A new Bitcoin ETF has debuted on the New York Stock Exchange. Here’s what investors need to know
The cryptocurrency hit the New York Stock Exchange this week with the introduction of a new Bitcoin-linked fund. The fund already manages over $ 1 billion and is the fastest ETF to reach that threshold, according to Bloomberg data.
Offered by ProShares, this new exchange-traded fund (ETF) marks a much-awaited milestone, according to experts. In the United States, crypto enthusiasts have been trying to get Bitcoin-related investment products approved for several years, according to Therese Morrison, a CFP 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. The fund posted a 2.59% increase on its first full day of trading, closing at $ 41.94 per share.
“Consumers should certainly approach it with some skepticism,” says Mike Hunsberger, owner and CFP of the California-based company. Financial planning for the next mission.
There have been regulatory hurdles and delays from the SEC in making a Bitcoin-linked ETF available to investors. Unlike previous proposals that the SEC rejected, BITO does not directly own Bitcoin, but instead trades Bitcoin futures contracts – an important distinction.
Here’s what investors need to know:
What are Bitcoin Futures?
Bitcoin and Bitcoin futures are not the same thing. With futures contracts, you agree to buy or sell the asset in the future at a specified price. You don’t buy and sell the underlying asset (Bitcoin in this case) directly.
When that specified date arrives, you must buy or sell the asset at the agreed price, regardless of the actual price of the asset on that day. If your contract comes up and Bitcoin is worth more than you agreed to, as an investor you make money. This is called premium trading. If the price of Bitcoin is lower than what you thought it was going to be, you are losing money, and this is called trading at a discount.
By investing in this new fund, you are simply betting on the possibility that your ETF shares will be worth later. And the underlying engine of the value of your stocks is Bitcoin.
Many assets trade in futures, usually commodities like oil, grains or coal. For example, you can buy a gold futures ETF instead of buying real gold bars.
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“Futures contracts are derivatives of Bitcoin and are not directly backed by physical Bitcoin,” says Dana J. Ménard, CFP and founder of Twin Cities Wealth Strategies in Minneapolis. This can lead to a bit of confusion as the price of ETF will not necessarily correlate with the price of Bitcoin.
For example, if Bitcoin rose 30%, the Bitcoin futures ETF might only rise 20%, Hunsberger says. This is because “futures ETFs hold contracts that expire periodically and must be redeemed,” Hunsberger explains. “This may add 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 to invest more than 5% of your total portfolio in speculative assets like cryptocurrency or specialized ETFs.
Bitcoin is still very new compared to conventional stock market investments, so it lacks the historical track record that investors can use to anticipate future performance. Before buying shares in a Bitcoin ETF, cryptocurrency, or any other speculative investment, remember to invest only what you are willing to lose, and never at the expense of other financial goals like investing. paying off high interest debt or saving for retirement.
Bitcoin is very volatile, and while there may be a difference between the price of Bitcoin and the price of BITO, the ETF does not protect you from the highs and lows of Bitcoin. This year alone, Bitcoin hit an all-time high of over $ 60,000 in April, before sharply losing half of its value over the summer – although it fell back to around $ 60,000 in the past. months that followed. You should expect the same volatility even in the ETF.
That said, if you want to expose your current portfolio to cryptocurrency in one way or another and accept the risks, BITO makes it easier than ever for investors. “While this is not a direct investment in Bitcoin, it may give investors little knowledge of how Bitcoin is typically bought and sold on exchanges,” Menard explains.
If you are new to cryptocurrency, trying to navigate a cryptocurrency exchange can be daunting. This ETF allows you to add Bitcoin exposure to your portfolio directly through your brokerage. Plus, you can keep it in tax-advantaged accounts like a Roth IRA or 401 (k), if you want.
“BITO will open up Bitcoin exposure to a broad segment of investors who have a brokerage account and are comfortable buying stocks and ETFs, but do not wish to go through the hassle and learning curve of ‘establish another account with a cryptocurrency provider and create a bitcoin wallet,’ said ProShares CEO Michael L. Sapir in a declaration On Monday.
How is BITO different from actually buying Bitcoin?
Aside from the fact that you will be buying Bitcoin futures contracts and not actually buying an ETF that directly holds Bitcoin, there are a few differences that you should consider before purchasing BITO.
The outright purchase of Bitcoin comes with its own set of fees, depending on the exchange you are using, how the account is paid, and other factors. BITO also comes with its own separate charges.
Specialized ETFs, like BITO, often have a higher expense ratio, which means they’re more expensive for you. BITO’s expense ratio is 0.95%, which experts say is very high. In other words, $ 95 of every $ 10,000 invested will go towards operating expenses of the fund. Experts say the best low-cost index funds have expense ratios of less than 0.3%.
“Since this is a new asset class, there will be a lot of middlemen and the price of the futures ETF will be high until more competition reduces fees and expenses a bit. “said Menard.
There could also be other ETFs linked to Bitcoin futures on the horizon. Three more requests are on the SEC’s file for October, according to Bloomberg.
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. “BITO will not do it. Although you can place orders during off-peak hours, orders will only be executed when the market opens. You won’t be able to transact with your BITO on weekends or evenings like you can with simple Bitcoin.
There hasn’t been any drastic regulation for cryptocurrency exchanges yet, and as such, each exchange operates under different rules. While none of the cryptocurrencies you keep in an exchange are FDIC insured, some exchanges offer private insurance to reimburse you in the event of a hack or theft.
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On the other hand, an ETF linked to Bitcoin has protections more in line with other conventional investments. While only a cash balance in a traditional brokerage account (like 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 is closed due to bankruptcy or other financial hardship and client assets are not reflected in the accounts.
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While the first Bitcoin-related investment product to be SEC approved is a big deal, crypto enthusiasts are already anxiously awaiting the next hurdle: an investment product that directly owns and tracks the price of the asset. real.
Some are frustrated with the asset term, which adds another layer of complexity to an already complicated subject. “If the SEC really cared about individual investors, it would allow an ETF that held Bitcoin in cash as opposed to a futures-based product that is confusing for most investors,” said Ryan cole, CFP at Citrine Capital in San Francisco. “In short, I see this as a win for Wall Street that will hurt individual investors.”
But with uncertainty as to whether or when the SEC might seek approval for a spot Bitcoin ETF, investors who want a happy medium between crypto and traditional investing will have to settle for a futures product.