spot Bitcoin ETF, investors can easily access the cryptocurrency market through their brokerage accounts, eliminating the need for specialized knowledge or the hassle of managing digital wallets.
Liquidity: Bitcoin ETFs provide liquidity, thanks to their listing on exchanges. This liquidity allows investors to buy and sell shares throughout the trading day, providing flexibility in managing their positions.
Regulatory framework: Spot Bitcoin ETFs operate within the regulatory framework established for traditional ETFs, offering investors a level of protection and transparency.
Potential cons
Despite the advantages, investors should be aware of the risks associated with spot Bitcoin ETFs.
Volatility: Cryptocurrencies, including Bitcoin, are known for their volatility, and spot Bitcoin ETFs are not immune to price fluctuations. Cryptocurrencies are speculative and involve a high degree of risk. Regulatory uncertainty surrounding cryptocurrencies also poses a risk, as changes in regulations could impact the ETF's operation and performance.
Security risks: While spot Bitcoin ETFs offer a convenient way to invest in Bitcoin, they are still susceptible to cyber threats and hacking attempts. Investors should choose reputable ETF providers with robust security measures in place to mitigate these risks.
Management fees: Investors should consider management fees and potential tracking errors when evaluating spot Bitcoin ETFs. Management fees can erode returns over time, and tracking errors may result in discrepancies between the ETF's performance and the actual price movements of Bitcoin.
No 24/7 trading: Unlike many crypto exchanges that allow investors to trade 24 hours a day, the regular exchanges that spot Bitcoin ETFs trade on only allow for trading during regular market hours.
The Future of Spot Bitcoin ETFs
The approval of spot Bitcoin ETFs marks a significant milestone in the evolution of the cryptocurrency market and ETF industry. While the future landscape of Bitcoin ETFs is expected to be dynamic and evolving, their approval signals a growing acceptance of digital assets within the mainstream financial ecosystem.
The approval of spot Bitcoin ETFs may spur innovation and competition among ETF providers, leading to the development of new products and investment strategies tailored to investor preferences and market demands. This could result in a more diverse range of Bitcoin ETF offerings, catering to different risk profiles and investment objectives.
However, challenges such as regulatory scrutiny, market volatility, and investor education remain important considerations. Regulatory authorities will likely continue to monitor the cryptocurrency market closely, with the aim of ensuring investor protection and market integrity.
What are the tax implications of Spot Bitcoin ETFs?
For tax purposes, the Internal Revenue Service categorizes Bitcoin and other digital currencies as property, not currency, similar to stocks. The tax treatment of a Bitcoin ETF can be said to mirror that of holding Bitcoin directly.
If held for over a year in a taxable account, gains are taxed at capital gains rates, typically ranging from 0-20% based on taxable income and bracket. Short-term gains, from investments held for a year or less, are taxed as ordinary income.
FAQs About Bitcoin ETFs
1. Could Bitcoin ETFs affect the price of Bitcoin?
The introduction of Bitcoin exchange-traded funds (ETFs) could impact Bitcoin's price by attracting institutional investors, increasing liquidity, influencing market sentiment, and providing easier market access for retail investors. ETFs offer a regulated and accessible way to invest in Bitcoin, potentially leading to heightened demand and price fluctuations based on market dynamics and investor sentiment.
2. Do Bitcoin ETFs pay dividends?
No, Bitcoin exchange-traded funds (ETFs) typically do not pay dividends. Unlike traditional stocks, which represent ownership in a company and may distribute dividends from profits, Bitcoin is a decentralized digital currency with no underlying company or earnings. Bitcoin ETFs derive their value from the price movements of Bitcoin itself. Investors in Bitcoin ETFs primarily benefit from changes in the price of Bitcoin rather than receiving dividend payments. These funds are designed to track the performance of Bitcoin and provide a convenient way for investors to gain exposure to the cryptocurrency market.
3. Do the new products come with any investor protections?
ETFs can provide an accessible route to Bitcoin exposure; however, they don't come with the same investor protections as traditional securities. Unlike traditional ETFs that may be backed by physical assets or held in custody by regulated institutions, spot Bitcoin ETFs are directly tied to the volatile cryptocurrency market.
Investors should exercise caution and conduct thorough research before diving into this space. The lack of a physical backing or regulatory oversight specific to the cryptocurrency market means that investors might not have the same level of protection as they would with conventional investments.
It's also essential to stay informed about the unique risks associated with spot Bitcoin ETFs, such as market volatility and potential regulatory changes, and to consider consulting with financial experts to make informed investment decisions.
4. Are there minimum investment requirements for spot Bitcoin ETFs?
In general, spot Bitcoin ETFs typically have a relatively low minimum investment requirement compared to many other investment options, which aims to provide accessibility to a broader range of investors, including retail investors.
However, factors like transaction fees and the ETF's expense ratio can still impact the overall cost and returns on smaller investments. Investors should always conduct research and review the details provided by the Bitcoin ETF and their investment platform to make informed investment decisions.
Disclaimer: Cryptocurrency ETFs are speculative and involve a high degree of risk. An investor may lose all or substantially all of an investment in the Fund. Bitcoin has historically exhibited high price volatility relative to more traditional asset classes, which may be due to speculation regarding potential future appreciation in value among other factors. The performance of these ETFs should follow bitcoin prices closely, minus fees and the fund’s trading costs. Before investing in an ETF, you should read both its summary prospectus and its full prospectus, which provide detailed information on the ETF’s investment objective, principal investment strategies, risks, costs, and historical performance (if any). You can find prospectuses on the websites of the financial firms that sponsor a particular ETF, as well as through your broker.
This content is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investing involves risks. Moomoo is a financial information and trading app offered by Moomoo Technologies Inc. Securities are offered through Moomoo Financial Inc., Member FINRA/SIPC.