January 30, 2024

Bitcoin ETF

29 minutes

Have you heard the news? There are now Bitcoin Exchange-Traded Funds (ETFs)! I can hear your head scratching from here but don’t worry. Matt and I are here to break down these new trade floor offerings on this week’s episode and give you the information you need to make an informed decision when it comes to investing in this new product.

What is a Bitcoin ETF?

Let’s start by breaking down Bitcoin and ETFs. In a prior episode, we talked about cryptocurrencies in depth and how buying into them is more speculation than investing. At the time, two and a half years ago, cryptocurrencies were dangerous due to their associated risks, including regulatory, security, insurance, fraud, market, and liquidity. That hasn't changed much in the meantime. We also did an episode on ETFs. In it, we discussed how ETFs are wrappers for financial products. So what is a Bitcoin ETF? Essentially, it is an easier way for you to enter the cryptocurrency market.

By purchasing a Bitcoin ETF, you gain exposure to cryptocurrencies without the complexities of directly buying, storing, and managing the actual “coins.”

Features of a Bitcoin ETF

Here's a summary of how they generally work:

Structure: Bitcoin ETFs are traded on traditional stock exchanges rather than cryptocurrency exchanges.

Underlying Asset: The ETF might be backed by actual Bitcoin holdings (physically backed), or it may use derivatives like futures contracts to track Bitcoin's price (futures-based). These new Bitcoin ETFs are set up to hold actual Bitcoin, so you do not have the peculiarities of Future contracts.

Accessibility: Since it's traded like a stock, investors can buy and sell shares of a Bitcoin ETF through regular brokerage accounts. This makes it accessible to a wider range of investors who may not be familiar with or comfortable using cryptocurrency exchanges.

Regulation and Safety: ETFs are regulated financial products, which means they are subject to the oversight of financial authorities. This provides a level of security and legitimacy that direct cryptocurrency investments may lack.

Custodial security: Your ETF is held by a Custodian (i.e. Fidelity) that is regulated by the SEC and has insurance against fraud

Avoidance of technical complexity: Trade it like a stock, and you own Bitcoin. You do not have to create new digital wallets, accounts, cold storage or any of that.

Risk Management: Investors get exposure to Bitcoin's price movements without dealing with the risks associated with holding the cryptocurrency, such as hacking or loss of access to their wallets.

Tax Efficiency: For some investors, particularly in certain jurisdictions, investing in a Bitcoin ETF can be more tax-efficient than holding Bitcoin directly. Basically, the reporting is the same as your other investments - Bitcoin will be represented in the year-end report so you don't have to track the cryptocurrency exchange personally.

Liquidity: ETFs are generally more liquid than holding the cryptocurrency directly, as they can be quickly and easily traded during market hours.

Fees and Costs: Investors should be aware of the fees associated with Bitcoin ETFs, which might include management fees and the potential costs associated with the fund's method of tracking Bitcoin's price.

Now that you know what a Bitcoin ETF is, you can make an informed decision about investing in this new technology.

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By Mike Morton, CFP®, RLP®, ChFC®

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