On Tuesday, the New York Stock Exchange debuted the first exchange-traded fund (ETF) connected to Bitcoin. It is expected to stimulate investment into the cryptocurrency, according to experts, but it may be difficult to convince Bitcoin supporters who want to cut out the middlemen.
The euphoria pushed Bitcoin’s price up to $63,998 (€54,000) on Wednesday, just shy of its all-time high of $64,895.22 set on April 14 this year. ProShares, a leader in exchange traded funds (ETFs), a type of investment tied to an index, announced on Monday the launch of a Bitcoin futures-related vehicle with the ticker “BITO.”
“We believe a large number of investors have been waiting for the debut of a bitcoin-linked ETF,” said Michael Sapir, CEO of ProShares. “BITO will provide access to bitcoin to a large segment of investors who already have a brokerage account and are comfortable buying stocks and ETFs, but do not want to go through the hassle and learning curve of opening a second account with a cryptocurrency provider and creating a bitcoin wallet, or are concerned that these providers may be unregulated and subject to security risks.”
The fund won’t invest directly in Bitcoin itself. Instead, it will focus on futures related to Bitcoin, a market that’s overseen by US regulators. That means investors need to be particularly aware of what they’re buying, and how it’s likely to perform.
What is an ETF?
An exchange-traded fund (ETF) allows investors to buy a broad range of investments in a single transaction. The S&P 500 index of large US equities, the price of gold, and high-yield bond indices are among the most popular ETFs.
Unlike traditional mutual funds, which only trade once a day, investors can buy and sell ETFs at any time during the trading day. This is especially true for cryptocurrencies, whose values can fluctuate dramatically from minute to minute, much alone day to day.
A Bitcoin-related ETF would provide investors with a new option to participate in the burgeoning cryptocurrency market. The price of bitcoin has more than doubled this year, and an increasing number of investors see it as a method to secure their investments.
The goal is that Bitcoin’s price will move in a way that is less dependent on economic assumptions than equities and other investments. If it works, it may be able to maintain portfolios when all else is decreasing or inflation is strong.
However, it does not have a perfect track record: at the onset of the pandemic in 2020, the US stock market plunged approximately 34%, and Bitcoin lost roughly the same amount. Some investors may be hesitant to create a new cryptocurrency trading account. Instead, customers can purchase the ETF using traditional brokerage accounts that they may already have for their stocks or IRAs.
Betting on futures
The fund will invest in Bitcoin futures, which are effectively bets on where the price of Bitcoin will move in the next months. The Commodity Futures Trading Commission regulates the Bitcoin futures market, which may provide further safety to investors. However, it does not completely track Bitcoin’s price. “This is not a substitute for personally owning bitcoin,” said Todd Rosenbluth, CFRA’s head of ETF and mutual fund research.
Who is it suited for?
The ETF is less than ideal for a Bitcoin believer who wants to invest in it for the long term because it will be invested in futures rather than actual Bitcoins, according to Rosenbluth. Instead of a buy-and-hold investor, he believes it will appeal to shorter-term traders looking to profit from its volatility, at least at first.
How much will it cost?
The expense ratio for BITO will be 0.95 percent. Such fees may be difficult to sell to Bitcoin supporters, who see cryptocurrency as a method to cut out middlemen from industries.