Should You Buy the New Bitcoin ETF?
ItâsâŚcomplicated.
If youâre relatively new to the cryptocurrency space or have been sitting on the sidelines waiting for a form of institutional exposure, then you may have applauded the recent approval of the USAâs first Bitcoin ETF under the symbol BITO.
For some traditional investors, having brokerage exposure to one of the best-performing assets in human history is akin to having a safety net. Instead of having to custody Bitcoin themselves and worrying about many doomsday possibilities, they can outsource that risk to ETF provider ProShares and rest easy at night.
While investing in the new Bitcoin ETF might seem like a no-brainer, itâs worth noting that there is some detail to parse out. Especially if youâre new to Bitcoin, adding BITO to your IRA or brokerage account may introduce more complications than gains.
Owning the ETF Doesnât Mean You Own Bitcoin
One of the most confusing questions for investors surrounding this ETF is whether or not this means that they hold Bitcoin. Since Bitcoin is stored on the Bitcoin blockchain itself, nobody really âownsâ any of it, but many control their private keys to retain self custody over their share of the digital asset.
BITO buys Bitcoin futures contracts and holds them until they are sold or rolled over, which is slightly more complicated than purchasing the actual commodity from an exchange or miners. This is vastly different than a spot Bitcoin ETF (which does not yet exist in the USA) and would track an index or the spot price of Bitcoin held in reserves somewhere.
If reading about futures or trying to decipher this financial instrument is wreaking havoc on your brain, simply knowing that BITO does not invest or hold Bitcoin. For a more straightforward explanation of futures, check out this video from TD Ameritrade:
This Differs from Popular Gold ETFs
BITOâs futures emphasis may matter to investors seeking a new store of value because this is a shakeup from some of the largest gold ETFs, which is the gold standard (literally) that commodity ETFs are compared to.
When traditional investors want gold exposure in their portfolio without actually holding it themselves, they are only a click away from purchasing SGOL or GLD and having brokerage access to physical gold held in secure vaults elsewhere. This makes sense, especially with significant holdings, because the amount of security, risk, and unique hassle to transfer in and out of gold quickly becomes burdensome compared to other commodities.
This isnât the case with BITO because no Bitcoin is held in custody by a corporation or trusted custodian. The BITO ETF is not tracking the spot price of Bitcoin but instead placing bets on what its future price might be. While highly educated financial experts that have studied Bitcoin may do well in guessing this, it simply will not yield the same results as holding Bitcoin yourself or tracking the spot price. Futures contracts can vary by many percentage points, and an investor should be prepared to accept higher percentage differences for a volatile asset like Bitcoin.
Bitcoin Doesnât Have the Same Custody Risks as Gold
As a digital commodity, Bitcoin is often touted as âGold 2.0â for many reasons:
- Itâs limited in supply to 21 million units.
- Miners secure and protect the Bitcoin network through electricity costs to verify each Bitcoin transaction.
- The Bitcoin chain is pseudonymous and can be audited to assure that each Bitcoin (or fraction thereof) is authentic.
- Since its launch in 2009, Bitcoin has continually risen in price and functioned as a store of value over time.
- Bitcoin is incredibly liquid on the open market and is the #1 accepted cryptocurrency for exchanging a wide variety of financial assets (from precious metals to collectibles and cash).
Yet unlike gold, which ultimately, because of its physical nature, must be custodied under armed guard or lockbox, any knowledgeable individual can securely store large amounts of Bitcoin on a flash drive or piece of paper. This is one of the unique advantages of cryptocurrency in general, but especially the dominant market leader.
Because Bitcoin does not have the same unique custody risks as gold, it may be more prudent to directly invest in Bitcoin yourself and pay a premium to learn how to secure and store it for the long haul. Whether through a personal hardware wallet or a third-party service, having direct exposure and access to Bitcoin will give you the advantage of tracking its spot price and reaping the immediate benefits of its appreciation.
Itâs Easier to Buy, Custody, and Secure Bitcoin Than Ever Before
In the early 2010s, when opportunities to buy and secure Bitcoin were far and few between, most investors would have clamored for a Bitcoin ETF or other traditional financial instrument to make tracking BTCâs value easier.
But nowadays, with the advent of large institutions such as Coinbase, buying and securing Bitcoin through a trusted custodian is easier than ever before. While Bitcoin advocates recommend self custody for the best experience (ânot your keys, not your coinsâ), many enterprise frameworks have been developed to help even high net worth individuals and organizations buy and secure large amounts of Bitcoin.
Even with all of this information, only you will know the proper allocation for your hard-earned capital and should think about these questions deeply to find the best solutions. While a Bitcoin ETF might start with a bang and then taper off (or be regulated out of existence), Bitcoin as an asset is here to stay and is worth holding onto.
Please be advised that this article does not constitute financial advice and that you should seek out a certified financial advisor for all your wealth plans. I cannot be held liable for investment decisions that you choose to make, and all investments are subject to risk (including losing all of your money). Iâm simply a man who loves teaching other people about Bitcoin, freedom, and other topics of interest.
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