The new Bitcoin ETF isn't what it appears to be

The ProShares Bitcoin Strategy ETF has drawn more than $1 billion in trading volume

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Myles Ma

Myles Ma

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Myles Ma is a health care expert & personal finance writer for Policygenius. He edits the Easy Money newsletter.

Published October 27, 2021|3 min read

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The first exchange-traded Bitcoin fund launched earlier this month. The ProShares Bitcoin Strategy ETF (BITO) has drawn more than $1 billion in trading volume, sparking talk of more cryptocurrency-linked funds hitting the market.

These funds offer a way for traditional investors to add more volatility to their portfolios — cryptocurrencies can lead to big returns, but also big losses —  without opening a crypto wallet account. Is it a wise investment? We talked to experts to find out.

What’s in the Bitcoin Strategy ETF?

An ETF is basically a bundle containing individual stocks, bonds, or other securities. The Bitcoin Strategy ETF sounds like it contains Bitcoin, but it doesn’t. It contains Bitcoin futures, which are contracts that basically say, “I’m going to buy Bitcoin at a certain price at a certain time.” 

While the price of Bitcoin futures generally tracks the price of Bitcoin, it doesn’t always, says Ric Edelman, founder of the Digital Assets Council of Financial Professionals.

“Futures contracts are their own asset class, which means traders may price the futures contracts differently from the price of Bitcoin itself,” he says.

Why does the ETF contain futures contracts and not Bitcoin? Because the Securities and Exchange Commission says so. The feds have thus far frowned on trading Bitcoin on traditional exchanges, but Bitcoin futures contracts are already traded on the Chicago Mercantile Exchange. While Bitcoin itself is a relatively new commodity, standardized futures contracts have been traded in established markets in the U.S. since the 1800s.

Should you buy the Bitcoin Strategy ETF?

Why buy this ETF instead of buying Bitcoin directly? Convenience and familiarity, Edelman says. While some investors may want to have some exposure to Bitcoin, which has quadrupled in price in the past year, they may not feel comfortable opening a separate account at a crypto exchange. On the other hand, anyone can buy an ETF at a traditional brokerage like Charles Schwab or TD Ameritrade. 

“It offers a very high degree of convenience for both advisors and investors who don’t want to go to the trouble of opening an account with a crypto exchange such as Coinbase or Gemini or Kraken, which many feel is cumbersome and unfamiliar,” Edelman says.

But there is a downside: The Bitcoin Strategy ETF may have higher expenses than simply investing in Bitcoin. For one, most ETFs come with a small management fee; the Bitcoin Strategy ETF fee comes out to less than 1% a year

But there’s another cost. The Bitcoin Strategy ETF contains futures contracts. Those contracts have a date when the holder is obligated to buy a certain amount of Bitcoin at a certain price. The ETF isn’t allowed to own Bitcoin, so the fund managers have to sell the contracts before they come due. 

“Every time you buy and sell a contract, you’re going to have a little expense on it,” says Daniel Johnson III, a certified financial planner and owner of Refocus Financial Planning

Those small expenses add up over time, which is why Johnson expects this ETF to appeal to more active investors, rather than long-term investors. People who want to hold crypto long-term should buy crypto directly, he says.

“You’re definitely going to have less friction and less costs involved if you go and just open an account at one of these exchanges and just buy it there,” Johnson says.

Another alternative to investing in Bitcoin directly? Investing in a publicly traded Bitcoin mining company like Riot Blockchain or Marathon Digital Holdings.

“It’s comparable to owning a gold mining company instead of gold,” Edelman says. 

But before making any investment related to cryptocurrency, it’s best to talk to a financial professional. Bitcoin and other digital currencies are notoriously volatile.

“Know there are great risks involved,” Johnson says. “Make sure what you’re investing in this is something you can afford to sit on, waiting for a long period of time to come back, and it’s not capital that you need in the short run.”

Correction, Nov. 8, 2021: This article originally said Ric Edelman was founder of the Digital Assets Council of Financial Advisors. The organization is called the Digital Assets Council of Financial Professionals.

Image: Freddie Collins / Unsplash