Bitcoin ETFs-How BTC ETFs May Be More Expensive than Bitcoin Itself? (2024)

The US SEC has been rejecting applications of Bitcoin’s ETFs pointing out the volatility of the underlying asset.

But after years of anticipation, the SEC has approved, filings by several firms to begin trading 11 new Bitcoin exchange-traded funds, or ETFs.

What changed? What persuaded the SEC to say yes? we are going to find out how Bitcoin ETFs will be more expensive than BTC itself.

In this blog post, we will learn what are the latest developments giving a push for Bitcoin ETFs. And what are Bitcoin ETFs?

What are ETFs?

Chiefly, ETF stands for exchange-traded fund.

In simple words, it is a type of pooled investment security that tracks a particular index, sector, commodity, or other asset.

ETFs can be purchased or sold on a stock exchange in the same way that a regular stock can be.

These ETFs are similar to mutual funds. However, unlike mutual funds, ETFs are traded directly on a stock exchange just like any other shares.

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What is a Bitcoin ETF?

A Bitcoin ETF is an exchange-traded fund that invests primarily in assets to the original cryptocurrency, Bitcoin.

ETFs sell shares to you on any open market and use the proceeds to build a portfolio of assets based on a market index, a stock market sector, or any other asset class like crypto.

Until January 10th, Bitcoin ETFs could not own Bitcoin itself. Rather, they had to own companies and other ETFs that were related to Bitcoin or cryptocurrency in general or they owned Bitcoin futures contracts.

A decade in the making, the ETFs area game-changer for Bitcoin, offering investors exposure to the world’s largest cryptocurrency without directly holding it. They provide a major boost for a crypto industry beset by scandals.

“It’s a huge positive for the institutionalization of Bitcoin as an asset class,” said Andrew Bond, managing director and senior fintech analyst at Rosenblatt Securities.

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Why Don’t Bitcoin ETFs Own Bitcoin?

None of the six listed ETFs own actual Bitcoin. Instead, they hold Bitcoin’s futures contracts, and in some cases the shares of companies and other ETFs active in the crypto space.

Chiefly, ETFs could not own Bitcoin because the SEC was concerned that BTC is traded on non-regulated crypto exchanges.

SEC chair Gary Gensler is on the record stating that given the novel character of cryptocurrency, relying on the proven and highly regulated futures market is a much safer approach for Bitcoin exchange-traded funds.

Futures are an agreement between two parties to sell a particular asset at a future date.

They allow traders to speculate about how prices may move in the future with minimal upfront investment because they frequently use leverage or borrowed money.

The fund buys positions in one-month CME Bitcoin futures contracts.

As the contracts get near expiration, the fund gradually sells them and buys longer-dated contracts.

So, if the price of BTC is rising, BITO uses its gains to add to a pool of funding held in cash and Treasuries.

If the price of BTC falls, it takes funds from the pool to pay for the losses in futures contracts.

Most of the Bitcoin ETFs use a similar strategy. But please note that attempting to earn money opposite to BTC’s Bitcoin ETF (BITI) follows a slightly different strategy.

Conversely, none of the approaches are perfect. Tracking the price of Bitcoin does not always replicate the performance of the underlying market, and there are extra costs as the managers roll forward the futures contracts they are buying.

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Bitcoin ETFs – What is a Spot Price?

Firstly, we will try to understand here what is a spot price.

The spot price is how derivative traders in the options and futures markets refer to the prices of an asset for immediate delivery rather than future delivery.

In simple words, the spot price is the current price of a commodity at the present moment, rather than guesses at what the price might be later.

Essentially, spot prices are used as benchmarks for pricing derivative contracts.

For instance, the spot price of a currency pair, such as the exchange rate between the U.S. dollar and the euro, is a reference point for currency hedging.

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How is Bitcoin ETFs different from Direct Investments in Bitcoin?

For starters, in the case of Bitcoin ETFs, an investor would not need a crypto wallet since they are not directly holding the Bitcoin.

Secondly, they would not have to register with a crypto exchange and maintain an account for holding their investment.

Thirdly, while investing in a Bitcoin ETF, the investment is not directly into the cryptocurrency but an indicator of its value.

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How do Bitcoin ETFs Operate?

Mainly, based on the proposals and the regulator’s comments on Bitcoin ETFs, there are a few ways in which the financial instrument could operate and assign value to the underlying asset.

The first is the fractionalized holding of the cryptocurrency. For instance, the institution running the fund would purchase Bitcoin at a particular rate and hold it.

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Will Bitcoin ETFs be more Expensive than Bitcoin itself?

Why owning a Bitcoin ETF may be more expensive than simply purchasing Bitcoin on a crypto exchange.

Because crypto exchanges typically charge one-time fees to buy and sell Bitcoin, while owning a Bitcoin ETF incurs an annual expense ratio fee.

For example, you want to buy Bitcoin on the exchange Coinbase. You would likely pay around 0.5% of your purchase price as a fee. This is less than you would pay over a year when you invest in a Bitcoin ETF, which all charge at least 0.65% per year.

But this trading fee is not all you have to keep in mind. You should also consider if you will want to transfer your Bitcoin ETF of your exchange to a separate hot or cold crypto wallet.

If that is the case, you will likely be on the hook for withdrawal fees, which are typically pretty small but very by the exchange.

At Coinbase, these clock in at 1% per withdrawal transaction. Depending on the amount of Bitcoin, you are transfering, that likely works out to be pretty negligible but ids still important to keep in mind.

Additionally, you need to consider your exit strategy. Even HODLers who plan to stick with the crypto long-term will need to sell portions of their holdings. That means paying a trading fee again when you sell. Again, these fees clock in at about 0.5% on Coinbase.

That said, shorter-term holders of an ETF may not mind the comparatively higher fees they incur because of the convenience provided by ETFs.

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Should You Buy a Bitcoin ETF Instead of Bitcoin?

Some of you may feel safer getting exposure to Bitcoin in your portfolio by purchasing a professionally managed ETF than you would do by actual BTC.

The widespread adoption of Bitcoin as an investment is relatively recent, and some people may be concerned about hacking or losing passwords or private keys needed to access your investment when it’s stored in a secure Bitcoin wallet.

In addition, not everyone has found that buying Bitcoin via a crypto exchange is for them.

While almost anyone can open a Coinbase account, for instance, not everyone is comfortable doing so.

Maybe you would be restricted to buying and selling securities in your traditional brokerage accounts for various reasons.

Often you may choose to invest for retirement in an individual retirement account. If you as a retiree investor would like to get a modest amount of exposure to Bitcoin without opening an account at a crypto exchange. Owning shares of a Bitcoin is not a terrible option.

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What is a Futures Contract?

To put it simply, a futures contract is a financial agreement between two parties to buy or sell an asset. Such as commodities, currencies, or financial instruments, at a predetermined price on a specific date in the future.

The price at which the asset will be bought or sold is known as the “futures price”.

This allows individuals and businesses to hedge against price fluctuations or speculate on the future direction of an asset’s price.

The profit or loss in a futures contract indeed depends on the difference between the agreed-upon futures price and the actual market price of the asset at the time of contract expiration.

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Are there any Mainstream Bitcoin ETFs?

The Grayscale Bitcoin Trust (GBTC) – It has a 2% management fee.

The Proshares Bitcoin Strategy ETF – It has an expense ratio of 0.95%.

The biggest equity index funds, in contrast, can have expense ratios below 10 basis points, which is equal to 0.10%.

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What will be the Impact of Bitcoin ETF on Crypto Market?

The potential approval of a Bitcoin ETF holds significant implications for the Bitcoin market and the broader financial industry.

It would provide investors with a regulated and convenient way to gain exposure to Bitcoin, potentially driving increased demand and liquidity.

Although the commission has approved these new Bitcoin ETFs for trading, the SEC still views Bitcoin and other cryptos skeptically.

In her dissent on the SEC vote to approve ETFs Commissioner Caroline Crenshaw said, “I am concerned that these products will flood the markets and land squarely in the retirement accounts of U.S. households who can least afford to lose their savings to the fraud and manipulation that appears prevalent in the spot bitcoin markets”.

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Why ETF is Less risky?

One ETF can give exposure to many stocks from a particular industry, investment category, country, or a broad market index.

ETFs can also provide exposure to asset classes other than equities, including bonds, currencies, and commodities. Portfolio diversification reduces an investor’s risk.

One of the SEC’s key concerns about a spot bitcoin ETF has been the potential for market manipulation. n

The BlackRock June filing proposes a surveillance-sharing agreement that could minimize that risk. The newer filing includes similar proposals.

These steps could avoid the market manipulation and the potential for fraud that the SEC has cited in its opposition to prior proposals for Bitcoin ETFs and spot price crypto exchanges.

For example, EDX’s new exchange for institutional customers would separate broker-dealer activities from each other and from the exchange itself.

It would ensure that the exchange is neutral and not pocketing the customer’s money. It would make sure that broker-dealers hold client assets in segregated accounts. And it would ensure that broker-dealers don’t collude with each other.

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Why BlackRock is offering its investment vehicle in the form of a trust, not an ETF?

Though many in the crypto community believe BlackRock’s spot in Bitcoin trust will be a de facto Bitcoin ETF, there are significant differences between the two options.

Grayscale Bitcoin ETF Trust (GBTC), a popular investment vehicle that invests in Bitcoin, also operates as a trust rather than as an ETF.

The drawback to GBTC is that like many investment trusts it often trades at a discount to the market value of its underlying asset, Bitcoin.

Its discount was around 50$ late last year. In the wake of the June BlackRock filing, that discount narrowed to about 33%.

Grayscale – GBTC

It trades at a discount partly because investors are allowed to sell their shares in the market, but they have no way to redeem their holdings in exchange for the Bitcoin in the trust.

And unlike an ETF, GBTC has no redemption mechanism. Much like any investment trust, GBTC shares can not be created and destroyed as demand shifts.

That limits the number of available shares. At the same time, GBTC charges shareholders a 2% fee or expense ratio.

Would the same problem dog investors in BlackRock’s proposed trust?

BlackRock has probably already spoken with market makers to create the arbitrage opportunity for a secondary market in BlackRock’s trust shares.

That could avoid price discounts and premiums. This is how BlackRock’s trust could act as an ETF and avoid the kind of price distortions hounding Grayscales’s trust.

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Is Bitcoin ETF taxable?

The IRS classifies cryptocurrency as property or a digital asset. Any time you sell or exchange crypto, it’s a taxable event.

This includes using crypto to pay for goods or services. In most cases, the IRS taxes cryptocurrencies as an asset and subjects them to long-term or short-term capital gains taxes.

How to invest in Bitcoin ETFs?

The first step is to open a brokerage account. There are many options for online brokers these days.

Once you have opened an account you can purchase Bitcoin ETFs the same way you would purchase any other stock or ETF.

You need to simply search for a ticker symbol in your brokerage interface, enter the number of shares you want to purchase, and click buy.

However, unlike traditional stocks, ETFs charge an annual expense ratio, which will be deducted from your account.

You should also keep in mind that cryptos such as Bitcoin are a relatively new and volatile asset class.

Nobody should invest more than they can afford to lose, and it’s always a good idea to consult a financial advisor before any investment decision.

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The Best Bitcoin ETFs of 2024

Expense ratio = 0.95%

Assets under management = $1.4 billion

Investing strategy = Bitcoin futures

It is the first ETF approved to trade in U.S. markets. Upon its debut in October 2021, BITO became one of the most heavily traded ETFs in market history, attracting around $1 billion in assets within a few days.

BITO is an actively managed fund that is seeking capital appreciation through transp[arent exposure to Bitcoin futures contracts.

It may also hold Treasury securities and cash.

2. VanEck Bitcoin Strategy ETF(XBTF)

Expense ratio = 0.76%

Assets under management = $63 million

Investing Strategy = Bitcoin futures

It is an actively managed fund that launched in November 2021. XBTF aims to provide capital appreciation by investing in BTC futures and may invest some of its assets in Treasuries and cash.

One advantage it has is its structure as a C-corp, unlike any other ETFs that are registered investment corporations. This is a tax-efficient structure because C-corps are not required to distribute long-term capital gains to investors as dividends,

For investors, this approach may lower taxable distribution and allow them to keep more money invested in the fund.

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Expense ratio = 0.95%

Assets under management = $55 million

Investing Strategy = Decline in Bitcoin futures

It was launched in June 2022. It is currently the only ETF approved by the SEC to trade the inverse of Bitcoin’s daily performance.

BITI attempts to complete this goal by returning the inverse of the S&P CME Bitcoin Futures Index for a single day at a time.

The fund maintains its inverse exposure by trading in the cash-settled futures market. In this market, the seller pays the buyer if the price of the futures contract goes up, and the buyer pays the seller when the contract’s price goes down.

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4. Valkyrie Bitcoin Strategy ETF(BTF)

Expense ratio = 1.20%

Assets under management – $35 million

Investing Strategy = Bitcoin futures

BTF is an actively managed ETF that launched in October 2021, hot on the heels of BITO.

The Valkyrie Bitcoin strategy fund aims to spend as close to 100% of its net assets as it can in Bitcoin futures contracts. Any remaining assets will be held in U.S. government securities, money market funds, and corporate bonds.

5. Simplify Bitcoin Strategy PLUS Inc ETF (MAXI)

Expense ratio = 11.38%

Assets under management = $31 million

Investing Strategy = Bitcoin Futures

This fund is actively managed and launched in September 2022. Like other BTC funds, MAXI can not invest in Bitcoin directly. Rather, it aims to provide capital appreciation by investing in BTC futures.

However, it also uses short-dated put or call spreads on a global equity index to help generate income for its investors.

6. Global X Blockchain % Bitcoin Strategy ETF (BITS)

Expense ratio = 0.65%

Assets under management – $15 million

Investing strategy = Bitcoin futures & blockchain stocks

BITS is an actively managed fund that was launched in November 2021. It splits its holdings between Bitcoin futures contracts and indirect holdings in blockchain companies.

Indirect in this case means that BITS owns shares in its sister ETF, the Global X Blockchain ETF(BKCH), which owns a range of blockchain stocks, including companies involved in digital asset mining, crypto exchanges, and companies developing new blockchain applications.

Note: –

Avoid ETFs trading only in blockchain-related stocks or other cryptos rather than Bitcoin futures.

Filter the remaing ETFs for those with more than $10 million in total AUM.

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ETH is set to outperform Bitcoin.

Additionally, Lunde and Helseth shared their optimism for the price of Ether, explaining that ETH appears likely to outperform Bitcoin over the next two months as it will benefit from strong momentum ahead of a futures-based ETF listing.

They explained Ether may track a similar path to Bitcoin which gained roughly 60% in the weeks leading up to the launch of the first Bitcoin futures-based ETF on Oct. 19, 2021.

The verdict on a futures-based Ether ETF is slated to be handed down in mid-October, which is reportedly set to get the green light from the BTC.

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In Canada, Spot Bitcoin ETFs have been working for Years.

Chiefly, BlackRock’s (BLK) recent filing for a Bitcoin exchange-traded fund with the US SEC sparked renewed institutional interest in Spot Bitcoin ETFs.

The development seems only to have increased divisive discussions on crypto-related financial instruments in the U.S.

But to have a more nuanced conversation on the implications of a spot Bitcoin ETF for markets, you only need to look north to Canada. These products have been approved and running successfully for the past two and a half years.

While the “not-your-keys,not-your-crypto” crowd will invariably point to the drawbacks of getting a portfolio through ETF.

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Present Scenario in Canada

Some crypto investors will always distrust not directly controlling their coins. But the reality is that in Canada, strict regulatory oversight has forced fund providers to operate transparently. As well as adhere to an operational framework.

This makes the potential for asset commingling, hacks, and fraud extremely difficult.

To date, investors have bought units of Canadian Spot Bitcoin ETFs. They never had their assets hacked or had their funds lost through malpractice or poor balance sheet management.

This can not be said for the millions of investors who trusted their assets with the likes of FTX, Celsius Network, and BlockFi.

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Conclusion

The SEC has continued to argue that a spot Bitcoin ETF could be dangerous for investors while, at the same time, having greenlighted Bitcoin futures ETFs.

And the direct buying and selling of digital assets on exchanges. But in Canada, it has been shown that Spot ETFs have been very efficient at mimicking direct portfolio exposure to Bitcoin.

That too, is without the added uncertainty and volatility of the futures markets and having to deal with the operational opacity of regulated exchanges.

Nobody knows what the future of these assets will be. Since its inception, Bitcoin prices have risen to more than $60,000 per coin and subsequently dropped below $19,000.

Whether cryptocurrencies and Bitcoin, in particular, will make for good long-term investments, you may need to decide on your own.

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