Bitcoin ETFs: Pros, cons and how they work

Cryptocurrencies like Bitcoin have gone from being niche and quirky ideas that only a few people in Silicon Valley understood or used, to a cultural phenomenon that is capturing headlines and assets around the world.

Investors who want to buy into Bitcoin can now do so through a growing range of ETFs. With over $6.5B in assets (Feb 2021), Bitcoin ETFs are a fast-growing segment of the ETF market and with competition for assets heating up, the fast pace of Bitcoin ETFs launches is likely to continue for some time, broadening the pool of choice for investors.

But what are the differences in investing in Bitcoin through an ETF instead of buying it directly?

Advantages of Bitcoin ETFs 

There are some advantages with using ETFs to invest in Bitcoin, such as convenience, confidence and safety.

1. An easier way to invest in Bitcoin

Bitcoin ETFs can be bought, held and sold using a normal brokerage account.

Unlike direct investment in Bitcoin, investors do not need to go through the challenges of setting up a cryptocurrency wallet or trading on unregulated cryptocurrency exchanges. Millions of investors’ existing brokerages or banks are already set up for trading ETFs, so this means no additional steps are necessary to start trading Bitcoin through ETFs.

2. Deal with the businesses you trust

Bitcoin ETFs are issued by regulated companies and trade on regulated exchanges so you can invest with greater confidence knowing that all parties involved have been checked and that their trades are monitored, to prevent market abuse or funding illegal activities. This would not be the case if investors invest directly through cryptocurrency exchanges.

With their investment physically backed and in custody of regulated entities, Bitcoin ETFs mitigate the risk of fraud and avoid the risk of scandal, collapses, hacks and failures that are associated with unregulated crypto exchanges.

3. No Wallet to Lose

There have been many horror stories of investors losing the key to their Bitcoin wallet and being unable to access thousands or even millions of dollars’ worth of Bitcoin.

An additional benefit of the ETF is that there is no risk of losing your key and suddenly being unable to access your Bitcoins. The buying, storing and selling of the Bitcoins backing the ETF is handled by the Authorised Participant and the ETF is stored in your brokerage account just like a normal share.

Disadvantages of Bitcoin ETFs 

This doesn’t mean that investors shouldn’t exercise caution with Bitcoin ETFs. Bitcoin was designed as a currency, not an investment and it is a volatile asset and particularly difficult to gauge the fair value. Here are some downsides to using a Bitcoin ETF vs buying Bitcoin directly on a crypto exchange.

1. Tracking isn’t always perfect

Some ETFs directly hold physical Bitcoins, others will replicate the asset synthetically via swaps. Different structures will give different results in terms of replication and moves in the price of Bitcoin might not always be exactly reflected in the price of the ETF. Swap-based products will also give you exposure to the counter party credit risk of the swap provider.

2. Bitcoin ETFs come with extra costs

ETFs have their own layer of fees that investors would not incur should they elect direct investment in Bitcoin. Overall costs of ownership include transaction costs (the cost of trading shares of the ETF) as well as management fees (the cost of holding shares of the ETF). Fees for Bitcoin ETFs can be high – often upwards of 2% a year. Over the long run these expenses will hinder returns relative to owning Bitcoin directly.

3. No-one knows if Bitcoin is a good long-term investment 

Bitcoin’s prospects and future price evolution are unclear. Hot and trendy, Bitcoin trades more on speculation as opposed to a real value, which has so far resulted in high volatility and large price swings.

Just like other investment in currencies, buying Bitcoin in anticipation of upward movement in price requires research from investors on the fundamental value of the currency. This analysis can be harder to make for Bitcoin as it is not used as a mainstream means of payment or linked to a specific economy.

4. You can’t buy things with a Bitcoin ETF

If you own Bitcoin directly, you can use it just like a regular currency to buy things or make payments as well as benefiting from any increase in value relative to your local currency. When you buy a Bitcoin ETF, you cannot use the Bitcoins to make (or receive) payments and are only benefiting from positive price changes.

Want to know more? Explore the Bitcoin ETFs available in your region with Trackinsight’s tools.