America’s Debut Bitcoin ETF Won’t Be Able To Compete With The Real Thing

America’s Debut Bitcoin ETF Won’t Be Able To Compete With The Real Thing
Milou Beunk

almost 3 years ago3 mins

What’s going on here?

With financial authorities finally looking close to allowing US investors access to an easily bought and sold bitcoin exchange-traded fund (ETF), you’d be forgiven for feeling excited. But step back for a second and you may find that investing in the cryptocurrency via an ETF isn’t actually all that great an idea.

What does this mean?

ETFs track the value of (almost) any asset, either by buying it directly or replicating its price performance through derivatives. You can trade them as simply as a stock, and this ease of use – combined with frequently low costs – has increasingly made ETFs the weapon of choice for many investors.

Cryptocurrency, of course, is the other big investment trend of recent years. But while Canadian regulators have put two and two together and greenlit the first Toronto-listed bitcoin ETFs in 2021, US authorities have been more reluctant. That’s thanks to the usual cryptocurrency-related concerns: volatility, criminality, and the difficulty of putting a precise price on the likes of bitcoin.

American investors have long been awaiting a bitcoin ETF of their own, not least because of the potential for indirect (and often previously prohibited) investment to push up the price of the cryptocurrency. Despite many false dawns, however, progress may now be at hand. Regulators recently acknowledged a fresh batch of applications to launch bitcoin ETFs from fund providers – and with new, potentially more crypto-friendly leadership arriving this summer, the chances of a positive verdict look better than ever.

VanEck and WisdomTree's applications to create a bitcoin ETF are under active consideration
VanEck and WisdomTree's applications to create a bitcoin ETF are under active consideration

Why should I care?

One of Canada’s four bitcoin ETFs has already racked up $1 billion of investment inside two months. Remember, ETFs are easy: there’s no need to set up a crypto wallet or manage your bitcoin on a separate investment platform. Big institutional investors previously prohibited from buying bitcoin directly will likely have dipped their toes in this welcoming water.

Another major attraction of the ETFs is their ability to track the price of bitcoin more closely than other types of fund which can’t easily create or destroy shares. The latter can end up trading at a big premium or discount to bitcoin’s actual price as a result: just look at what happened to the popular Grayscale Bitcoin Trust.

Grayscale’s fund, bitcoin’s price (white), and an exchange-traded product (yellow) (Source: Bberg)
Grayscale’s fund, bitcoin’s price (white), and an exchange-traded product (yellow) (Source: Bberg)

But all these benefits don’t necessarily mean investing in a bitcoin ETF makes sense for retail investors like you or me – especially when you consider the costs. If you’re a US investor buying $100 worth of bitcoin via Coinbase – America’s biggest crypto exchange, and now itself publicly listed – you’ll pay one-off trading fees of around 3.5%, depending on your location, payment method, and so on.

Three of the biggest bitcoin exchange-traded investment products currently available outside the States are Canada’s Purpose Bitcoin ETF (ticker: BTCC), Germany’s BTCetc - ETC Group Physical Bitcoin (BTCE) in Germany, and Sweden’s Bitcoin Tracker EUR (COINXBE). The latter two aren’t technically “true” ETFs – but they do have an annual expense ratio of around 2% to 2.5%, on top of any brokerage fees applied when you buy in (the recently launched Canadian ETF’s expense ratio isn’t yet known). Taking these fees as indicative of a US bitcoin ETF would make investing in it more expensive than buying bitcoin directly.

ETFs are great when they’re cheap (the average expense ratio of all US ETFs was 0.13% in 2019 – far lower than the bitcoin products outlined above) and group a broad bunch of investments together under one easy-access roof. But bitcoin ETFs are expensive – and they only expose you to a single asset. So if you’re willing and able to set up a crypto wallet, buying bitcoin directly is likely to be a better bet.

The arrival of a US bitcoin ETF could indeed be a big deal in terms of attracting new investment in the cryptocurrency, potentially leading to higher prices and lower volatility. But there’s an obvious way to benefit from that without paying someone an annual fee for the privilege…



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