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Are Bitcoin ETFs a Good Investment?

Since Bitcoin’s launch 13 years ago no security on a traditional stock exchange has out-performed it.

Until recently, bitcoin’s price has been driven largely by retail investors. These investors have accumulated their bitcoin either through mining, acquiring it through work, or purchasing it through cryptocurrency exchanges. Institutional investment in bitcoin to date has been minimal despite its performance. There are a few outliers like Elon Musk’s Tesla, and Michael Saylor’s Microstrategy, and slowly more institutional money is making its way into Bitcoin. The creation of a Bitcoin ETF should accelerate this process.

Institutional investors have been reluctant to adopt bitcoin as part of their portfolio for numerous reasons. These reasons include Bitcoin’s historic price volatility, the difficulty in acquiring, holding, and selling it, and general unfamiliarity with the space.

As of 2021, however, there’s a new way of gaining Bitcoin exposure that’s a little more familiar to traditional investors. We’re talking, of course, about the Bitcoin ETF.

Could a Bitcoin ETF be right for you?

Bitcoin Meets Traditional Investing

A Bitcoin ETF allows a security to be listed on traditional stock exchanges that tracks Bitcoin to fiat currency through futures contracts. The first Bitcoin ETF application was filed back in 2013. It has taken eight years for a Bitcoin ETF to finally gain approval by the SEC.

It went live on the New York Stock Exchange (NYSE) on October 19, 2021, under the ticker BITO. The NYSE Bitcoin ETF was beaten to market by a Bitcoin ETF launched on the Canadian TSX (Toronto Stock Exchange) back on February 18, 2021.

What is an ETF?

To understand what ETFs are and why the introduction of a Bitcoin ETF is important it is important to first familiarize ourselves with traditional stock markets and some of the securities that are bought and sold on them. In regards to understanding ETFs, the two securities we should familiarize ourselves with are stocks and mutual funds.

Stocks: Pieces of publicly traded companies. If you own a stock of a company, you own a piece of that company. You can freely buy and sell stocks on any stock exchange as many times as you like within opening hours

Mutual Funds: Pooled funds that bundle securities together to offer investors a diversified portfolio. Typically, between 100 to 3000 different securities within a mutual fund. Heavily regulated and actively managed, with management fees attached. They are traded only once per day after markets close.

ETF: An exchange-traded fund (ETF) is a type of security that is similar to an index but has the benefit of being able to be bought or sold on a stock exchange the same way a regular stock can be. ETFs also carry fewer fees than mutual funds and are typically passively managed.

What are the Benefits of a Bitcoin ETF?

Using a Bitcoin ETF is easy, convenient, and familiar to traditional investors who operate in stock exchanges. An approved Bitcoin ETF adds additional legitimacy to Bitcoin. To be clear, Bitcoin does not require an ETF for its legitimacy or approval. However, having one removes a layer of FUD for people unfamiliar with Bitcoin. It does this by having a seat at the same table as the largest publicly traded companies like Apple and Microsoft.

A Bitcoin ETF is significant in just how much access and exposure it will allow. As previously mentioned, for the past 13 years Bitcoin’s price has been largely the result of retail investors. If institutional money now has an easily accessible way to put bitcoin into their balance sheets, then it is reasonable to expect that more and more institutions will start to do so.

Another significant benefit of a Bitcoin ETF is that retail investors will easily be able to add it to retirement vehicles (such as a Roth IRA, Traditional IRA or RRSP in Canada). That means that investors could potentially hold Bitcoin very long-term and potentially pay very little tax on it.

Why Use a Bitcoin ETF When You Can Buy Bitcoin directly?

The cryptocurrency industry is technical and intimidating for people unfamiliar with it. Institutional investors know they want exposure to Bitcoin, but trying to navigate a hyper-growth industry with minimal knowledge is a difficult hurdle to overcome. It enables investors the ability to keep their entire portfolio in one location, adjust to swings in real-time, rather than having to juggle between multiple exchanges and wallets.

What Are the Disadvantages of a Bitcoin ETF?

The clearest disadvantage for owning a Bitcoin ETF compared to owning bitcoin directly is that you do not own the private keys or the bitcoin itself. This is an important distinction compared to cryptocurrency exchanges and other custodial wallets. This is important because as Bitcoin starts to gain more widespread adoption and usage as a form of payment, not owning the actual bitcoin means you won’t be able to take advantage of its fungibility. This will be more of a disadvantage for retail investors in stock markets rather than institutional investors.

Another disadvantage of using a Bitcoin ETF is that you are at the mercy of the operating hours of the stock exchanges. Cryptocurrency exchanges operate 24 hours a day compared to most stock exchanges are only operational between Monday to Friday 9am – 4pm. This is a major disadvantage for using a Bitcoin ETF. Bitcoin’s price can keep adjusting outside stockbrokers’ operating hours and prevent them the ability to position themselves until the next day or week.

A Bitcoin ETF compared to simply owning bitcoin has the added disadvantage of carrying a management fee of around 1% annually per $1000 invested. This will be an added calculation when it comes to how much investors will be willing to invest in a Bitcoin ETF.

What is the Impact of a Bitcoin ETF?

The approval of a Bitcoin ETF is a watershed moment for Bitcoin, and the cryptocurrency industry as a whole. It signals a wider acceptance of the magic internet money and opens the door for future cryptocurrency ETFs.

The Bitcoin ETFs offer institutional investors the exposure to Bitcoin that they are looking for within a framework they understand without having to learn a new, highly technical industry. It will lead to more people coming in contact and familiarizing themselves with Bitcoin, and should help accelerate larger adoption.

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Iain Taylor

About the Author

Iain Taylor

Iain Taylor grew up in Northern Ireland, and is currently living in Halifax, NS. He has quadruple citizenship status, and has been involved in cryptocurrency since the end of 2020. He completed a study in Bitcoin, Blockchain Technology, and Cryptocurrencies at Dalhousie in 2021, and has been writing on the industry since September 2021.

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