Is it worth investing in crypto ETFs?
BTC ETF’s made headlines last week as the first BTC ETF traded in the US. But what are they, and why are they garnering so much interest? We’ll give you a quick overview of what all the hype is about, and what role they might play in the future of the crypto industry.
What is an ETF?
ETF stands for “Exchange Traded Fund” and is a type of investment fund that’s traded on the stock exchange. The purpose of an ETF is to provide investors easy access to global stock markets without the need to identify any market winners. Rather, they are already given a collection of the top investments in a single market or sector.
There are several advantages to ETFs. Most notably, trading flexibility, instant diversification, low cost and tax efficiency.
Traditional funds are only traded once per day after the markets close. The fund net asset value (NAV) is announced at the end of the day, which is when investors can find out how much they paid for new shares when buying, as well as the amount they’ll receive when selling. On the other hand, ETFs are bought and sold during the day when markets are open, offering more flexibility to investors. Therefore, they can quickly find out how much they paid to buy shares and how much they received through selling them.
There are a wide variety of ETFs available in the stock market which cover different sectors, industries, indices, countries, with underlying assets (trackers) or strategies (i.e. managed ETFs) spanning various classes. Theyfore, there have specific terms (long, mid, short, etc.), level of quality (treasury, corporate, high yield, etc.) and regions.
ETFs also allow you to build a diversified portfolio with the same low cost as traditional stocks. They also tend to have lower expense ratios.
Finally, ETFs offer investors more control over taxes compared to traditional mutual funds. The capital gains taxable event for the ETFs is incurred when the investor sells the ETF, at the end of the holding period. A mutual fund can suffer taxable events on the sale and turnover of many of its underlying assets, throughout the holding period.
ETFs and crypto
The advantages of ETFs have seen their popularity grow significantly. So, it isn’t surprising that they have made their way into the crypto world. Most notably, bitcoin (BTC) ETFs, which track the value of the cryptocurrency. They also trade on traditional market exchanges, rather than the cryptocurrency exchanges.
Much like traditional ETFs, BTC ETFs also hold several advantages such as convenience, diversification and tax efficiency.
BTC ETFs leverages the cryptocurrency’s value without the need to go through the usual steps of BTC investment. In other words, investment institutions don’t need to sign up for a cryptocurrency exchange as the ETF is readily available on traditional regulated exchanges.
They can also hold multiple assets, which gives investors the opportunity to diversify their portfolios. For example, a single BTC ETF could hold several stocks, such as Apple and Facebook.
But what about BTC’s volatility? The Horizons Inverse Bitcoin ETF (BITI) aims to allow investors to bet on price losses, rather than gains. The Canadian company stated that the fund will allow investors to short BTC futures, with its executives describing it as a way to benefit from episodes of price volatility.
What are the Various BTC ETFs and How do they Differ?
There are currently three different kinds of BTC ETFs - CAD denominated where USD is hedged, CAD denominated where USD is unhedged, and then USD denominated tracking the BTC/USD pair.
BTCC was the original BTC ETF to exist and represented the first of these types. It was launched in February 2021 by Purpose Investments, which is purchased with Canadian dollars and hedges US currency exposure. They subsequently released BTCC.B, which can be purchased with Canadian dollars but does not hedge US currency exposure, followed by BTCC.U, which is purchased with the US dollar and allows investors to hold BTC in this currency. These are all spot-based ETFs, allowing the investor to hold the underlying asset, giving them direct exposure to the price movements of BTC in USD or CAD.
Having previously been banned in the US by the Securities and Exchange Commission, the ProShares Bitcoin Strategy (BITO) ETF was the first to be released on the New York Stock Exchange on the 19th October. Like BTCC.U, it is denominated and hedged in USD. Nevertheless, BITO is a futures-based ETF using standardised contracts that allow traders to commit to the price of BTC at a future date.
The disadvantages of BTC ETFs
BTC ETFs aren’t without their disadvantages. For instance, ETFs tend to charge management fees for the convenience they provide. As a result, these fees can build up over time if you own multiple BTC ETFs.
Additionally, there are also limits in cryptocurrency trading. BTC can often be traded for other cryptocurrencies, can only trade so far against traditional assets, in the regulated space.
There’s also the fact that BTC, like other cryptocurrencies, is decentralised and provides privacy and anonymity through the blockchain. However, as BTC ETFs have their underlying (Bitcoin) held in a centralised trust that is regulated by the government, these benefits do not apply.
The Future for BTC ETFs
BTC futures-based ETFs were only approved in the US by the Securities and Exchange Commission last week, where spot-based are still banned there due to concerns over how easy it is to manipulate the spot BTC market. Nevertheless, spot-based Canadian ETFs have proven hugely popular elsewhere already, particularly with individual investors. We’ve even seen the price of BTC catapult in recent weeks in anticipation of the US launch.
Although there are many countries such as France and Germany that still maintain this ban, it is hoped that widespread interest will encourage the US to allow spot-based ETFs to exist, and other countries to follow the US' lead and allow ETFs to exist more generally.
Would you consider a BTC ETF in the future, or do you think it takes away the fun from investing in crypto?
