Bitcoin is trading in the form of an exchange-traded fund (ETF) for the first time in the US, after the Securities and Exchange Commission (SEC) approved the launch of the ProShares Futures Bitcoin Strategy ETF on October 18, 2021. This is a historic milestone for the cryptocurrency industry, as it opens the door for more mainstream investors to access Bitcoin without having to deal with the technical challenges of buying and storing it directly.
An ETF is a type of investment fund that tracks the performance of an underlying asset or index, such as stocks, bonds, commodities or currencies. Investors can buy and sell shares of an ETF on a stock exchange, just like any other security. The ETF provider is responsible for holding the actual assets and ensuring that the ETF price reflects the market value of the underlying asset.
A Bitcoin ETF is an ETF that tracks the price of Bitcoin, either by holding physical Bitcoins in a trust or by using derivatives contracts such as futures and swaps. The ProShares Bitcoin Strategy ETF is an example of the latter, as it does not hold any Bitcoins directly, but rather invests in Bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME). The ETF aims to provide exposure to the daily changes in the price of Bitcoin, minus fees and expenses.
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The main advantage of a Bitcoin ETF is that it lowers the barriers to entry for investors who want to gain exposure to Bitcoin without having to buy and store it themselves. Buying and storing Bitcoin requires a high level of technical expertise, security measures and regulatory compliance, which can be daunting and costly for many investors. A Bitcoin ETF simplifies this process by allowing investors to buy and sell shares of the ETF through their existing brokerage accounts, with no need to worry about wallets, keys, hacks or thefts.
Another benefit of a Bitcoin ETF is that it provides more liquidity and transparency to the Bitcoin market, as it increases the demand and supply of Bitcoin futures contracts, which are standardized and regulated by the CME. This can help reduce the volatility and price discrepancies of Bitcoin across different platforms and regions. Moreover, a Bitcoin ETF can attract more institutional investors, such as pension funds, hedge funds and mutual funds, who may have more stringent requirements for investing in Bitcoin than individual investors.
The launch of the ProShares Bitcoin Strategy ETF has been met with great enthusiasm by the cryptocurrency community, as it signals a growing acceptance and recognition of Bitcoin by regulators and traditional financial institutions. The ETF debuted with more than $1 billion in assets under management on its first day of trading, making it one of the most successful ETF launches in history. The ETF also sparked a rally in the price of Bitcoin, which reached a new all-time high of over $66,000 on October 20, 2021.
However, a Bitcoin ETF also comes with some risks and challenges that investors should be aware of before investing. One of the main risks is that a Bitcoin ETF does not provide direct exposure to Bitcoin, but rather to Bitcoin futures contracts, which may not always reflect the actual price of Bitcoin due to factors such as contango, backwardation, rollover costs and tracking errors.
Contango occurs when the futures price is higher than the spot price, which means that the ETF has to sell low and buy high when it rolls over its contracts every month, resulting in a negative return. Backwardation occurs when the futures price is lower than the spot price, which means that the ETF has to buy low and sell high when it rolls over its contracts every month, resulting in a positive return. Rollover costs are the fees and expenses associated with rolling over futures contracts. Tracking errors are the differences between the performance of the ETF and its underlying asset.
Another risk is that a Bitcoin ETF is subject to regulatory uncertainty and potential legal challenges, as the SEC has not yet approved any Bitcoin ETF that holds physical Bitcoins in a trust, which many investors consider to be a more direct and secure way to invest in Bitcoin. The SEC has expressed concerns about the lack of oversight and regulation of the Bitcoin spot market, as well as the potential for fraud, manipulation and cyberattacks. The SEC has also warned that investing in a Bitcoin ETF involves significant risks, including volatility, liquidity, valuation and operational issues.
A final risk is that a Bitcoin ETF may not fully capture the innovation and potential of Bitcoin as a decentralized peer-to-peer network that enables censorship-resistant transactions without intermediaries. By investing in a Bitcoin ETF, investors are essentially entrusting their money to a centralized entity that may not share their vision or values regarding Bitcoin. Some critics argue that a Bitcoin ETF goes against the ethos and spirit of Bitcoin, as it introduces more intermediation and dependence on traditional financial systems.
Bitcoin ETF is a novel and exciting way to invest in Bitcoin that offers many benefits but also some drawbacks. Investors should do their own research and due diligence before investing in a Bitcoin ETF, as they should with any other investment opportunity.
BlackRock bitcoin ETF raking in flows as GBTC continues to bleed assets
Meanwhile, BlackRock, the world’s largest asset manager, has seen a surge of inflows into its bitcoin exchange-traded fund (ETF) since its launch in October 2023. The fund, which tracks the performance of the CME bitcoin futures contracts, has amassed over $1 billion in assets under management (AUM) in less than four months, according to data from ETF.com.
Meanwhile, the Grayscale Bitcoin Trust (GBTC), the largest and oldest bitcoin investment product, has continued to lose market share and assets. GBTC, which holds physical bitcoins in a trust and issues shares that trade on the over-the-counter market, has seen its AUM drop from $40 billion in September 2023 to $28 billion in January 2024, according to Grayscale’s website.
One of the main reasons for the divergence between the two products is the difference in their pricing mechanisms. GBTC often trades at a premium or discount to its net asset value (NAV), which reflects the value of its underlying bitcoins. This means that investors may pay more or less than the actual value of the bitcoins they are buying or selling. The premium or discount can vary widely depending on the supply and demand of GBTC shares and the sentiment of the bitcoin market.
On the other hand, BlackRock’s bitcoin ETF trades at a much closer price to its NAV, as it is based on the futures contracts that are traded on a regulated exchange. The futures contracts also have their own premiums or discounts, but they tend to be smaller and more stable than those of GBTC. Moreover, the futures contracts have an expiration date, which means that they converge to the spot price of bitcoin as they approach maturity.
Another advantage of BlackRock’s bitcoin ETF is that it has lower fees than GBTC. The ETF charges an annual expense ratio of 0.95%, while GBTC charges 2%. This means that investors can save money by choosing the ETF over the trust. Additionally, the ETF offers more liquidity and accessibility than GBTC, as it can be bought and sold on any brokerage platform that supports ETFs, while GBTC is limited to the OTC market.
BlackRock’s bitcoin ETF is not the only one that has been attracting investors’ attention. Several other bitcoin ETFs have been launched or approved in the US and Canada, such as the VanEck Bitcoin Strategy ETF, the ProShares Bitcoin Strategy ETF, and the Purpose Bitcoin ETF. These products offer similar features and benefits as BlackRock’s ETF, but they may differ in their tracking methods, fees, and liquidity.
The rise of bitcoin ETFs has been a boon for investors who want to gain exposure to the leading cryptocurrency without having to deal with the hassles and risks of buying and storing it directly. However, there are also some drawbacks and challenges that investors should be aware of before investing in these products.
For instance, bitcoin ETFs may not fully capture the upside potential of bitcoin, as they are subject to futures contract rollover costs and tracking errors. Moreover, bitcoin ETFs may face regulatory uncertainty and volatility, as they are subject to the rules and decisions of the authorities and exchanges that oversee them.
BlackRock’s bitcoin ETF has been raking in flows as GBTC continues to bleed assets, thanks to its superior pricing mechanism, lower fees, higher liquidity, and wider accessibility. However, investors should also weigh the pros and cons of investing in bitcoin ETFs versus other alternatives, such as buying and holding bitcoin directly or using other investment products.