Just this year, there are more than 300 million people using cryptocurrency around the world. There are also over 18,000 companies that accept cryptocurrency as payment for services.
Trading Bitcoin continues to grow in popularity but the process seems complicated to some. If you want to get into crypto without trading the asset outright, you can through Bitcoin ETFs!
Before getting involved with Bitcoin ETFs, there are some things you need to know. Keep reading for a complete overview of this asset.
What Are Bitcoin ETFs?
Bitcoin ETFs are funds for trading on a stock exchange that attempt to track Bitcoin performance.
When you purchase an ETF, you aren’t directly buying Bitcoin. Instead, you are buying shares of a fund that invests in or tries to mimic the performance of Bitcoin.
Because cryptocurrency and digital currency trading aren’t regulated by the Securities and Exchange Commission (SEC), you cannot directly own Bitcoin through ETFs.
A few ETF firms and investment firms have submitted applications to SEC to launch ETFs that allow you to directly purchase Bitcoin.
Approving these funds isn’t high on the agenda list for SEC right now. There is speculation that approval will happen in the future.
Bitcoin vs. Bitcoin ETFs
The best ETF fund can’t perfectly track Bitcoin’s price because fees are built into ETFs to pay for management. So, why would you buy a Bitcoin ETF instead of purchasing Bitcoin directly?
A Bitcoin ETF makes it easier to get Bitcoin investment exposure in an IRA (individual retirement account). Plus, opening an account with a crypto exchange comes with a lot of complications.
It’s important to note that not all investment companies support crypto trading through an IRA account. With a select specialty investment company, you can keep your Bitcoin investments with the rest of your funds.
In 2016, Bitcoin IRA was launched to provide investors with the tax advantage of an IRA and the return of a high-risk asset class. In nature, Bitcoin IRA is similar to other IRAs but not funded by cash, bonds, or gold.
Bitcoin IRA is not limited to just Bitcoin. You can invest in other cryptocurrencies as well. While Bitcoin is the most important cryptocurrency right now, it’s more beneficial to have a diverse portfolio.
The crypto retirement space is expected to see a significant shift because the market has more options.
A self-directed IRA is the best option for holding crypto. An employer-sponsored 401(k) or a Roth IRA likely won’t allow for alternative assets like crypto and even gold.
How Do Bitcoin ETFs Work?
The idea of an ETF is to create something that tracks the price of a cryptocurrency. The fund will hold Bitcoin and allow investors to buy and sell it as they would on the open stock market.
A Bitcoin ETF would work like other ETFs that get traded on stock market exchanges. Instead of being linked to groups of stocks or indexes, the value of the shares in a Bitcoin ETF tracks the price of the volatile cryptocurrency.
SEC has yet to approve any ETFs tied to the price of Bitcoin. However, they do allow ETFs that provide exposure through Bitcoin features. This means ETFs invest in contracts that speculate the price of Bitcoin.
Futures contracts are agreements between two traders that obligate one trader to buy or sell an asset at a specific price, time, and quantity. Because Bitcoin is a commodity, futures trading related to it must take place on a regulated exchange.
Is Bitcoin ETFs Important?
The expectation for Bitcoin ETFs is to bring a new level of mainstream trustworthiness and acceptance to Bitcoin investing. Public trading companies bought Bitcoin as an investment which spurred new adoption.
Cryptocurrency is still seen by many as a risky bet. Conservative investors tend to stay clear of Bitcoin and Bitcoin ETFs.
If the SEC were to approve a Bitcoin ETF, investors can speculate on the price of Bitcoin easily. It could bring Bitcoin to Wall Street as the Bitcoin ETF would be traded through the same places as major stocks.
Likely, approval by the SEC would lead to a boost in the price of Bitcoin. The main argument for the rejection by the SEC is that Bitcoin’s price is prone to market manipulation.
Even if Bitcoin ETFs drew prices solely from the best crypto exchanges, the price can still be manipulated on exchanges with looser and less reputable restrictions.
The SEC also cites the lack of transparency in the crypto market as one of their main concerns.
Pros of Bitcoin ETFs
There are different reasons for owning Bitcoin ETFs, but what are the most attractive benefits? Convenience, flexibility, and regulations seem to be the top reasons.
An average investor enjoys the convenience that comes with owning a Bitcoin ETF because they don’t have to handle an underlying asset.
Cryptocurrency is difficult to understand and most platforms don’t do the best job of explaining the process. Trading on crypto platforms is dangerous if you choose an exchange without a great track record.
The risk for investors is heightened if the cryptocurrency exchange has dubious regulatory policies.
With a crypto ETF, an investor gains exposure to the new market using an existing brokerage account. This means an investor doesn’t have to worry about the safety and security of holding the assets.
Unlike investing in Bitcoin directly, when you have a Bitcoin ETF, you’ll have the option of going long or short. Long or short selling involves investing in the spot market to profit from a falling asset’s value.
An investor with a Bitcoin ETF can take advantage of market corrections and rallies.
Even though crypto markets are unregulated, ETFs are regulated even with a cryptocurrency ETF.
Regulators can monitor the Bitcoin ETF performance and analyze it on public platforms. In addition, they can protect against price manipulation in the ETF market.
However, this means the underlying price of Bitcoin can still be manipulated through unregulated crypto exchanges.
Cons of Bitcoin ETFs
ETFs do come with some faults. Learn the disadvantages of Bitcoin ETFs to see if the pros outweigh the cons for you.
Issuers of ETFs charge a management fee per year which amounts to between 0.4% and 1.5%. There is not a fee for storing Bitcoin on crypto exchanges, but safety is more of a concern for digital wallets.
When you hold digital assets outright, it’s easy to exchange them. A Bitcoin wallet makes it easy to swap crypto for another type of asset that is supported by the platform.
A Bitcoin ETF is different. You won’t be able to trade pairs across different platforms which means speculators won’t take advantage of price differences.
Not only are there exchange limitations for trading, but exchanges aren’t always the safest place to hold crypto. There are hundreds of cryptocurrency exchanges but only a select few are worth the trouble.
Crypto traders flock to the most popular options to know that their assets are in a safe space.
Price Discovery Errors
ETFs can track the performance of underlying assets which could mean actual assets or indices. The net asset value (NAT) of the fund will lag behind the actual asset values that are tracked.
In other instances, the change in prices could be caused by market volatility.
Investing in Cryptocurrency in Other Ways
Cryptocurrency is still a new concept that investors are trying to feel out. If you don’t think Bitcoin ETFs are worth your money, you might be interested to learn how to invest in crypto in other ways.
If you want to own a digital currency outright, you can invest in Bitcoin directly. You can add a crypto investment to your portfolio by finding an exchange that fits your needs.
There are different types of cryptocurrencies to choose from, not just Bitcoin. Other popular options are Ether and Tether, but just because they are established doesn’t make them a good investment.
Learn about the different cryptos and practice investing with caution.
Because there are various cryptocurrency exchanges out there, you can join the world of crypto by buying company stock. For example, Coinbase is a major exchange with a public stock that has been available for almost a year now.
You can also invest through blockchain ETFs. Blockchain, the central technology behind cryptocurrencies, has stocks through companies involved in utilization and development.
A blockchain ETF might be the best way to expose yourself to crypto technology without investing in currencies directly.
Are You Ready to Invest in Bitcoin ETFs?
Bitcoin ETFs are different than owning a digital asset directly. Although some prefer to invest in Bitcoin outright, others enjoy the benefits that come with investing in a Bitcoin ETF.
The best way to invest is by combining your Bitcoin ETF with other retirement savings. Going about this is easier with the help of experts.
Tax Savers can help with any questions you might have and figure out how to save you money.