Should You Invest in a Bitcoin ETF?
Disclaimer: Sharon Winsmith is not a financial advisor and is not engaged in the business of providing financial investment advice. The information contained on this page includes details regarding Sharon Winsmith’s personal investments. Nothing contained on this page or elsewhere on this website constitutes investment advice. We encourage you to do your own independent research and consult with your personal advisors before making any investment decisions.
Here, we’ll take a closer look at Bitcoin, the largest (by market capitalization) and most popular cryptocurrency in the world. We will also cover popular ways to invest in Bitcoin, including investing through ETFs that provide exposure to the cryptocurrency.
We will also go through the pros and cons of investing in a Bitcoin ETF to help you decide if it is the right investment for you.
What is Bitcoin?
Chances are that you have probably heard of Bitcoin (unless you live under a rock). But do you really understand what it is?
We won’t go into great detail about cryptocurrency because it might make your head explode. In any event, before you invest in anything, it is critical that you understand what you are buying. If you want more background on investing in cryptocurrencies and the pros and cons check out this page.
In simple terms, Bitcoin is a digital currency that can be exchanged over the internet without the need for intermediaries or central banks. New Bitcoins are created through a process called “mining.” The mining is done when network nodes (which are basically a bunch of computers that verify each transaction) complete a new block on the blockchain.
We definitely aren’t going to go into more detail on mining and blockchain technology because that will really make your head explode. In any event, you do need to know this stuff and understand how this all works before you start actually buying or investing in crypto yourself.
Bitcoin was released to the public in 2009 by a mysterious person named Satoshi Nakamoto. To this day, nobody knows who the person (or group of people) behind Bitcoin really is.
There is a limited number of Bitcoin that will ever be available. Once all of the Bitcoin has been mined, there will be no new Bitcoin in the future. This is very different from other forms of currency, such as the U.S. dollar, as the Federal Reserve Bank can and does print an unlimited supply of money.
The value of Bitcoin is determined based on the supply and demand for the crypto. If more people want to buy Bitcoin, the price will increase. If more people want to sell their Bitcoin, the price will decrease. Bitcoin, and cryptocurrencies in general, are highly volatile meaning there are often large swings in their prices. Don’t invest unless you are able to stomach the large drops in price that can, and do, happen overnight.
What is an EFT?
An ETF, or “exchange-traded fund, is a fund that tracks an underlying benchmark or index. There are many different types of ETFs. Some common examples include ETFs that track the S&P 500 index or the price of gold.
An ETF should be differentiated from a mutual fund (which is the worst type of investment you can make). Unlike mutual funds, ETFs are traded like stocks, and their price is updated throughout the day. They can be bought on margin and sold short, and they can also provide exposure to the futures and options markets. It’s easy to find the price of an ETF: Simply enter the ticker symbol into your trading platform and you should be able to see the real-time price of the ETF.
ETFs do not always invest directly in the underlying asset. In many cases, the investment is made through derivative contracts such as futures or swaps. This is the case for most Bitcoin ETFs which commonly gain exposure to Bitcoin through futures contracts. Many ETFs are also partially invested in index funds.
The way an ETF works is that the value of the ETF should generally go up and down as the value of the underlying asset it seeks to track goes up and down. In this case, the underlying benchmark is Bitcoin. That means a Bitcoin ETF should track the value of the price of Bitcoin itself.
ETFs offer an easy way to get exposure to all types of investments for a low fee, which is one of the reasons why they have exploded in popularity in recent years. You should always check the expense ratio before investing in an ETF to make sure you aren’t paying too much!
Similar to public stocks, ETFs are regulated by our friends at the Securities and Exchange Commission (SEC). The SEC has been hesitant to make cryptocurrency ETFs available to the public and it has taken some time for any crypto ETFs to get approved. Nonetheless, there are a few ETFs that provide options to investors seeking to gain exposure to Bitcoin.
5 Different Ways You Can Invest in Bitcoin
There are many ways traders and investors can get exposure to Bitcoin that doesn’t just include actually buying and holding the crypto. If, after careful research, you decide to invest in Bitcoin, it is important that you select the investment method that works best for you based on your level of risk tolerance and investment objectives.
No one way is better than the other. The key is finding the approach that makes the most sense for you. Investors who are more risk averse may prefer to invest through methods that provide more indirect exposure to Bitcoin. Whereas, investors who truly believe in Bitcoin and the future of cryptocurrency (like myself), typically prefer to own the crypto outright.
Read more here about my personal investments in cryptocurrency.
Here are 5 examples of different ways you can invest in Bitcoin.
1. Buy Bitcoin directly on an exchange
Bitcoin can be bought and sold on online exchanges. Some of the most popular exchanges are Coinbase or Crytpo.com. To start trading crypto, you would sign up for an account at one of the online exchanges similar to how you create an online bank or brokerage account. Once you are signed up, you can start buying crypto and adding to your own personal portfolio.
Crypto that you own will be stored digitally. Therefore, there is no physical object that represents or proves your ownership of the Bitcoin.
There are typically fees that apply when you buy and sell crypto through an online exchange. These fees are for the miners who mine new crypto and verify the transactions (thank goodness there are people who do that for us). The exchange may also charge additional fees.
There are many reasons investors do not want to own crypto directly through this method. Some of the common reasons this approach may not be preferred is because of the complexity and hassle of storing your crypto in a digital wallet and keeping track of private keys. Check out this article by the NY Times to understand the importance of not losing your private keys!
Some are also concerned about the fact that the online exchanges are relatively new companies. The online exchanges haven’t been around hundreds of years like other large financial instructions, such as JP Morgan or Wells Fargo, so they don’t have as much of a long-term proven track record as some would prefer.
2. Invest in a Bitcoin ETF
If you don’t want to own Bitcoin outright, there are other ways you can invest in this asset class. Bitcoin ETFs are ETFs that are designed to closely track the price of Bitcoin. This approach might be more familiar for those investors who have experience with investing in the stock market.
The first crypto ETF was introduced in the U.S. in October 2021. Therefore, it is important to note that Bitcoin ETFs, and other ETFs that are designed to track the prices of cryptocurrency, are still fairly new. Therefore, you will not have access to long-term data about the track record of the ETF before you invest.
Some ETFs are created to solely track the price of Bitcoin. However, there are also ETFs that track the prices of cryptocurrencies other than Bitcoin. For example, another popular benchmark for cryptocurrency ETFs is Ethereum.
ETFs are a viable option for investors who want to diversify or get exposure to cryptocurrencies within a standard brokerage account, as most brokers offer a variety of ETFs to invest in. One downside to investing through a Bitcoin ETF is that most of the crypto ETFs currently have a higher than preferred expense ratio. This means the cost of investing in the ETF is higher than you might typically prefer and will reduce the overall profits you earn on the investment.
We cover some examples of Bitcoin ETFs that are available further below.
3. Invest in public companies that invest in Bitcoin
Another way to invest in Bitcoin is to buy stocks of a company that invests heavily in or otherwise transacts with Bitcoin. This might be a good option for someone who wants some exposure to cryptocurrency but is still concerned about the large price fluctuations.
This approach would be the most indirect way to invest in Bitcoin. Unlike a Bitcoin ETF which solely tracks the price of Bitcoin, you would own shares of a company that is somewhat impacted by the price of Bitcoin. The level of impact the changes in Bitcoin’s price would have on the shares of the company depends on the type of company you invest in.
For example, Coinbase is currently the largest cryptocurrency exchange that has recently gone public. This means you can buy shares of Coinbase the same way you would buy shares in any other public company.
Since Coinbase is a crypto exchange, their profits largely depend on the current price of cryptocurrencies. The higher the price, the more fees Coinbase is able to collect from investors and traders who use the platform. This typically causes Coinbase shares to increase. On the other hand, Coinbase shares commonly decrease as the price of crypto drops.
Another approach that would be less directly correlated to the prices of crypto would be to invest in a company like Tesla. According to a recent financial statement, Tesla holds over $1 billion worth of Bitcoin on its balance sheet. If the price of Bitcoin takes off, there is a good chance Tesla’s share price might also increase because the company would realize substantial gains.
Nonetheless, there are plenty of other reasons Tesla’s share price will go up and down over time. So an investment in Tesla shares is an investment in something much larger than Bitcoin itself.
Investing in companies to get indirect exposure to Bitcoin does come with some risks. Not only would you need to do due diligence on Bitcoin itself to see if it is a good investment for you, you would also need to do due diligence on the company. This would involve analyzing the latest company financial statements, assessing the quality of the management team, and much more. While investing in a good company that holds Bitcoin can prove to be a winning combination and arguably less risky approach, your upside potential on the investment is likely limited if the price of Bitcoin surges.
4. Bitcoin ATMs
You may have noticed a Bitcoin ATM in your local grocery store. I find these very misleading because they create the false impression that there is a physical form of the crypto, like a crisp $1 bill. However, we know that is not the case because Bitcoin is a digital currency.
You can buy crypto with the “ATM” using a debit card or credit card. Some will also accept cash. When you buy Bitcoin through a Bitcoin ATM, you will first usually be prompted to download and set up a crypto wallet. You may also have to answer a few background questions on the machine. The crypto wallet must be supported by whatever Bitcoin ATM machine you are using. The “ATM” will then send the Bitcoin you buy to your wallet for digital storage.
I don’t like Bitcoin ATMs and never use them. There is something that just seems a bit odd about buying Bitcoin at the Stop and Shop that I can’t seem to get over. Bitcoin ATMs also charge pretty high fees and there have been some situations where scammers have set up fake Bitcoin ATMs to steal your money.
5. Bitcoin mining
Last but not least, technologically adept investors and blockchain enthusiasts may invest in Bitcoin by mining for the crypto yourself. If you have followed the cryptocurrency space for some time, you may have already heard about Bitcoin mining. There has also been a lot of news coverage lately about the potential harmful impacts to the environment caused by the energy needed to mine crypto.
Each Bitcoin is a record that is stored in a public ledger called a blockchain. When a transaction in Bitcoin is initiated, thousands of computers around the world are assigned the task to verify the transaction. In the process, the computers (a.k.a. miners) are rewarded with new Bitcoin.
Now, there is a catch. While mining new Bitcoin was relatively easy (for those smarter than I) in the early days of the digital currency, rising competition around the world has made the process more difficult in recent years. In the beginning, people were successful in mining new Bitcoin with their PCs. Nowadays, you’ll likely have to invest thousands or millions of dollars in equipment to compete against large institutional mining facilities, such as those in China or even a few that have started in the U.S.
The higher the competition, the more difficult it gets to verify a transaction and get rewarded. So those news stories you see about 5-year-olds making millions a year mining Bitcoin will start to be fewer and further between.
Examples of Bitcoin ETFs Currently Available
If you don’t want to bother with mining or buying Bitcoin directly on an exchange, there are a few Bitcoin ETFs that may provide an uncomplicated way to invest. Below are a few examples of options available.
Before you invest, make sure you do your own due diligence and independent research. The Bitcoin ETFs provided below are not my recommendations. They are merely intended to be examples of investments that exist.
1. ProShares Bitcoin Strategy ETF (BITO)
The ProShares Bitcoin Strategy ETF (Ticker: BITO) was the first U.S. Bitcoin ETF. The ETF seeks to only track the price of Bitcoin. The fund trades Bitcoin futures contracts and does not invest directly in Bitcoin.
The ProShares Bitcoin Strategy ETF has an expense ratio of 0.95%.
2. Valkyrie Bitcoin Strategy ETF (BTF)
The Valkyrie Bitcoin Strategy ETF (Ticker: BTF) is another ETF that trades in Bitcoin futures contracts. Just like BITO, this Bitcoin ETF does not invest directly in Bitcoin.
The Valkyrie Bitcoin Strategy ETF has an expense ratio of 0.95%.
3. Global X Blockchain & Bitcoin Strategy ETF (BITS)
The Global X Blockchain & Bitcoin Strategy ETF (Ticker: BITS) invests in both Bitcoin futures contracts and blockchain technology. The company invests in blockchain technology by investing in the Global X Blockchain ETF (Ticker: BKCH), which is a blockchain ETF.
The Global X Blockchain & Bitcoin Strategy ETF has an expense ratio of 0.65%.
4. Bitwise Crypto Industry Innovators ETF (BITQ)
The Bitwise Crypto Industry Innovators ETF (Ticker: BITQ) seeks to track the performance of public companies involved in the cryptocurrency industry. This includes companies that are involved in crypto mining, developing technology around crypto, and financial services companies providing crypto services to clients. Examples of the types of companies the fund may invest in include Coinbase and Marathon Digital Holdings.
The fund has exposure to the broader cryptocurrency market and is not just limited to tracking the price changes in Bitcoin.
The Bitwise Crypto Industry Innovators ETF has an expense ratio of 0.85%.
Pros and Cons of Investing in ETFs
ETFs have become one of the most popular investments since their introduction. It is important to know that there are a number of pros and cons to investing in ETFs. Make sure you assess whether adding a few ETFs to your portfolio makes sense in light of your overall investment strategy.
- Diversification: Some ETFs are designed to track several underlying securities or assets. This can provide investors with diversification by owning a single ETF. There are ETFs that track almost anything, from exotic currencies to gold or silver. This means that an investor can also create an effective ETF strategy to diversify his or her holdings and to reduce market risk by owning several different and uncorrelated ETFs.
- Low costs: Exchange-traded funds are usually passively managed, which means that they have lower expense ratios compared to actively managed funds, such as mutual funds. Investors should make sure to check the expense ratio before selecting which ETFs to buy.
- Liquidity: ETFs can be bought and sold instantaneously during trading hours just like publicly-traded stocks.
- Tax efficiency: ETFs are much more tax efficient than mutual funds. Because ETFs are passively managed, there should not be frequent sales which trigger capital gains taxes.
- Fees: While low costs have been one of the major advantages of investing in ETFs, there are still fees which are often higher than if you were to directly own a specific stock or asset. When buying a stock, there is no annual fee that has to be paid by the investor.
In addition, some ETFs that follow a less-liquid or exotic index tend to have relatively wide bid-ask spreads throughout the day which can increase the trading costs for investors who want to buy or sell the ETF.
Lack of diversification: In some cases, the benchmark that an ETF seeks to track may be limited. That means that investors may not get exposure to a broad range of assets or securities unless they own multiple uncorrelated ETFs.
Even ETFs Can Be Risky!
Investments of any type can be volatile at times. There are many factors that affect the value of an investment, such as a company’s management decisions, turnover, supply problems, and economic recessions to name a few.
Regardless of its recent rise in popularity, cryptocurrencies are still new. I never invest more money in cryptocurrency than I am prepared to lose. While I believe in the future of cryptocurrency and think it is a good investment for me, there is still the risk that the value of Bitcoin could drop to $0 overnight.
Just like stocks and cryptocurrencies, ETFs come with risks. For example, if an investor decides to invest in a leveraged fund, both the potential profits and losses would be magnified which can lead to high losses. Similarly, if an investor invests in an ETF that tracks a volatile financial instrument (such as Bitcoin), the investment could lead to losses if the underlying asset falls in value. So keep in mind that you can still get yourself in trouble by buying an ETF.
Whether a cryptocurrency ETF is a good investment for an individual investor depends on many factors. Investors should always avoid putting all of your eggs in one basket. If you decide to add a Bitcoin ETF to your overall portfolio, make sure it makes sense in light of your overall investment objectives.
Investing in cryptocurrencies like Bitcoin can be done in a variety of ways, such as buying the currency directly on the exchange, investing in the underlying technology (i.e., blockchain), investing in companies that invest in the crypto ecosystem, or simply buying a crypto-related ETF.
Even though ETFs may sound like a great investment, they don’t come without risks. Bitcoin ETFs in particular may be more risky than other ETFs due to the volatile nature of cryptocurrency prices. Investors need to assess whether a highly-volatile asset such as Bitcoin is appropriate for their risk tolerance and overall financial goals. Volatile assets tend to generate large returns, but those returns don’t come without high risks!