Bitcoin Investment Funds: Where To Invest?

Bitcoin ETFs (exchange-traded funds) are funds that trade on a stock exchange and attempt to track the performance of Bitcoin. They are traded on the stock market, just like any other stock or exchange-traded fund. Bitcoin ETFs are highly liquid funds that change price throughout the trading day, much like a stock. They are designed to track the price of Bitcoin directly by holding it.

The Securities and Exchange Commission (SEC) approved the first-ever spot Bitcoin ETFs in January 2024, including those from Fidelity, BlackRock, and Invesco. This means that a new batch of ETFs can now directly purchase Bitcoin and hold it in custody or outsource the holding of Bitcoin to a third party.

- iShares Bitcoin Trust (IBIT)

- Fidelity Wise Origin Bitcoin Fund (FBTC)

- Bitwise Bitcoin ETF (BITB)

- Grayscale Bitcoin Trust (GBTC)

- ARK 21Shares Bitcoin ETF (ARKB)

- Invesco Galaxy Bitcoin ETF (BTCO)

Bitcoin ETFs vs. direct investment

Overview

Bitcoin, the world's leading and most widely adopted cryptocurrency, offers two primary investment options: Exchange-Traded Funds (ETFs) and direct ownership. While both methods provide exposure to Bitcoin, they differ significantly in terms of management, custody, trading, and tax implications.

Management

Bitcoin ETFs are managed by professional fund managers who handle the buying, selling, and custody of Bitcoin. This simplifies the investment process, especially for investors unfamiliar with cryptocurrencies. However, it comes with management fees that can reduce overall returns over time. In contrast, direct ownership of Bitcoin eliminates these fees but requires investors to manage their own purchases, sales, and custody, which can be complex and time-consuming.

Custody and Security

ETFs typically utilise institutional-grade custody solutions provided by third-party custodians, employing advanced security measures like cold storage and multi-signature wallets. This arrangement reduces the risk of theft and loss but introduces counterparty risk. On the other hand, direct ownership offers greater control but also increased responsibility for securing the assets. Investors must educate themselves on best practices for protecting their Bitcoin, such as hardware wallets and two-factor authentication.

Trading and Liquidity

Bitcoin ETFs are traded on major stock exchanges during regular market hours, providing high liquidity and ease of trading. However, trading is limited to exchange hours, unlike the 24/7 crypto market. In contrast, direct ownership allows investors to buy and sell Bitcoin on cryptocurrency exchanges 24/7, providing constant access to a global market.

Tax Implications

Investing in a Bitcoin ETF may offer more straightforward tax reporting as they are treated like other securities. Certain ETFs may also provide tax advantages, such as deferring capital gains taxes. On the other hand, direct ownership of Bitcoin involves complex tax considerations, particularly around capital gains and losses, requiring careful compliance and often consultation with tax professionals.

The choice between a Bitcoin ETF and direct ownership depends on the investor's preferences and needs. ETFs are suitable for those seeking a traditional, well-regulated investment vehicle, long-term exposure, and convenience. In contrast, direct ownership appeals to investors with a strong crypto understanding, a preference for direct asset control, and active trading interests.

How to buy Bitcoin ETFs

Bitcoin ETFs are now widely available through online brokers, and you can buy them through a brokerage account, often with no commission. Here's how to get started:

• Open a brokerage account: You'll need a brokerage account to buy ETFs. You can open a brokerage account online in about 15 minutes, then fund it by transferring money from your bank account.
• Search for the ETF: Use the brokerage's search tool or ETF screener to find the ETF by its name or ticker symbol. If you're unsure which Bitcoin ETF to invest in, compare them based on their expense ratios, which is the annual cost of owning the ETF.
• Place your trade: Once you've found the ETF you want to purchase and have funded your account, placing your trade is as simple as clicking a buy button. You'll get a chance to double-check your order before it goes through.

• Grayscale Bitcoin Trust (GBTC)
• IShares Bitcoin Trust ETF (IBIT)
• Invesco Galaxy Bitcoin ETF (BTCO)
• Bitwise Bitcoin ETF (BITB)
• ProShares Bitcoin Strategy ETF (BITO)
• Fidelity Wise Origin Bitcoin Fund (FBTC)
• VanEck Bitcoin Trust (HODL)
• ARK 21Shares Bitcoin ETF (ARKB)

Keep in mind that investing in Bitcoin and Bitcoin ETFs carries risks, and you should carefully consider your investment goals, financial situation, and risk tolerance before investing.

Bitcoin ETF fees

Bitcoin ETFs have been a hot topic in 2024, with the SEC approving the first spot Bitcoin ETFs in January of that year. There are a variety of fees associated with Bitcoin ETFs, and these fees can vary significantly between different funds. When considering a Bitcoin ETF, it is essential to understand the different types of fees involved and how they can impact your investment.

Types of Bitcoin ETF Fees

One of the most significant fees associated with Bitcoin ETFs is the management fee, also known as the expense ratio or fund management fee. This fee covers the cost of managing the fund, including administration, marketing, and compliance. The management fee is usually charged as a percentage of the fund's assets and can vary widely between different Bitcoin ETFs. For example, the Bitwise Bitcoin ETF (BITB) has a management fee of 0.20%, while the Grayscale Bitcoin Trust (GBTC) charges a much higher fee of 1.5%.

In addition to management fees, there may also be other costs associated with investing in a Bitcoin ETF, such as bid-ask spreads, custodian fees, and brokerage fees. The bid-ask spread is the difference between the price buyers are willing to pay and the price sellers are willing to accept. Custodian fees are charged for securely storing Bitcoin, and brokerage fees may be incurred when buying or selling Bitcoin ETF shares through a broker.

Factors Affecting Bitcoin ETF Fees

The fees charged by Bitcoin ETFs can be influenced by various factors, including competition among fund providers and the size of the fund. As more Bitcoin ETFs have entered the market, there has been increased competition to attract investors, leading to a "fee war" with fund providers lowering their fees to remain competitive. Additionally, some larger funds may be able to offer lower fees due to economies of scale, as seen with BlackRock's iShares Bitcoin Trust (IBIT).

It's worth noting that fees for Bitcoin ETFs are generally higher than those for traditional stock index funds but are comparable to those for commodity funds. For example, the SPDR S&P 500 ETF Trust (SPY), a stock index fund, charges less than 0.10% in fees, while the SPDR Gold Shares (GLD) and United States Oil Fund (USO) commodity funds charge 0.40% and 0.60%, respectively.

Fee Waivers and Promotions

To attract investors, some Bitcoin ETFs offer fee waivers or promotional periods with discounted or waived fees. For example, the Bitwise Bitcoin ETF (BITB) waived its management fee for the first six months or the first $1 billion in fund assets. Similarly, the Franklin Templeton Digital Holdings Trust (EZBC) waived its fees until August 2, 2024, or until the fund's assets reached $10 billion, whichever came first. These fee waivers can provide a significant cost savings for investors during the promotional period.

Choosing a Bitcoin ETF

When selecting a Bitcoin ETF, it is essential to consider not only the fees but also the track record, performance, and reputation of the fund provider. While a low-fee ETF may be attractive, it is crucial to ensure that the fund is backed by a trustworthy and established company. Additionally, considering the fund's trading volume, assets under management (AUM), and brand loyalty can also be essential factors in making an informed investment decision.

Bitcoin ETF providers

The world of Bitcoin and other cryptocurrencies is a volatile one, but for those willing to take on the risk, there are now several ETF providers that offer Bitcoin funds. Here is a list of some of the top providers and their products:

IShares Bitcoin Trust (IBIT)

BlackRock's iShares Bitcoin Trust is one of the first ETFs to directly purchase and hold Bitcoin, rather than trading futures contracts. It has been one of the most heavily traded Bitcoin ETFs, benefiting from the iShares brand, which has long dominated the ETF industry. The fund has a management fee of 0.25%, but this is currently waived, with investors paying just 0.12% until January 11, 2025, or when the fund's assets reach $5 billion, whichever comes first.

Fidelity Wise Origin Bitcoin Fund (FBTC)

Fidelity, one of the world's largest investment managers, offers this Bitcoin fund with an annual management fee of 0.25%. This fee is currently waived and will be until August 1, 2024. The fund had a strong start with more than $700 million worth of shares traded on its first day.

Bitwise Bitcoin ETF (BITB)

Bitwise is a well-known name in the crypto space, offering a range of products that aim to make crypto more accessible to mainstream investors. Its Bitcoin ETF has a management fee of 0.2%, which is currently waived for the first six months of trading or until the fund's assets reach $1 billion, whichever comes first. After that, the fee will increase to 0.2%, which is still among the lowest of all the spot Bitcoin ETFs.

ARK 21Shares Bitcoin ETF (ARKB)

Cathie Wood's Ark Invest is known for investing in disruptive technologies, so it's no surprise that they have launched a Bitcoin ETF in partnership with crypto company 21Shares. The fund has a low expense ratio of 0.21% and is waiving fees until July 2024 or when fund assets reach $1 billion.

Grayscale Bitcoin Trust (GBTC)

Grayscale's Bitcoin Trust is one of the oldest Bitcoin funds, having launched in 2013. It was originally an investment trust but was converted into an ETF in January 2024, allowing it to offer more direct exposure to Bitcoin. The fund has an annual fee of 1.5%, which is higher than its competitors, and it experienced outflows when the new ETFs were approved. However, it is still the largest fund tracking Bitcoin's performance.

Valkyrie Bitcoin Fund (BRRR)

Valkyrie's Bitcoin Fund is one of the approved spot Bitcoin ETFs that started trading in January 2024. The fund's fees are currently unknown, but it is likely to be competitive with other providers.

VanEck Bitcoin Trust (HODL)

VanEck is an established ETF provider with a 0.2% fee for its Bitcoin Trust. The fee is waived until March 31, 2025, or when the fund's assets reach $1.5 billion, whichever comes first.

Franklin Bitcoin ETF (EZBC)

The Franklin Bitcoin ETF is another of the approved spot Bitcoin ETFs with a fee waiver. The fund will waive fees until August 2, 2024, or when its assets reach $10 billion, whichever is first.

Bitcoin ETF pros and cons

A Bitcoin ETF (exchange-traded fund) is a way to invest in Bitcoin with the help of traditional market instruments. An exchange fund purchases Bitcoin and then sells stocks that can be traded on traditional stock markets.

Pros

• It encourages the adoption of cryptocurrencies as full-scale investment methods.
• It offers steady liquidity, which positively affects Bitcoin.
• It is a more developed instrument in terms of regulation and control, which makes it more attractive for institutional investors.
• It removes technical issues such as coin storage, wallet registration, safety compliance, and the threat of hacking attacks.
• It can be seen as an instrument for the adaptation of cryptocurrency to operations within the framework of the financial structure.
• It provides a way for investors with little to no technological knowledge to invest in cryptocurrency.
• It is easier to own a share in a Bitcoin ETF than to own Bitcoin.
• It may bring much-needed institutional investors to the cryptocurrency space, further legitimizing the industry.
• It may be the impetus for the global adoption of cryptocurrencies.

Cons

• The commodities market, including commodity-based ETFs, is heavily manipulated, and bringing ETFs to cryptocurrency could bring heavy manipulation to the Bitcoin network.
• The introduction of a Bitcoin ETF could cause a dramatic change in price as it becomes available to a much broader audience.
• Liquidity may become a big risk if the fund manager or custodian decides to sell short.
• Owning a share in a Bitcoin ETF is not the same as owning Bitcoin, and investors do not enjoy the same benefits, such as voting rights, higher security, and peer-to-peer transactions.
• Bitcoin ETFs centralize what is designed to be a decentralized currency, and hundreds of millions of dollars worth of Bitcoin could be controlled by a single entity.
• People who own Bitcoin ETFs will not need to have any understanding of cryptocurrencies, which could be detrimental to the industry's progress.
• ETFs usually charge management fees for the convenience they provide, which could lead to high management fees over time.
• ETFs may not accurately track the price of Bitcoin due to their other holdings.
• Bitcoin ETFs are regulated by the government, eliminating Bitcoin's benefits as a hedge against central banks, fiat currencies, and equities.

Frequently asked questions