Spot Bitcoin Etf: A Beginner's Guide To Investing

Investing in a spot bitcoin exchange-traded fund (ETF) is now easier than ever following the U.S. Securities and Exchange Commission's (SEC) decision to approve 11 bitcoin ETF applications in January 2024. This move opened the door for regular investors to enter the crypto market without the need for a bitcoin wallet. Instead, investors can now simply buy and sell shares in the new funds via their current brokerage account. The SEC's approval of spot bitcoin ETFs is a significant regulatory seal of approval for the world's largest crypto asset, likely reducing investor fears about entering this space.

How to buy a Bitcoin ETF

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.

Where to Buy a Bitcoin ETF

Bitcoin ETFs are available through most online brokers that offer traditional securities like stocks and bonds. Some of these brokers may also offer the opportunity to invest in Bitcoin directly, while others only allow you to trade Bitcoin futures.

ETFs trade on traditional exchanges such as the New York Stock Exchange or the Nasdaq.

• Open a brokerage account: Select a company that offers spot Bitcoin ETFs and open an online brokerage account.
• Fund the account: Many brokerage platforms allow you to fund your account from other brokerage platforms or a regular bank account. Ensure you fund the account with enough money to cover the cost of your ETF shares, additional fees, and commissions.
• Research available Bitcoin ETFs: There are currently 11 Bitcoin ETFs approved by the SEC. Look for ETFs with a high trading volume and high assets under management (AUM). Also, research what other assets comprise the ETF and check if the issuer behind it is reputable.
• Select a preferred Bitcoin ETF: Many brokerages give you at least a couple of options, displaying the difference in fees for each offer. Choose a Bitcoin ETF that aligns with your budget and investment goals.
• Place an order: Place a buy order for your selected Bitcoin ETF, as you would for stocks. You can choose between a market order, which buys the ETF in minutes, or a limit order, which will execute at your pre-set price.
• Monitor your investments regularly: Keep an eye on your investment, observe Bitcoin charts, and watch out for any Bitcoin-related news, as this can often affect the volatility of your spot Bitcoin ETF.

Things to Consider Before Buying a Bitcoin ETF

When deciding whether to buy a Bitcoin ETF and choosing a specific product, there are several things to consider:

• Fees: Analyse the fees involved in the different ETFs and the platforms they are offered on. Many issuers are offering fee waivers to encourage investments, but these are temporary. Also, look out for high management fees, which can cut into your ETF profits.
• Liquidity: The liquidity of the underlying Bitcoin futures contracts is crucial for the ETF to operate smoothly. Limited liquidity in the futures market may result in wider bid-ask spreads, making it more expensive for investors to buy or sell shares of the ETF.
• Regulatory uncertainty: The regulatory landscape for cryptocurrencies is still evolving, and changes in regulations can impact the legality, trading, and valuation of Bitcoin futures.
• Security risks: The underlying Bitcoin in your ETF is in the custody of at least one counterparty. If the counterparty gets hacked, it could adversely affect your investment's safety.
• Volatility: Bitcoin is already infamous for its high volatility, and investing in a Bitcoin ETF will expose you to these price swings.

The difference between ether and bitcoin

Bitcoin (BTC) and Ether (ETH) are two of the most popular cryptocurrencies globally and the first two cryptocurrencies by market capitalization. They are both based on blockchain technology, but there are some key differences.

Bitcoin was launched in January 2009 and was the first cryptocurrency. It was introduced as an online currency without any central authority, controlled by governments or corporations. Bitcoin was created primarily as a decentralized digital peer-to-peer currency aiming to serve as a payment system and a store of value. Over time, it has also become viewed as a hedge against inflation and a means of preserving wealth.

Ethereum, which launched in July 2015, is a versatile platform that supports not only a digital currency but also smart contracts and decentralized applications (dApps). It is intended for complex smart contracts and decentralized applications, which are believed to be part of the emerging infrastructure of the future of the internet, known as Web3. Ether, the native cryptocurrency of the Ethereum network, is traded as a digital currency, held as an investment, used to purchase goods and services, and used on the Ethereum network to pay transaction fees.

While both networks are powered by the principle of distributed ledgers and cryptography, they differ technically in several ways. For example, transactions on the Ethereum network may contain executable code, while the data affixed to Bitcoin network transactions is only used to record transaction information. Another difference is block time: an ETH transaction is confirmed in seconds, compared with minutes for BTC. Additionally, their consensus mechanisms differ: Bitcoin uses proof-of-work, while Ethereum uses proof-of-stake.

Bitcoin has seen greater acceptance by traditional finance, evidenced by the approval of spot Bitcoin ETFs in 2024. Ethereum, on the other hand, can support smart contracts, which Bitcoin does not have. Bitcoin uses an energy-intensive method of verifying transactions known as Bitcoin mining, while Ethereum has transitioned to a less energy-intensive process called staking.

Both Bitcoin and Ethereum have experienced change and upgrades over the years, and it remains to be seen which cryptocurrency and blockchain will stand the test of time.

How to trade Bitcoin ETFs

Bitcoin ETFs (exchange-traded funds) are investment funds that allow people to invest in Bitcoin without actually owning the cryptocurrency. They are traded on stock exchanges, providing investors with diversified exposure to Bitcoin's price movements.

Step 1: Understanding Bitcoin ETFs

Firstly, it is important to understand the difference between Bitcoin ETFs and Bitcoin. Bitcoin ETFs are investment vehicles that gather funds from numerous investors to invest in Bitcoin. They are traded on exchanges, meaning their share prices vary throughout the day as investors buy and sell them. This is in contrast to Bitcoin, which can only be bought and sold along the blockchain.

Step 2: Choosing a Platform

You can trade Bitcoin ETFs on traditional exchanges such as the New York Stock Exchange and Nasdaq. Many online brokers that offer ETFs now provide access to some or all of the approved spot Bitcoin ETFs, including Interactive Brokers and Fidelity.

Step 3: Opening a Brokerage Account

If you don't already have a brokerage account, you'll need to open one to buy ETFs. You can open a brokerage account online by selecting a company that offers spot Bitcoin ETFs and funding your account from other brokerage platforms or a regular bank account.

Step 4: Researching and Selecting Bitcoin ETFs

There are currently 11 spot Bitcoin ETFs approved by the SEC. When choosing a Bitcoin ETF, it is important to compare the fund's expense ratio, which is the annual cost of owning the ETF. Spot Bitcoin ETF expense ratios currently range from 0.19% to 1.50%. It is also worth looking into what other assets comprise the ETF and checking if the issuer behind it is reputable.

Step 5: Placing an Order

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

Step 6: Monitoring Your Investments

It is important to regularly monitor your investments, observing Bitcoin charts and watching out for any Bitcoin-related news, as this can affect the volatility of your spot Bitcoin ETF.

Advantages of Bitcoin ETFs:

• Convenience: Bitcoin ETFs are tradeable on traditional exchanges, so investors can easily explore them without needing to sign up for crypto exchanges or worry about wallet safety and custody issues.
• Liquidity: Bitcoin ETFs bring liquidity to Bitcoin, which can be beneficial to investors. The companies issuing spot Bitcoin ETFs provide the liquidity required for trading and implement smaller spreads, encouraging monetary inflows.
• Regulatory Oversight: Spot Bitcoin ETFs are a more regulated asset class than cryptocurrencies, providing a greater protective barrier for investors.

Disadvantages of Bitcoin ETFs:

• Crypto Volatility: The cryptocurrency market has experienced heightened volatility in recent years, and holding a Bitcoin ETF does not protect you from this volatility.
• Regulatory Uncertainty: Spot Bitcoin ETFs are subject to government control and scrutiny, and new regulations could limit your investments in these ETFs.
• Security Risks: The underlying Bitcoin in your ETF is in the custody of at least one counterparty. If the counterparty gets hacked, it could adversely affect the safety of your investment.
• Management Fees: High management fees can cut into your ETF profits over time.
• No 24/7 Trading: Unlike crypto exchanges, the regular exchanges that spot Bitcoin ETFs trade on only allow trading during regular market hours.

The risks of investing in Bitcoin

Bitcoin is the most successful virtual currency today, but with any new frontier, there are obstacles. Despite its recent popularity, there are some serious risks when it comes to investing in Bitcoin. Here are some of the key risks to be aware of:

Volatile and Fluctuating Market

The price of Bitcoin is constantly changing and can be extremely volatile. With such an unpredictable market, there’s no guarantee of a return on your investment. For example, on November 6, 2018, one bitcoin was worth $6,461.01. If you purchased a bitcoin on December 17, 2017, the price topped $20,000. Days later, on the 24th, buyers could not sell their investment for more than $14,626. To avoid massive losses, it is recommended to make small and cautious investments.

Cyber Threats and Fraud

Bitcoin is a technology-based currency, which makes it susceptible to cyberattacks and hacking. There is no way to retrieve lost or stolen bitcoins, and many reports suggest that buyers often lose their investments on exchanges and mining losses. Additionally, there is a fair amount of fraud in the bitcoin market, with fake exchanges and phishing attacks duping investors out of their bitcoins.

Little or No Regulation

The Bitcoin market currently operates with little to no major regulations. Governments and tax authorities are still figuring out how to approach cryptocurrency, and the lack of clarity can lead to uncertainty and potential future restrictions. The unregulated nature of the market also makes it more vulnerable to price manipulation and other malicious activities.

Technology Reliance

Bitcoin is entirely reliant on technology, and without it, cryptocurrency is worthless. It is a 100% technology-based currency with no physical collateral. This makes bitcoin owners more vulnerable to cyber threats and online fraud, and a system shutdown could be catastrophic.

Security, Custody & Consumer Rights

Storing bitcoins and other cryptocurrencies can be risky. There have been numerous incidents of theft on personal wallets and exchanges. If cryptocurrencies are not correctly stored and protected, hacking remains a constant threat. Additionally, investors may not have the same legal options or recourse if they become victims of financial crime or fraud.

The future of Bitcoin ETFs

Firstly, the volatile nature of cryptocurrencies means that Bitcoin ETFs are risky investments prone to significant price swings. The value of an ETF may not always directly match the current value of Bitcoin due to management fees, transaction costs, or logistical issues.

Secondly, the regulatory landscape for cryptocurrencies is still evolving, and changes in regulations can impact the legality, trading, and valuation of Bitcoin futures, creating uncertainty for investors.

Thirdly, the liquidity of the underlying Bitcoin futures contracts is crucial for the smooth operation of Bitcoin ETFs. Limited liquidity in the futures market can make it more expensive for investors to buy or sell shares of the ETF.

Additionally, the recent approval of spot Bitcoin ETFs by the SEC has sparked a fee war among issuers, with many waiving or reducing fees to attract investors. This may impact the profitability of these ETFs in the long term.

Finally, the approval of spot Bitcoin ETFs has opened up cryptocurrency investing to a wider range of investors, increasing demand for Bitcoin and driving up its price.

In conclusion, while the future of Bitcoin ETFs is uncertain, the volatile nature of cryptocurrencies, regulatory changes, liquidity issues, fee competition, and increased demand are all factors that may impact their performance and popularity in the coming years.

Frequently asked questions