PARIS, FRANCE – JUNE 25: In this photo illustration, a visual representation of the digital … [+]
After months of rumors and attempts by several companies, ProShares launched the first Bitcoin ETF this week. It is the ProShares Bitcoin Strategy ETF (ticker: BITO). Now you can deal with Bitcoin in your broker account.
First of all, while this helps with the complexities of owning Bitcoin, it doesn’t eliminate potential fees. The ETF (Exchange Traded Fund) charges 0.95% per year. That is, if you invest $ 10,000 in the fund and the price doesn’t change, you will be billed $ 95 per year for holding the investment. That’s pretty high for an ETF, but fees can come down as other Bitcoin ETFs hit the market. Also keep an eye on the bid-ask spreads as this ETF will continue to trade over time as the fund has now increased in volume.
Technically, the fund doesn’t actually own Bitcoin. The fund holds bitcoin futures based on the bitcoin reference price of the Chicago Mercantile Exchange. This frees the fund from the tricky business of Bitcoin custody and may be one reason the SEC first approved this fund. However, this means that the ETF is exposed to all of the risks inherent in the futures market, such as counterparty risk and potential margin and collateral requirements.
Depending on how the futures are traded, there is also a certain risk that the price movements of futures do not exactly mirror the price movements of Bitcoin. Futures and ETFs are both established financial instruments, so the overall risks here are low.
However, the price of a future that does not match its spot price is pretty routine for a variety of reasons. So when you buy the ETF don’t expect your returns to perfectly replicate the Bitcoin price. Of course, time will tell if this works out in your favor. There may well be times when spot bitcoin does better and other times when futures have an advantage.
However, some studies have shown that if the way the ETF futures trades are known to other market participants, it can hurt returns due to front running and other practices. Extreme market events such as financial crises can also cause the ETF to deviate from the Bitcoin price.
It’s also worth noting that unlike many ETFs, this isn’t a diversified strategy. For example, if you own an S&P 500 ETF, then Apple AAPL is having a bad day (or year), Amazon can have a good day, and you will likely benefit from the advances of better performing companies over time. With this ETF it is a bet on Bitcoin alone, and if Ethereum or any other cryptocurrency outperforms Bitcoin, for example, you will not benefit.
So this is a relatively expensive way to own Bitcoin because of the 0.95% per year embedded fee in the ETF. Given the use of futures and the annual fee, it is unlikely that Bitcoin’s spot price will be closely tracked.
However, it’s also an easy way to make Bitcoin part of your portfolio and a major milestone in financial innovation. Perhaps most importantly, the approval of this ETF should pave the way for other innovations in the cryptocurrency space that will make these assets more accessible to investors.
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