Cryptocurrency hit the New York Stock Exchange on Oct. 19 with the introduction of a new Bitcoin-linked fund. The fund quickly grew to over $1 billion in assets, becoming the quickest ETF to reach that threshold, according to Bloomberg data.
Offered by ProShares, this new exchange traded fund (ETF) marks a long-awaited milestone, experts say. Crypto enthusiasts in the United States have been trying to get Bitcoin-linked investment products approved for several years now, says Theresa Morrison, a CFP with the Beckett Collective.
“Consumers should definitely approach it with some skepticism,” says Mike Hunsberger, owner and CFP with California-based Next Mission Financial Planning.
There have been some regulatory hurdles and delays by the SEC in making a Bitcoin-linked ETF available to investors. Unlike past proposals the SEC has rejected, BITO does not directly hold Bitcoin, but instead trades on Bitcoin futures — an important distinction.
Here’s what investors need to know:
What Are Bitcoin Futures?
Bitcoin and Bitcoin futures are not the same thing. With futures, you agree to buy or sell the asset in the future at some specified price. You are not directly buying and selling the underlying asset (Bitcoin in this case).
When that specified date arrives, you must buy or sell the asset at the agreed upon price, no matter what the actual price of the asset ends up being that day. If your contract comes up and Bitcoin is worth more than what you agreed upon, as an investor, you make money. That’s called trading at a premium. If Bitcoin’s price is less than you thought it was going to be, you lose money, and it’s called trading at a discount.
By investing in this new fund, you’re simply betting on the potential for your shares of the ETF to be worth more later. And the underlying driver behind the value of your shares is Bitcoin.
There are many assets that trade on futures — usually commodities like oil, grain, or coal. For example, you can buy a gold futures ETF instead of buying actual gold bars.
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“Futures contracts are derivatives of Bitcoin, and are not directly backed by physical Bitcoin,” says Dana J. Menard, a CFP and founder of Twin Cities Wealth Strategies in Minneapolis. This may lead to a bit of confusion as the price of the ETF will not necessarily correlate with the price of Bitcoin.
For example, if Bitcoin went up by 30%, the Bitcoin futures ETF might only rise 20%, Hunsberger says. That’s because “futures ETFs hold contracts that periodically expire and have to be repurchased,” says Hunsberger. “This can add to tracking error between the ETF and the underlying asset, in this case Bitcoin.”
Should You Buy a Bitcoin-Linked ETF?
Whether you’re buying cryptocurrency outright or investing in a crypto-linked ETF, experts recommend never investing more than 5% of your total portfolio in speculative assets like cryptocurrency or speciality ETFs.
Bitcoin is still very new compared to conventional stock market investing, so it lacks the historical track record investors can use to anticipate future performance. Before you buy shares in a Bitcoin ETF, cryptocurrency, or any other speculative investment, remember to only invest what you’re OK with losing, and never at the expense of other financial goals like paying off high-interest debt or saving for retirement.
Bitcoin is highly volatile, and while there might be a difference between the price of Bitcoin and the price of BITO, the ETF does not protect you from the ups and downs of Bitcoin. This year alone, Bitcoin experienced an all-time high of over $60,000 in April, before abruptly losing half of its value over the summer — though it has returned to around $60,000 in the months since. You should expect the same volatility even in the ETF.
That said, if you’re interested in exposing your current portfolio to cryptocurrency in some way, and are OK with the risks, BITO makes it easier than ever for investors. “While it isn’t a direct investment in Bitcoin, it can give investors with little knowledge about how Bitcoin is typically bought and sold in exchanges exposure,” says Menard.
If you’re new to cryptocurrency, trying to navigate a cryptocurrency exchange can be intimidating. This ETF lets you add some Bitcoin exposure to your portfolio directly through your brokerage. Plus you can hold it within tax-advantaged accounts like a Roth IRA or 401(k), if you choose.
“BITO will open up exposure to Bitcoin to a large segment of investors who have a brokerage account and are comfortable buying stocks and ETFs, but do not desire to go through the hassle and learning curve of establishing another account with a cryptocurrency provider and creating a bitcoin wallet,” ProShares CEO Michael L. Sapir said in a statement Monday.
How Is BITO Different From Actually Buying Bitcoin?
Aside from the fact that you’ll be buying Bitcoin futures and not actually buying an ETF that directly holds Bitcoin, there are a few differences you should consider before buying BITO.
Buying Bitcoin outright does involve its own set of fees, depending on which exchange you use, method of account payment, and other factors. BITO comes with its own, separate fees as well.
Specialized ETFs, like BITO, often come with a higher expense ratio, meaning they’re more expensive for you. BITO’s expense ratio is 0.95% — which experts say is very high. In other words, $95 of every $10,000 invested will go toward the fund’s operating expenses. Experts say the best low-cost index funds have expense ratios of less than 0.3%.
“With it being a new asset class, there will be many middlemen and the price of the futures ETF will be high until more competition drives the fees and expenses down a bit,” says Menard.
There may be other Bitcoin futures-linked ETFs on the horizon, as well. Three other applications are on the SEC’s docket for October, according to Bloomberg.
You can buy, sell, or trade Bitcoin at any time. Cryptocurrency is not subject to market hours.
“Bitcoin trades 24/7/365,” says Rockie Zeigler, a CFP with RP Zeigler investment services. “BITO will not. While you can place orders during off-market hours, the orders will not fill until the stock market opens. You won’t be able to transact with your BITO on the weekends or during evenings like you can with straight Bitcoin.”
There has not yet been sweeping regulation for cryptocurrency exchanges, and as such, each exchange operates on different rules. While none of the cryptocurrency you keep in any exchange is FDIC-insured, some exchanges offer private insurance to reimburse you if there’s a hack or theft.
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On the other hand, a Bitcoin-linked ETF comes with protections more in line with other conventional investments. While only a cash balance in a traditional brokerage account (like Fidelity, Charles Schwab, or Vanguard) is covered by FDIC insurance, brokerage accounts are protected by the Securities Investor Protection Corporation (SIPC). This insurance covers accounts up to $500,000 in securities if a brokerage is closed due to bankruptcy or other financial difficulties and customers’ assets are missing from accounts.
While the first Bitcoin-linked investment product to be approved by the SEC is a big deal, crypto enthusiasts are already looking forward to the next hurdle: an investment product that directly owns and tracks the price of the actual asset.
Some are frustrated about the futures asset, which adds another layer of complexity to an already complicated subject. “If the SEC really cared about individual investors they would allow for an ETF that held spot Bitcoin as opposed to a futures-based product that is confusing for most investors,” says Ryan Cole, CFP at Citrine Capital in San Francisco. “In short, I see this as a win for Wall Street that will hurt individual investors.”
But with uncertainty around if or when the SEC might look to approve a spot Bitcoin ETF, investors who want a middle ground between crypto and traditional investing will have to settle for a futures-based product.