A major milestone was reached last week in the markets. For the first time, investors can now purchase Bitcoin without buying it on a crypto exchange and for crypto enthusiasts, this is a huge step in what the market has deemed to be the right direction.
Proshares ETF is the first US Linked Bitcoin ETF that offers investors an opportunity to gain exposure to Bitcoin returns in a convenient, liquid and transparent way. According to Proshares, the Fund seeks to provide capital appreciation through managed exposure to bitcoin futures contracts.
On the first day of trading BITO, up to $1billion was traded and according to the Financial Times, between 12% and 15% was from retail investors and others from institutional investors and other market participants.
BITO was the first ETF asset to reach $1Billion according to Bloomberg Data and this is a reflection of investors appetite to Bitcoin and cryptocurrencies as a whole.
This is widely considered as a positive step especially considering how the market has reacted to it and could mark the start of other crypto linked ETFs. The fund closed up over 2.5% on its first day of trading, closing at $41.94 per share.
Taking a closer look at the holdings of BITO however we can see it does not actually hold Bitcoin. Instead it holds Bitcoin futures and there is a difference between these.
From the prospectus, we can deduce two things:
- The Fund does not directly invest in Bitcoin.
- The price and performance of Bitcoin futures are expected to differ from the spot price of Bitcoin.
What is a Bitcoin Future
Before considering what a Bitcoin future is, let us recap what a future is. When you enter a futures contract, you are betting on the future price of an underlying asset. Think of it as an agreement between you and the issuer.
So in effect, you are looking to pay a certain price, at a future date, for an asset and on the day of expiry, the asset is handed over to you and once settled you would have either made a profit or loss.
A Bitcoin future is a financial instrument that allows you to purchase or sell Bitcoin at a future day and price.
BITO ETF tracks the futures contracts on Bitcoin not actual Bitcoins and what that means is when you get into a contract and the expiry reaches, if the price of Bitcoin is higher than what you paid for the contract, well you have made some money and if Bitcoin is lower than the price of the contract, then you have made a loss.
By purchasing BITO, you are betting that the price of Bitcoin will rise so you aim to benefit from that. It is important to note BITO is not first of its kind when it comes to tracking a future.
USO for example is a US oil ETF that tracks the future price of Oil and the same can be done for Gold, Silver or other commodities.
Bitcoin Vs Bitcoin ETF: Which should I Buy
Should an investor buy BITO or Bitcoin or even both of them? There is no simple yes or no answer and it depends on different factors including how long the position is held for, an investors goals and how tech savvy they are.
BITO as we now know tracks the future price of Bitcoin; this means the spot price of Bitcoin i.e buying Bitcoin right now at an Exchange will be different from the Future price.
Buying the ETF and holding for a long time means you will bear the cost. This can lead to investors purchasing BITO for short periods of time as opposed to holding it long term.
There are a number of differences between purchasing Bitcoin or BITO and here are a few of them.
1: Regulation: Cryptocurrencies are still not as regulated as other asset classes and BITO is an attempt to have some regulatory framework while gaining exposure to the performance of Bitcoin. BITO being an ETF will have certain protections similar to other asset classes.
2: Fees: It may be cheaper to purchase BITO rather than buying Bitcoin on an Exchange. BITO however like other funds, has an expense ratio of 0.95% which means for $95 for every $10,000 will towards paying for expenses. This is pretty high considering low cost index fund have an expense ratio of around 0.4% or even lower.
3: Trading Hours: Crypto exchanges are open all day everyday so there is an opportunity to buy or sell at any time. Trading ETFs on the other hand are subject to the opening and closing hours of the Exchange they are listed on.
4: Safer: There is an element of safety when it comes to accessing the performance of Bitcoin without some of the risks associated with cryptocurrencies because it is not uncommon for Exchanges to be hacked and accounts stolen. Trading an ETF (BITO in this case) is relatively safer because you are not at risk of losing any coins.
5: No need to be Tech Savvy: Buying an ETF from a broker is quite straight forward and more investors are more likely to be familiar with this as opposed to having a wallet or multiple, managing them and keeping them safe.
What the Future Holds
It is difficult and dangerous to try and predict the future however there are number of trends that can be observed as a result of this new development.
Investors appetite for cryptocurrency is yet to abate and there is an expectation for more funds to be launched that track the performance of Bitcoins – so the spot price of Bitcoin.
The different financial agencies will review and determine if investors can access for example in the UK, retail investors are not allowed to trade BITO.
Other funds can be launched to provide investors exposure to other cryptocurrencies such as Ethereum and others that have significant market capitalisation. Further down the line, there may be a fund that will track the performance of multiple cryptocurrencies too.
Advantages of Bitcoin ETF
There are a number of advantages when it comes to the new Bitcoin ETF.
Reduced Complexity
The complexity of having a digital wallet, password or storing anything is eliminated when it comes to trading the ETF.
Exposure to Bitcoin Performance
Investors can gain exposure to the performance of Bitcoin and have some protection that other regulated asset classes have.
Hedging and Shorting
It provides another option for investors to take a short position in Bitcoin using the ETF.
Disadvantages of Bitcoin ETF
Not the same as Bitcoin
You do not actually have Bitcoin and in many cases, the future price will differ from the spot price.
Exposure to Volatility
You will not be protected from the volatility that cryptocurrencies are known for.
Final Note
The launch of a Bitcoin linked ETF marks several things for different investors or spectators. For some, it shows Bitcoin and Cryptocurrencies are here to start and can be considered as an asset class.
The creation and approval of this ETF by the regulators is also seen as an attempt to have some sort of regulatory framework around Bitcoin which is not necessarily a bad thing because perhaps more sophisticated investors will pay attention to Bitcoin and other Cryptos at large.
For other crypto followers who had faith all the way, this is can be seen as a reward for the work done over the year to get regulators to acknowledge Bitcoin.
BITO as it is named allows investors to benefit from the performance of Bitcoin without necessarily being tech savvy, having multiple wallets and the concern that it can be lost or the Exchange is hacked.
There are differences in the way in which BITO the ETF allows investors to benefit from the performance of Bitcoin and as more Funds are approved, more options will be made available to investors to benefit from the performance of other Cryptocurrencies too.
