A Bitcoin ETF allows investors to gain exposure to Bitcoin without holding the cryptocurrency directly. It tracks the price of Bitcoin, allowing investors to buy and sell shares that represent its value.
Also, Bitcoin ETFs provide an easy way to invest in Bitcoin within regular brokerage accounts. However, bitcoin ETFs come with risks like volatility, security issues, and regulatory uncertainty that investors should understand.
In this beginner's guide, we will explain bitcoin ETFs, how they work, their benefits, how to invest, and the limitations to consider before investing in these crypto-tracking funds.
What are Bitcoin ETFs?
A Bitcoin exchange-traded fund, or ETF, is a special investment that makes it easy to put money into Bitcoin without directly buying the digital currency.
Like a regular stock, an ETF allows you to invest in a group of stocks at once. A Bitcoin ETF lets you invest in Bitcoin without dealing with crypto exchanges or digital wallets. Instead, you buy shares of the ETF through a brokerage firm.
The fund manager pools money from all the ETF shareholders and purchases actual Bitcoin on your behalf. This allows public stock market investors to get exposure to price changes in Bitcoin in their regular brokerage accounts.
Essentially, Bitcoin ETFs make the leading cryptocurrency an option in traditional stock portfolios.
How do Bitcoin ETFs really work?
A Bitcoin ETF works like any exchange-traded fund that trades on public stock exchanges. For example, when you buy shares of a gold ETF like the SPDR Gold Shares (ticker: GLD), you don't directly own any physical gold.
Instead, you own shares representing a portion of the fund's total gold assets. Similarly, when you invest in a Bitcoin ETF, you don't directly own any of the actual digital currency. The fund manager purchases the underlying bitcoins with money pooled from all the investors.
Assuming you buy $1,000 worth of stock in a Bitcoin ETF and the fund holds $10 million in actual bitcoins, you effectively own 0.01% of the fund's cryptocurrency holdings. Your shares rise and fall in value based on Bitcoin's USD price changes.
This allows public investors to gain price exposure to Bitcoin without worrying about buying, storing, or safeguarding it themselves.
You can also look at it as investing in a fruit. Imagine a person owning a big basket of apples, oranges, and bananas. Now, instead of going to the store and buying the actual fruits, you could buy shares of the fruit basket ETF.
You don't have to hold any real fruit yourself. The fund manager buys and manages all the actual fruit. As the overall value of the fruits in the basket goes up or down on the market, the price of your fruit basket ETF shares will also go up and down. Understand?
Benefits of Bitcoin ETFs
For investors interested in cryptocurrency investment, Bitcoin ETFs offer major advantages over owning actual bitcoins or Bitcoin futures contracts. As exchange-traded funds (ETFs), these financial vehicles trade similarly to stocks, making Bitcoin and other digital assets more accessible to regular ETF trading on public markets.
One of the biggest benefits of Bitcoin ETFs is their convenience and simplicity compared to direct cryptocurrency investment. Investors don't need to deal with clunky crypto exchanges, digital wallets, or complicated blockchain addresses to gain exposure to market trends.
Additionally, funds like the ProShares Bitcoin ETF (ticker: BITO) operate as Bitcoin Futures ETFs, meaning they track regulated Bitcoin derivative contracts. This provides transparency and protection for investors unfamiliar with custodying crypto assets.
ETF regulations also limit operational risks inherent in cryptocurrencies. As SEC-registered securities, Bitcoin ETFs offer guarantees against hacking, theft, or lost passwords, which frequently plague individual crypto investors.
Professionally managed funds are custodied by regulated financial institutions and insured against technology failures or fraud as well.
For long-term investors, buying and holding BITO shares in a retirement account allows tax-deferred growth on any portfolio gains tied to the crypto market's upside trends. And timing the market becomes easier with Bitcoin ETFs through handy features like limit orders and options strategies.
In addition to lower barriers and heightened security, Bitcoin ETF trading attracts investors who prefer to incorporate digital assets using existing brokerage accounts and proven finance strategies. More advisors advocate carving out small blockchain finance allocations to balance portfolios instead of making standalone bets. This diversification shines compared to owning only bitcoins directly.
As the easiest way to gain crypto exposure in regular stock accounts, Bitcoin ETFs unlock digital currency investing for millions of new participants without radically altering their successful investment approaches.
Though unable to replace holdings in spot bitcoin, Bitcoin ETFs handily complement traditional portfolios by merging cryptocurrency investment with the well-known ETF trading ecosystem.
How to invest in Bitcoin ETF
Investing in a Bitcoin ETF is very similar to purchasing any exchange-traded fund. The main thing you need is an online brokerage account that allows you to buy and sell ETFs—popular brokers like Fidelity, Charles Schwab, E*Trade, and TD Ameritrade all permit Bitcoin ETF trading.
Once you have a brokerage account setup, follow these steps to invest in a Bitcoin ETF:
1. Choose Your Bitcoin ETF
There are currently only a couple of Bitcoin ETFs available, the largest of which is the ProShares Bitcoin Strategy ETF, which trades under the ticker "BITO." Before moving money into the account, Ensure your broker allows trading the specific ETF you want to buy.
2. Fund Your Account
Transfer money into your brokerage account via options like bank wire, ACH transfer, or check deposit. Make sure there are sufficient cleared funds to cover your desired Bitcoin ETF purchase amount plus any commissions.
3. Enter A Buy Order
In your account's trading platform, look up the fund's ticker symbol and enter the share quantity you wish to buy along with the type of order. Most beginners opt for a standard market order to purchase shares immediately at current market prices.
4. Hold or Trade ETF Shares
Once your buy trade is executed, you will own shares in the Bitcoin ETF, which can be held long-term or sold later when you want to take profits or cut losses. Track the fund's net asset value over time to see your investment value appreciate or depreciate based on Bitcoin price changes.
5. Reinvest Dividends
Some Bitcoin ETFs pay periodic dividends based on the yield they earn from the bitcoins they own and loan out. Opting to reinvest dividends allows more fund shares to accumulate through a compounding effect.
Bitcoin ETF investing crosses cryptocurrency exposure with public equities accessibility. By following the same brokerage account funding and trading procedures used for buying stocks, you can now add exposure to digital assets to a diversified portfolio all in one place.
This convenience for accessing volatile yet potentially lucrative crypto investments continues attracting droves of mainstream investors to Bitcoin ETFs.
Limitations of Bitcoin ETFs
1. No Direct Bitcoin Ownership
While Bitcoin ETFs provide price exposure, they don't entitle shareholders to own or spend any actual bitcoins directly. Investors rely on the custodian and fund manager to handle assets.
2. Premiums/Discounts to NAV
Supply and demand imbalances for popular Bitcoin ETF shares can detach market prices from the fund's underlying net asset value benchmark tied to Bitcoin holdings. Traders pay inflated premiums during heavy demand.
3. Tracking Error from Futures
Most approved Bitcoin ETFs operate via Bitcoin futures derivatives instead of direct coin ownership. The mechanics of rolling contracts can lag spot prices and cause divergent returns long-term compared to owning bitcoins outright.
4. No Voting Rights
As purely financial instruments tracking an index and managed by a fund provider, Bitcoin ETFs don't afford shareholders any voting rights or influence on the cryptocurrency ecosystem itself. They only offer indirect exposure.
5. Regulatory Uncertainty
While rules for exchange-traded funds are well-established, oversight specific to Bitcoin vehicles remains unpredictable. Any bans or restrictions on related activities like futures trading directly impact ETF viability.
Rounding Up
In conclusion, Bitcoin ETFs present exciting opportunities and unique risks that investors should weigh carefully. These innovative investment vehicles greatly simplify gaining exposure to the crypto market's potentially lucrative yet volatile price trends.
Bitcoin ETFs allow cryptocurrency participation without the complex storage and security responsibilities required of direct Bitcoin owners. However, ETFs also introduce tracking errors and premiums/discounts and rely on the fund manager's capabilities.
While not perfect substitutes for owning digital coins outright, Bitcoin ETFs enable public equity traders to access emerging blockchain assets using familiar brokerage accounts and proven portfolio tactics suited for managing risk. Ultimately, they unlock crypto's investment potential for Wall Street at large.