Should You Buy Into The US’s First Bitcoin ETF?

Should You Buy Into The US’s First Bitcoin ETF?
Stéphane Renevier, CFA

over 2 years ago5 mins

  • There are many advantages of holding the new BITO ETF: it’s easily accessible and liquid, and it should track the price of bitcoin relatively well

  • But it also has some disadvantages: high fees, rolling costs, and added complexity. You’re also not holding any actual bitcoin.

  • Overall, this new ETF is not a bad alternative for investors who can’t physically buy bitcoin. But for those who can, nothing beats holding real bitcoin in a hard wallet.

There are many advantages of holding the new BITO ETF: it’s easily accessible and liquid, and it should track the price of bitcoin relatively well

But it also has some disadvantages: high fees, rolling costs, and added complexity. You’re also not holding any actual bitcoin.

Overall, this new ETF is not a bad alternative for investors who can’t physically buy bitcoin. But for those who can, nothing beats holding real bitcoin in a hard wallet.

The first US bitcoin-linked ETF is finally available for trading under the ticker “BITO” . And it closed its first day with a bang: up 5%, with record volume and high retail participation. But while there are plenty of reasons to be excited, there are also a few things you need to be aware of before you rush to buy in.

How does BITO work?

Rather than buying bitcoin directly, BITO – whose prospectus you can find here – is buying bitcoin futures a derivative product linked to the price of bitcoin.

If you hold a futures contract on bitcoin, you aren’t holding bitcoin directly: you’re instead agreeing to buy bitcoin at a specific price on a specific date in the future. The futures market is similar to a betting market, where losers pay the winners in a “zero-sum game”. In other words, wealth is transferred, not created.

Say you bought a November 2021 futures contract at $65,035 (you can find market prices for all the different contracts here). If the price of bitcoin ends up higher than $65,035 on the 26th of November (the last day the November contract trades), you’ll make a profit. If it’s lower, you’ll make a loss. Alternatively, you could also sell your contract any time before expiration, in which case your profit is simply the difference between the prices at which you bought and sold.

What’s the difference between buying BITO and buying bitcoin?

BITO is more complex operationally.

Sure, buying bitcoin directly through a crypto-exchange presents certain challenges: you have to access an exchange you trust, deposit money or cryptocurrencies in it, make the transaction, and ideally safely store your bitcoins in a hard-wallet. But once the bitcoin’s in your account, that’s it – you don’t need to do anything more.

Bitcoin futures appear simpler: all you have to do is buy the ETF, and you have shares in a fund that in theory tracks the price of bitcoin. But it’s important to remember that there’s an extra layer of complexity under the hood. For one thing, there are lots of futures contracts to choose from, each with a different expiration date, price, and liquidity. And since you can’t hold the contract past the expiration date, it has to be “rolled over” when (or ideally before) expiry. That means the fund manager has to decide which contracts to buy, when to roll, not to mention make sure any investments are compliant with all the different rules and regulations. But

BITO’s futures contracts expire.

The transaction costs associated with buying and selling futures contracts are relatively cheap, but that’s not always the case with the costs associated with rolling the contracts. After all, imagine that the price of the contract you’re about to buy is higher than the one you’re currently bought into. When you rebalance, you’ll have to sell your current contract at a lower price than the one you’re buying, meaning you’ll make a loss equal to the difference between the two.

BITO’s management fees are higher.

The management fee on a bitcoin futures ETF was never going to be cheap, given both the operational complexity and the costs of rolling them over. In the case of BITO, the annual management fee is almost 0.95%. That’s in the normal range for such a specialized ETF, but it’s extremely high in the grand scheme of things. Think about it: if you invested $1000 today at a 10% annualized return for the next 20 years, you’d earn $6730. But subtract the compounded effect of the 1% management fee, and you’d only actually receive $5600. In other words, you’d have essentially paid $1130 for the service – more than your initial investment.

BITO is regulated.

The exchanges that bitcoin ETFs are listed on are regulated, which means you’ll receive some protection from regulators and are unlikely to lose all your money if something goes wrong. That’s the good news. The bad news is that, well, exchanges are regulated, so regulators could freeze the ETF – and your bitcoin exposure – at the drop of a hat if the regulatory war against cryptocurrencies intensifies..

So should you buy BITO?

BITO isn’t a bad alternative if you can’t or don’t want to buy bitcoin directly – say if you have an old-school brokerage account or are worried about having to buy and store physical bitcoin directly. Sure, it won’t track the price of bitcoin perfectly, fees will eat some of your returns, and you won’t benefit from all the freedom that bitcoin itself entails. But you will at least access bitcoin in a simple, accessible, liquid, and relatively safe way. The benefits arguably outweigh the disadvantages.

What’s more, many other – and potentially better – ETFs are in the pipeline. For example, Grayscale Investments LLC is in the process of converting its Grayscale Bitcoin Trust into an ETF. If approved by regulators, this ETF will physically hold bitcoin, an arguably better alternative to futures. Others might have lower fees. So holding BITO until a better alternative comes to market definitely isn’t a bad option.

If you don’t have constraints, however, I’d highly recommend that you buy bitcoin directly and store it safely in a hard wallet. You’ll pay lower fees in the long term, your investment will be much safer, and you’ll avoid the extra complexity associated with holding a futures-based ETF.

BITO is certainly better than staying out of markets if you’re bullish on bitcoin, but nothing beats buying physical bitcoin and storing them safely.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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