New Bitcoin ETF Grows at Record Speed. Here’s What Investors Should Know

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Cryptocurrency hit the New York Stock Exchange on October 19 with the introduction of a new Bitcoin-linked fund. The fund quickly grew to over $1 billion in assets and became the fastest ETF to hit that threshold, according to Bloomberg data

Brought to you by ProShares, this new exchange traded fund (ETF) is a long-awaited milestone, experts say. Crypto enthusiasts in the United States have been trying to get Bitcoin-linked investment products approved for several years, says Theresa Morrisona GVB with the Beckett Collective

Trading under the ticker symbol BITO, the fund allows investors to buy Bitcoin without actually buying it on a crypto exchange.

“Consumers should definitely approach it with some skepticism,” said Mike Hunsberger, owner and CFP at California-based Next mission Financial planning

There have been some hurdles and delays by the SEC in making a Bitcoin-linked ETF available to investors. Contrary to previous proposals that the SEC has rejected, BITO does not hold Bitcoin directly, but trades Bitcoin futures – an important distinction.

Here’s what investors need to know:

What are Bitcoin Futures?

Bitcoin and Bitcoin futures are not the same. With futures, you agree to buy or sell the asset at a specified price in the future. You do not buy and sell the underlying asset (in this case Bitcoin) directly.

When that specified date arrives, you must buy or sell the asset at the agreed-upon price, regardless of the asset’s actual price that day. If your contract is concluded and Bitcoin is worth more than what you have agreed, you will make money as an investor. That is called trading with a premium. If the price of Bitcoin is lower than you thought it would be, you will lose money and that is called discount trading.

By investing in this new fund, you are simply betting on the potential that your shares of the ETF will be worth more later on. And the underlying driver behind the value of your stocks is Bitcoin.

There are many assets that are traded in futures – usually commodities such as oil, grain or coal. For example, you can buy a gold futures ETF instead of buying real gold bars.

[READ MORE:] What is Bitcoin?

“Futures contracts are derivatives of Bitcoin and are not directly backed by physical Bitcoin,” says Dana J. Menard, a CFP and founder of Twin Cities Wealth Strategies in Minneapolis. This can lead to some confusion as the price of the ETF does not necessarily correlate with the price of Bitcoin.

For example, if Bitcoin were to rise 30%, the Bitcoin futures ETF could only rise 20%, Hunsberger says. That’s because “futures ETFs have contracts that expire periodically and need to be bought back,” Hunsberger says. “This can contribute to the tracking error between the ETF and the underlying asset, in this case Bitcoin.”

Should You Buy a Bitcoin Linked ETF?

Whether you buy cryptocurrency directly or invest in a crypto-linked ETF, experts recommend never investing more than 5% of your total portfolio in speculative assets such as cryptocurrency or specialty ETFs.

Bitcoin is still very new compared to conventional stock market investing, so it lacks the historical track record that investors can use to anticipate future performance. Before buying shares in a Bitcoin ETF, cryptocurrency, or other speculative investment, remember to invest only what you feel comfortable losing, and never at the expense of other financial goals, such as paying off high-yield debt or saving for money. your pension.

Bitcoin is highly volatile and while there may be a difference between Bitcoin’s price and BITO’s price, the ETF does not protect you from Bitcoin’s ups and downs. This year alone, Bitcoin experienced an all-time high of over $60,000 in April, before abruptly losing half its value over the summer — though it has bounced back to around $60,000 in the months since. Even in the ETF, you can expect the same volatility.

That said, if you’re interested in exposing your current portfolio to cryptocurrency in some way and are okay with the risks, BITO makes it easier than ever for investors. “While not a direct investment in Bitcoin, it can provide investors with little knowledge of how Bitcoin is typically bought and sold on exchanges,” Menard says.

If you are new to cryptocurrency, it can be intimidating to navigate a cryptocurrency exchange. This ETF allows you to add some Bitcoin exposure to your portfolio directly through your brokerage. Plus, you can keep it in tax-advantaged accounts, such as a Roth IRA or 401(k), if you prefer.

“BITO will open Bitcoin exposure to a large segment of brokerage-owned investors who are comfortable buying stocks and ETFs, but don’t want to go through the hassle and learning curve of setting up another account with a cryptocurrency market.” provider and creating a bitcoin wallet,” said Michael L. Sapir, CEO of ProShares in a statement Monday.

How does BITO differ from actually buying Bitcoin?

Apart from the fact that you are buying Bitcoin futures and not actually buying an ETF that contains Bitcoin directly, there are a few differences to consider before buying BITO.

cost

Buying Bitcoin comes with its own costs, depending on the exchange you use, payment method, and other factors. BITO also has its own separate fees.

Specialized ETFs, such as BITO, often have a higher expense ratio, meaning they are more expensive for you. BITO’s expense ratio is 0.95% – which is very high according to experts. In other words, $95 of every $10,000 invested goes toward the fund’s operating expenses. Experts say the best low-cost index funds have an expense ratio of less than 0.3%.

“Because it’s a new asset class, there will be a lot of middlemen and the futures ETF price will be high until more competition lowers fees and costs a little bit,” Menard says.

There may also be other Bitcoin futures linked ETFs on the horizon. Three other applications are on the SEC’s rollout for October, according to: Bloomberg

Market hours

You can buy, sell or trade Bitcoin at any time. Cryptocurrency is not subject to market hours.

“Bitcoin trades 24/7/365,” says Rockie Zeigler, a CFP with RP Zeigler investment services. “Not BITO. While you can place orders outside of market hours, orders will not be filled until the stock market opens. You will not be able to transact with your BITO on weekends or evenings like regular Bitcoin.’

Regulation

There is no sweeping regulation for cryptocurrency exchanges yet, and as such, each exchange operates on different rules. While none of the cryptocurrency you keep on an exchange is FDIC insured, some exchanges offer private insurance to pay you back if there is a hack or theft.

[READ MORE:] Best Cryptocurrency Exchanges of September 2021

On the other hand, a Bitcoin-pegged ETF comes with protections more in line with other conventional investments. While only a cash balance in a traditional brokerage account (such as Fidelity, Charles Schwab, or Vanguard) is covered by FDIC insurance, brokerage accounts are protected by the Securities Investor Protection Corporation (SIPC). This insurance covers accounts up to $500,000 in securities if a brokerage closes due to bankruptcy or other financial difficulties and client assets are missing from accounts.

[READ MORE:] Best Online Stock Brokers for Beginners for October 2021

What’s next?

While the first Bitcoin-linked investment product to be approved by the SEC is a big deal, crypto enthusiasts are already looking forward to the next hurdle: an investment product that directly owns and tracks the price of the actual asset.

Some are frustrated with the futures asset, which adds an extra layer of complexity to an already complicated subject. “If the SEC really cared about individual investors, they would allow an ETF with mock Bitcoin rather than a futures-based product that is confusing to most investors,” he says. Ryan ColeGVB at Citrine Capital in San Francisco. “Basically, I see this as a win for Wall Street that will hurt individual investors.”

But with uncertainty over whether and when the SEC wants to approve a spot Bitcoin ETF, investors seeking a middle ground between crypto and traditional investing will have to settle for a futures-based product.

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