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A New Bitcoin ETF Debuted on the New York Stock Exchange. Here’s What Investors Should Know

A New Bitcoin ETF Debuted on the New York Stock Exchange. Here’s What Investors Should Know
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Cryptocurrency hit the New York Stock Exchange on October 19 with the introduction of a new Bitcoin-linked fund. The fund quickly grew to more than $1 billion in assets, becoming the fastest ETF to reach that far, according to Bloomberg data.

Experts say this new exchange-traded fund (ETF) offered by ProShares is a long-awaited milestone. U.S. crypto enthusiasts have been trying to get approval for bitcoin-related investment products for several years, says Theresa Morrison, a CFP with Beckett Collective.

Trading under the BITO symbol, the fund allows investors to buy in Bitcoin without actually buying it on a cryptocurrency exchange.

“Consumers should definitely treat it with some skepticism,” says Mike Hunsberger, owner of California-based financial planning firm Next Mission Financial.

There have been some regulatory hurdles and delays by the Securities and Exchange Commission (SEC) in making bitcoin-linked ETFs available to investors. Unlike previous proposals that were rejected by the SEC, BITO does not hold bitcoin directly, but instead trades bitcoin in futures contracts – an important distinction.

Here’s what investors need to know:

What are bitcoin futures contracts?

Bitcoin and Bitcoin futures are not the same thing. With a futures contract, you agree to buy or sell an asset in the future at a specified price. You are not buying and selling the underlying asset (Bitcoin in this case).

When that particular date arrives, you must buy or sell the asset at the agreed-upon price, regardless of the actual price of the asset on that day. If your contract is made and the bitcoin is worth more than what you, as an investor, agreed to, you make money. This is called premium trading. If the price of bitcoin is lower than you thought it would be, you lose money, this is called discount trading.

By investing in this new fund, you are simply betting on the possibility that your shares in the ETF will become more valuable later. The main reason behind the value of your shares is Bitcoin.

There are many assets that are traded in futures contracts – usually commodities such as oil, grain or coal. For example, you can buy a gold futures ETF instead of buying actual gold bullion.

[READ MORE:] What is bitcoin?

“Futures are derivatives of Bitcoin, and are not directly backed by physical Bitcoin,” says Dana J.Menard, CFP and founder of Twin Cities Wealth Strategies in Minneapolis. This could lead to a bit of confusion as the price of the ETF will not necessarily correlate with the price of Bitcoin.

For example, if bitcoin rises 30%, the bitcoin futures ETF could rise only 20%, says Hunsberger. That’s because “futures ETFs hold contracts that periodically expire and must be repurchased,” says Hansberger. “This could add to the tracking error between the ETF and the underlying asset, in this case Bitcoin.”

Should you buy an ETF tied to Bitcoin?

Whether you are buying cryptocurrency directly or investing in a crypto-related ETF, experts recommend investing no more than 5% of your total portfolio in speculative assets such as cryptocurrencies or specialized ETFs.

Bitcoin is still very new compared to traditional stock market investing, so it lacks a historical record that investors can use to predict future performance. Before you buy shares in a Bitcoin ETF, cryptocurrency, or any other speculative investment, remember to only invest what you are willing to lose, not at the expense of other financial goals such as paying off high-interest debt or saving for retirement.

Bitcoin is highly volatile, and while there may be a difference between the bitcoin price and the BITO price, the ETF does not protect you from the ups and downs of bitcoin. This year alone, Bitcoin saw an all-time high of more than $60,000 in April, before abruptly losing half its value over the summer – although it has returned to around $60,000 in the ensuing months. You should expect the same volatility even in an ETF.

However, if you are interested in exposing your existing cryptocurrency portfolio in some way, and are OK with the risks, BITO makes it easier than ever for investors. “While this is not a direct investment in Bitcoin, it can give investors a little insight into how Bitcoin is typically bought and sold through exposure on exchanges,” says Maynard.

If you are new to cryptocurrency, trying to navigate a cryptocurrency exchange can be intimidating. This ETF allows you to add some Bitcoin exposure to your portfolio directly through your brokerage. Plus you can keep them under tax privilege accounts like a Roth IRA or 401(k), if you choose.

“BITO will open up Bitcoin exposure to a large segment of investors who have a brokerage account and are comfortable buying stocks and ETFs, but don’t want to go through the hassle learning curve of setting up another account with a cryptocurrency provider and creating a Bitcoin wallet,” the CEO said. ProShares, Michael L. Sapir, in a statement Monday.

How is BITO different from actually buying Bitcoin?

Aside from the fact that you will be buying Bitcoin futures and not actually buying an ETF that directly holds Bitcoin, there are some differences to consider before buying a BITO.

Outlay

Buying Bitcoin outright has its own set of fees, depending on the exchange you’re using, account payment method, and other factors. BITO comes with its own separate fee, too.

Specialized ETFs, such as BITO, often come with a higher expense ratio, which means they are more expensive for you. BITO’s expense ratio is 0.95% – which experts say is too high. In other words, it will set aside $95 of every $10,000 invested to cover operating expenses for the fund. Experts say the best low-cost index funds have spend ratios of less than 0.3%.

“Because it is a new asset class, there will be many brokers and the price of the futures ETF will be high until increased competition will lower fees and expenses a bit,” Maynard says.

There may be other ETFs tied to Bitcoin futures on the horizon as well. Three more requests are on the SEC’s agenda for October, according to Bloomberg.

market hours

You can buy, sell or trade bitcoin at any time. Cryptocurrency is not subject to market hours.

“Bitcoin is traded 24/7/365,” says Rockie Zeigler, CFP with investment services RP Zeigler. “No BITO. While you can place orders during off-market hours, orders will not be filled until the stock market opens. You will not be able to transact your BITO on weekends or evenings as you can with live Bitcoin.”

Regulation

There has not yet been comprehensive regulation of cryptocurrency exchanges, and as such, each exchange operates under different rules. Although none of the cryptocurrencies you hold on any exchange are secured by the FDIC, some exchanges offer private insurance to compensate you if there is a hack or theft.

[READ MORE:] Best cryptocurrency exchanges in September 2021

On the other hand, the Bitcoin-linked ETF comes with more protection in line with other traditional investments. While the cash-only balance in a traditional brokerage account (such as Fidelity, Charles Schwab, or Vanguard) is covered by FDIC insurance, brokerage accounts are protected by Securities Investor Protection Corporation (SIPC). This insurance covers accounts up to $500,000 in stock if the brokerage is closed due to bankruptcy or other financial hardship and client assets are lost from the accounts.

[READ MORE:] Best Online Stock Brokers for Beginners for October 2021

What then?

While the first Bitcoin-related investment product to be approved by the SEC is a big deal, crypto enthusiasts are already looking forward to the next hurdle: an investment product that directly owns and tracks the actual price of the asset.

Some are frustrated about futures assets, which adds another layer of complexity to an already complex topic. “If the Securities and Exchange Commission (SEC) is really interested in individual investors, it will allow an ETF that holds spot bitcoin instead of the futures-based product that is confusing most investors,” says Ryan Cole, CFP at Citrine Capital in San Francisco. In short, I see this as a Wall Street gain that will hurt individual investors.

But with uncertainty about whether or when the SEC might look to approve a Bitcoin ETF, investors who want to compromise between crypto and traditional investing will have to settle for a futures-based product.

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