The Arrival Of Bitcoin Etfs: How To Invest

Bitcoin ETFs have become an increasingly popular way to invest in Bitcoin, especially after the Securities and Exchange Commission (SEC) approved several exchange-traded funds that invest directly in the cryptocurrency in January 2024.

A spot Bitcoin ETF pools investor money to purchase Bitcoin directly. It is managed by an investment firm and listed on a traditional stock exchange. Bitcoin ETFs are available through most online brokers who offer traditional securities like stocks and bonds.

If you're looking to invest in a Bitcoin ETF, here are the steps you can follow:

1. Choose a Brokerage Platform: Select an online brokerage platform that offers Bitcoin ETFs, such as Fidelity, BlackRock, or Invesco.

2. Open an Account: Sign up and create an account with your chosen brokerage platform.

3. Fund Your Account: Transfer funds from your bank account to your brokerage account.

4. Search for a Bitcoin ETF: Use the brokerage platform's search tool or ETF screener to find the desired Bitcoin ETF by its name or ticker symbol. Compare different options based on factors like the fund's expense ratio.

5. Purchase the Bitcoin ETF: Once you've found the Bitcoin ETF you want to invest in, place your buy order, ensuring you've selected the correct number of shares and ticker symbol.

It's important to note that investing in Bitcoin and Bitcoin ETFs carries risks due to the volatile nature of cryptocurrencies. Be sure to do your research, understand the potential risks and regulations, and consult with a financial advisor before making any investment decisions.

Where to buy Bitcoin ETFs

There are several options for buying Bitcoin ETFs, with varying levels of fees and risk.

Firstly, it is important to note that the regulatory environment for Bitcoin ETFs varies across the world. For example, Germany has been described as "crypto-friendly", with crypto recognised as an official financial instrument. This has allowed for the launch of a physically-backed Bitcoin ETF, BTCetc Bitcoin Exchange Trade Crypto (BTCE), on the Frankfurt Stock Exchange. However, the US Securities and Exchange Commission (SEC) has blocked several proposals for Bitcoin ETFs due to the unregulated nature of the market.

As a result, US investors have had to look at alternative investment options. One option is the Grayscale Bitcoin Trust (GBTC), which holds physical Bitcoin and has attracted $8 billion in assets under management. It is important to note that this is not an ETF, and it is subject to counterparty risk. Another option is the ProShares Bitcoin Strategy ETF (BITO), which is traded on the NYSEArca and has been recognised as a Bitcoin ETF.

For those looking to invest in crypto-centric ETFs, online brokers such as Coinbase, eToro, and Robinhood Crypto offer the ability to buy and sell shares. These platforms often provide commission-free trading and a range of advanced tools and educational resources. However, you may be required to maintain a minimum balance to open an account.

When considering where to buy Bitcoin ETFs, it is essential to research the fees, reputation, and regulatory environment of the chosen platform or exchange. It is also worth noting that crypto ETFs are subject to management fees, which can lead to high costs over time.

How to buy Bitcoin ETFs

To buy a Bitcoin ETF, you'll need to open a brokerage account if you don't already have one. You can do this online in about 15 minutes, then fund it by transferring money from your bank account.

Once your account is open, you can follow these steps to purchase a Bitcoin ETF:

Search for the ETF you want

Use the brokerage's search tool or ETF screener to find the ETF by its name or ticker symbol. If you don't know which Bitcoin ETF to invest in, compare them — one key detail is the fund's expense ratio, which is the annual cost of owning the ETF.

Place your trade

Once you've funded your account and found the Bitcoin ETF you'd like to purchase, placing your trade is typically as simple as clicking a buy button. You'll get a chance to double-check your order, ensuring you've purchased the correct number of ETF shares for the right amount of money and selected the correct ticker symbol.

Where to buy Bitcoin ETFs

Bitcoin ETFs are available at many online brokers that offer ETFs, often with no trade commission. Some of the brokers that offer Bitcoin ETFs include:

• Interactive Brokers
• Merrill Edge® Self-Directed
• Fidelity
• ETRADE

A spot Bitcoin ETF pools investor money to purchase Bitcoin directly. It is managed by an investment firm and listed on a traditional stock exchange.

Who should invest in Bitcoin ETFs?

Investing in a Bitcoin ETF could be a good option for people who are looking for a more traditional way of investing in the digital currency. ETFs remove some of the complexity of investing directly in Bitcoin by packaging Bitcoin into ETF form.

All ETFs that trade on U.S. exchanges are regulated by the Securities and Exchange Commission (SEC).

The benefits of Bitcoin ETFs

Bitcoin ETFs, or exchange-traded funds, have become an increasingly popular way to invest in cryptocurrencies. Here are some of the key benefits:

• Streamlined investing processpurchase shares using conventional brokerage accounts, making it easier for those unfamiliar with crypto exchanges to invest in Bitcoin.
• Regulatory oversight: Bitcoin ETFs operate within regulated financial systems, providing greater investor protection and a more secure investment environment.
• Diversification: ETFs provide a way to diversify investment portfolios. Adding a Bitcoin ETF can aid in risk distribution since Bitcoin often has a low correlation with traditional assets like stocks and bonds.
• Liquidity: Cryptocurrency investments through ETFs typically offer better liquidity than direct investments. This allows investors to react more quickly to market fluctuations, especially in volatile markets.
• Tax efficiency: Investing in Bitcoin ETFs may be more tax-efficient than direct Bitcoin investments due to the special tax treatment ETFs often receive.
• Simplicity: For most investors, buying shares in an ETF is much simpler than buying and holding crypto directly. With an ETF, there is no need to create a wallet, find an exchange, or worry about storing crypto securely.
• Security: ETFs do not require investors to own any cryptocurrency or store keys safely. This reduces the risk of hacking or losing passwords or private keys associated with direct crypto investments.
• Professional fund management: ETFs are managed by professionals, which can be beneficial in the complex and rapidly evolving world of cryptocurrencies.

While there are advantages to investing in Bitcoin ETFs, it's important to consider the potential drawbacks as well, such as higher fees, lack of direct ownership, and the volatile nature of the crypto market.

The risks of Bitcoin ETFs

Bitcoin ETFs have become an increasingly popular way to gain exposure to Bitcoin's price movements without directly buying, holding, and managing the cryptocurrency. However, investing in Bitcoin Exchange-Traded Funds (ETFs) comes with several risks that investors should carefully consider before adding them to their portfolios. Here are some of the key risks associated with Bitcoin ETFs:

Extreme Volatility

The value of Bitcoin is known for its substantial price fluctuations, and ETFs that track its price are inherently high-risk investments. The extreme volatility of the cryptocurrency market can lead to the possibility of significant and rapid losses for investors. For example, it is not uncommon for the price of Bitcoin to change by more than 10% in a single day, which can be disturbing for investors unaccustomed to such volatility.

Regulatory Uncertainty

The regulatory landscape for cryptocurrencies is constantly evolving, and changes in regulations can significantly impact the operation, availability, and even the viability of Bitcoin ETFs. Authorities worldwide are considering and implementing new regulations for digital currencies. For instance, regulatory crackdowns in major markets like China have historically led to significant downturns in the cryptocurrency market.

Management Fees and Expense Ratios

Bitcoin ETFs generally carry higher management fees compared to the transaction costs associated with directly owning cryptocurrency. These fees, along with the expense ratios of the ETFs, can noticeably reduce potential investment returns over time. The expense ratios of Bitcoin ETFs can range from 0.19% to 1.50%, and in some cases, even higher.

Limited Investor Protections

Bitcoin ETFs offered as exchange-traded products (ETPs) may have less regulatory oversight than traditional ETFs, potentially exposing investors to increased risks or conflicts of interest. The limited investor protections in ETPs are a concern for regulators, who worry about the suitability of highly volatile assets like Bitcoin for everyday investors.

Security Concerns

While Bitcoin ETFs eliminate the need for investors to manage private keys, the security of the underlying Bitcoin holdings remains crucial. The funds rely on third-party custodians, introducing potential vulnerabilities related to hacking or mismanagement of assets. The cryptocurrency market's susceptibility to cybersecurity risks, hacks, fraud, and security breaches can impact the value of Bitcoin and, consequently, the performance of the ETFs.

Suitability for Retirement Accounts

Regulatory bodies express serious concerns about using retirement savings to invest in cryptocurrencies like Bitcoin. These assets may not align with the prudent investment guidelines required for retirement plan administrators. Therefore, investors should carefully consider the suitability of Bitcoin ETFs for their long-term investment goals and risk tolerance.

Bitcoin ETF alternatives

Bitcoin Exchange-Traded Funds (ETFs) are investment funds that hold Bitcoin and/or other crypto-assets and issue securities as shares of the fund, which are traded on an exchange. They are traded on stock exchanges, providing investors with diversified exposure to various asset classes and the flexibility to buy or sell shares throughout the trading day at market prices.

You can buy a Bitcoin ETF through a brokerage account, often with no commission. If you don't already have a brokerage account, you'll need to open one to buy ETFs. Once you have your account open, you can search for the ETF you want using the brokerage's search tool or ETF screener.

There are several alternatives to investing in Bitcoin ETFs, including:

• Investing in Bitcoin directly: You can buy and sell Bitcoin directly on a crypto exchange. This option may be preferable if you want to have more control over your holdings and don't want to pay ongoing fees. However, it also comes with more security risks and responsibilities, such as storing your Bitcoin in a crypto wallet or on an exchange.
• Crypto-related investments: If you don't want to deal with the complexities of owning and storing cryptocurrency, you can invest in crypto-related stocks. For example, you can buy stock in Coinbase, a major cryptocurrency exchange, or in companies that have invested in crypto or whose business involves cryptocurrency trading, mining, or other services.
• Other crypto ETFs: There are also other crypto ETFs that offer exposure to multiple cryptocurrencies or the industry as a whole. These ETFs are often based on derivatives like futures contracts. Examples include the Amplify Transformational Data Sharing ETF (BLOK) and the First Trust Indxx Innovative Transaction & Process ETF (LEGR).
• Robo-advisors: These are online investment platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. They can be a low-cost option for investors who want a more passive approach to investing in cryptocurrencies and other assets.

Frequently asked questions