The First Bitcoin ETF Is Finally Here, Is It For You?
After months of rumors and attempts from multiple firms, ProShares have launched the the first U.S. Bitcoin ETF this week. It is the ProShares Bitcoin Strategy ETF (ticker: BITO). Now you can get exposure to Bitcoin in your brokerage account.
First off, though this helps with the complexity of owning Bitcoin, it doesn’t do away with potential fees. The ETF (Exchange Traded Fund) charges 0.95% a year. That means if you invest $10,000 in the fund and the price doesn’t change, you are charged $95 a year for holding in the investment. That’s quite high for an ETF, but the fees may decline as other Bitcoin ETFs emerge. Bid/ask spreads are worth keeping an eye on too as this ETF continues to trade over time, for now the fund has attracted a lot of volume.
Technically, the fund does not actually own Bitcoin. The fund holds Bitcoin futures based on the Chicago Mercantile Exchange’s Bitcoin Reference Rate. This gets the fund out of the tricky business of Bitcoin custody, and may be one reason why the SEC approved this fund first. However, this does mean that the ETF is exposed to any risks inherent in the futures market such as counterparty risk and potential margin and collateral requirements.
Also, depending on how the futures are traded there is some risk that the way futures prices move don’t exactly mirror the price moves of Bitcoin. Futures and ETFs are both well-established financial instruments, so the overall risks here are low.
However, the price of a future not matching the spot price is quite routine for a host of reasons and so if you’re buying the ETF don’t expect your returns to track the Bitcoin price perfectly. Of course, time will tell if this works out in your favor. There may well be times when spot Bitcoin performs better and other times when futures have an edge.
However, some studies have suggested that if the way that the ETF trades futures is known by other market participants that may create a drag on returns due to front running and other practices. Extreme market events, such as financial crises, may also cause the ETF to deviate from the Bitcoin price.
It is also worth noting that unlike many ETFs this is not a diversified strategy. If you, for example, own an S&P 500 ETF then if Apple has a bad day (or year), Amazon may have a good one and you’ll likely benefit from the progress of stronger performing companies over time. With this ETF it’s a bet on Bitcoin alone, and should, for example, Ethereum or another cryptocurrency outperform Bitcoin, you will fail to benefit.
So, this is a relatively expensive way to own Bitcoin due to the fee of 0.95% a year embedded in the ETF. Given the use of futures and the annual fee, Bitcoin’s spot price is unlikely to be tracked precisely.
However, it is also a simple way to make Bitcoin part of your portfolio and an important milestone in financial innovation. Perhaps most importantly, the approval of this ETF should pave the way for other innovations in the cryptocurrency space making these assets more accessible for investors.Source