If only 13% of Australians own crypto, are heaps more folks about to jump in? It’s about the same in the US. Bitcoin is just off all time highs after its epic retrace in May 2021. It’s probably time for the FOMO set in. If you’re a crypto beginner and looking for ways to get involved with crypto, you might have heard about the new crypto ETF. The first Bitcoin ETF launched in the US recently. Australia and Canada have followed suit.
However, before you jump on the bandwagon, there are some things to understand about this historic cross-over of traditional and crypto markets. In this article we will review the new Bitcoin ETF, who it might be good for, and 5 reasons any crypto newbie might think twice about investing.
What is an ETF?
An ETF is an Exchange Traded Fund, which basically means that it’s a fund listed on the stock exchange.
An ETF is an investment fund that (usually) owns the underlying assets (shares of stock, bonds, oil futures or gold bars) and divides ownership of those assets into shares. These can be traded on exchanges just like individual stocks.
This differs from buying shares in companies because instead of owning fractions of businesses, you are invested into funds containing lots and lots of companies within a particular investing theme.
As the crypto market has matured, many have called for the creation of a crypto ETF or a Bitcoin ETF.
Can you invest in a crypto ETF today?
The answer to that question depends what country you’re in!
If you are in the US, you can now invest in a Bitcoin Futures ETF – an ETF based on the Bitcoin Futures market.
In the last week, US regulators have approved the first US Bitcoin Futures ETFs: ProShares’ Bitcoin Strategy ETF (Ticker BITO).
Several other fund managers, including the VanEck Bitcoin Trust, Invesco, Valkyrie, Ark Invest and Galaxy Digital Funds, have also applied to launch Bitcoin ETFs in the United States but as yet these are not approved.
The ProShares Bitcoin ETF is a futures based ETF.
The are no Bitcoin or crypto ETFs (either Futures or Spot) approved for investment in Australia, but there are several in Canada and Europe.
Futures vs Spot Bitcoin ETF
Futures-based ETFs are different from spot market ETFs in that they track futures contracts rather than the spot price of an asset. A Bitcoin futures ETF follows Bitcoin futures contracts rather than the value of bitcoin itself. As a result, the ETF’s price will not correspond to the price of bitcoin.
A futures ETF is a ‘synthetic ETF’ because it’s based on financial derivatives (futures contracts) traded at the Chicago Mercantile Exchange (CME). The fund BITO doesn’t buy and sell any Bitcoin and you don’t actually own any Bitcoin by buying into fund!
A spot Bitcoin ETF is in the works. Word is that trust fund manager Grayscale will soon apply to regulators to have their Grayscale Bitcoin Trust fund changed to a Bitcoin ETF.
What is the difference between a Bitcoin ETF and a crypto ETF?
A Bitcoin ETF will follow the Bitcoin spot price or futures contracts. It doesn’t cover other cryptocurrencies. It’s movement up or down relates only to Bitcoin’s movement.
A crypto ETF will track a broader basket of cryptocurrencies. It’s movement / price is weighted to the fund’s allocation of this basket cryptocurrencies. It make sense that the first crypto ETFs are likely to track a basket of large cap coins or more established crypto themes, like Decentralised Finance coins or Layer 1 protocols. Although there seems to be growing support for an Ethereum ETF to launch next.
Why you may be tempted to buy shares in a crypto ETF
Exposure to a new asset class
Crypto ETFs are new. Hell, mostly they still don’t even exist. But they’re coming, and large investment houses will undoubtedly be successful selling these funds to their clients as a new ‘must have’ asset class in their portfolio. They will espouse a bunch of benefits about an ETF being less risky, easier to buy and out of, more passive – all appealing traits for new crypto investors. Will you be convinced? Let’s look at these.
If you buy into a crypto ETF that holds a basket of cryptocurrencies, then on the surface at least your portfolio is more diversified than owning one coin and you minimise risk. How? Your investing eggs aren’t all in one basket. Also, a basket of crypto may slightly dampen the market volatility of exposure to a single coin. That said, large cap crypto and crypto asset classes can move together and move wildly, so you’re not avoiding volatility altogether.
Easy to buy and sell
Investors who want exposure to cryptocurrency without actually holding any will find it easier to purchase via an ETF than going out and buying Bitcoin directly. This makes crypto ETFs accessible to traditional investors that don’t want to go through the learning process of setting up their own crypto wallet and navigating the on and off ramps into the crypto ecosystem.
For example, you can buy shares in an ETF through a regular stock broker or on an easy to use stock app straight from your mobile. To get crypto is a bit more involved and there’s a learning curve.
Reduced investing risks
Crypto funds are still relatively new and we’ve posted extensively about the different risks of investing directly in crypto (and how to manage them).
If you really don’t want to take the plunge buying into a crypto ETF could help avoid some of these risks – like human error in navigating the block chain. Any ETF fund manager will also do the due diligence for you. They vet the coins in the basket, so your risk of things like project failure (when the coin goes to zero) and rug pulls are theoretically less. You also don’t need to think about coin custody and cyber hacks because you won’t actually ever own any cryptocurrency.
A crypto ETF is good for crypto (but is it good for you?)
A crypto ETF is expected to bring more money into the crypto asset ecosystem. Mainstream investors may see it as opening up the possibility of large gains to traditional stock market investors. A common view is crypto ETFs will bring new money, new investors and greater legitimacy into the crypto ecosystem.
This is good for crypto hodlers like us because demand for crypto assets that we own will increase.
The price of Bitcoin has already pumped more than 10% on the news of the Proshares Bitcoin Futures ETF and the ETF will not even hold any Bitcoin!
But in the end, a crypto ETF is a traditional financial instrument. That means middlemen taking their fat fees and others controlling your money. Ask yourself, is buying into a crypto ETF a good way to start your crypto investing?
Here’s 5 reasons we don’t think so..
5 reasons to think twice about buying a crypto ETF
1. You’ll pay more
There are additional fees associated with using a fund set up by institutional investors. Instead of paying more of you hard earned fiat, you can buy crypto directly and pay less for the opportunity.
2. Wall Street gets richer
ETFs involve middlemen who clip the ticket on your investment. If you’re cool fattening their pockets, then go you. But if you know about the idea behind crypto and believe in its human good, then making Wall Street richer should grate on you.
Crypto is about decentralised system of finance where opportunity isn’t controlled by Wall Street and everyone invests from a level playing field.
3. You miss out on DeFi opportunities
Owning cryptocurrency can open up the opportunity for gains other than to the underlying asset price movement. For example, holding a crypto asset might qualify you for an ‘Airdrop’ in which you’re gifted another asset by the same crypto project (for free). We’ve received many an Airdrop that has turned into sweet profits in the past. You won’t get this owning shares in an ETF.
DeFi is also an opportunity to compound any crypto investment gains. You can own a crypto, be exposed to its market price and also earn passive income from lending that crypto or staking it in a DeFi protocol. An ETF only exposes you to the price gains or losses of the underlying crypto asset.
4. Double the market risk?
ETFs are part of the stock market (fiat currency based). Irrespective the asset an ETF covers, it may be influenced by overall stock market movements and sentiment. On top of this, a crypto ETF may be influenced by crypto market movements and sentiment.
5. It’s not the future
You don’t need to learn anything new to buy a crypto ETF. This may seem like a benefit, but is it in the long term? We would argue that with digital assets and blockchain tech growing exponentially, the sooner you learn about how to use blockchain technology and transact cryptocurrency assets, the better off you’ll be in the long term.
Conclusion – invest in yourself not Proshares
None of this is financial advice peeps, be we think crypto is here to stay. Digital assets are a growing asset class and a part of our asset portfolio. The opportunities you open up from understanding the crypto ecosystem right now can be asymmetrical.
But that won’t always be.
It’s up to you. You can invest in a crypto ETF and you might get some nice gains. Or you can invest in yourself, learn crypto and use it like we have to get to financial freedom.
If you want to join the digital asset revolution and just by crypto instead, check out our starter guide to the right of screen. It’s free and it will help you buy your first crypto safely in 6 easy steps. It even has links to everything you need on the internet. -> -> ->