Bitcoin ETF vs Bitcoin

The first Bitcoin ETF has come to market – BITO. It’s a pretty significant landmark for the crypto world that the BitCoin Strategy Fund began trading on 19th October in the US.

Crypto and exchange traded funds have apparently finally come together, pairing up for what some investors might think is a dream come true. 

But is it all it’s cracked up to be?

So on 19th October, ProShares—a provider of specialized exchange-traded products based in Bethesda in Maryland – began trading of the Bitcoin Strategy Fund on Oct. 19, 2021, marking the first Bitcoin ETF to trade in the US. It has since been joined by Valkyrie Bitcoin Strategy ETF – a similar fund doing similar things. For this video, I’m going to talk about BITO.

I’m a long term investor – I like index funds and ETFS, these baskets of various different stocks that trade under one convenient umbrella, that, generally speaking, offer diversity and a broad position in a particular market. I also appreciate the impact that crypto is likely going to have on the world going forward, and so the idea of a bitcoin etf certainly appeals to me on the face of it. 

The idea that there would be an ETF to track the price of Bitcoin is a bit weird to me, because in some ways it’s a bit of a contradiction. An ETF as I would consider it usually assumes some kind of diversification and there doesn’t seem to be much diversification here since we are focused only on Bitcoin. So given that fact why would you bother going after a bitcoin etf and not just bitcoin.

Well let’s look at that before we get into what’s in this BITO ETF. 

1. By going with an ETF you avoid having to register on whatever crypto exchange you choose and going through all that know your customer stuff avoiding all the potential confusion with buying your coins or moving them to a different address or onto a hardware wallet or whatever. Crypto can have a fairly high barrier to entry in terms of jargon and getting set up. Places like Coinbase make it all a bit easier, but the fees are higher, generally speaking, meaning you pay for this convenience.

2. As an ETF you could, if you are so inclined, short the price of Bitcoin – that is to say you can make a bet the price will go down via CFDs. If that doesn’t mean much to you, well, perhaps all the better. I’m not a fan of CFD’s in the slightest. The point is you can’t do that if you are only buying the asset on a crypto exchange

3. You could, in theory, include this ETF in your tax free wrappers if such a thing is available to you, whereas managing your tax liabilities in crypto could become difficult. 

4. There are security concerns – securing your crypto isn’t second nature to most people, so having your crypto in an ETF and being managed professionally could be quite appealing.

Before BITO began trading, more of which I’ll talk about a little later, let’s just look back a few years into the past, and we will see there have been other attempts to get a Bitcoin ETF or more generally a crypto ETF off the ground.  

The Winklevoss brothers had a couple of goes at it, but were unsuccessful. Van Eck and SolidX also had a turn at trying to make it happen. None of these have so far managed to get moving and I suspect without going into too much detail that there is something of a conflict of interest here, trying to bring a unregulated asset into the much more robustly monitored world of financial markets. 

There seemed to be just too much risk of fraud and manipulation in the crazy world of crypto. And to be fair – there is truth to this. Intentionally or otherwise we have seen guys like Elon Musk move the price of Dogecoin in massive ways just by tweeting about it. Some folks involved in the crypto space have long held the view that the only thing that will move the crypto market is the behaviour of whales, controlling prices to a point, anyway and leaving the average investor to just hang on for dear life!

However, the meat and potatoes of this whole thing comes when we fast forward to 19th October 2021 and BITO is available for trading. 

From the ProShares website:

ProShares Bitcoin Strategy ETF (BITO) is the first U.S. bitcoin-linked ETF offering investors an opportunity to gain exposure to bitcoin returns in a convenient, liquid and transparent way. The Fund seeks to provide capital appreciation primarily through managed exposure to bitcoin futures contracts.

The fund does not invest directly in bitcoin

The price and performance of bitcoin futures should be expected to differ from the current “spot” price of bitcoin

Before we pull that apart – a quick look at the chart sees that it’s down around 3.2% since inception and launch at $40, to the time of recording this video. this is despite it having the second biggest trading debut ever for an ETF:

And yet in the same time frame, Bitcoin itself is down around 1%. So if the idea as a Bitcoin ETF was to track the price of Bitcoin, we aren’t off to a great start. But that isn’t the aim of the ETF as implied by the name… we’ll get into that in a minute.

But sticking with the attributes of this ETF the annual expense ratio is 0.95% which puts it at the pricier end of what a typical ETF might cost. By contrast Consider Vanguard’s VUSA which tracks the S&P500 is at 0.07%.

So lets look a bit closer at this ETF and see what you are actually getting.

First off let’s highlight The fund does not invest directly in bitcoin.

Ok – feels a bit weird, but that’s clear enough at least, so what is it invested in?

The Fund seeks to provide capital appreciation primarily through managed exposure to bitcoin futures contracts. 

Ok, so managed exposure to bitcoin futures contracts. What does that mean? 

Futures are a way for two parties to strike a deal over the price of an asset at a given point in time in the future. Then when that date comes round, whatever the market value is for an asset on that day is irrelevant, because the deal has already been struck at a particular price and the two parties are obliged to honour that deal. Someone will likely end up getting a better deal than the other. That’s life. 

So let’s carry that notion into Bitcoin futures. For Bitcoin miners, futures are a means to lock in prices that ensure a return on their mining investments, regardless of whatever price crypto is when the date in the deal rolls round. Depending on how the market has moved they might end up selling at a higher valuation than market value if the market has dipped, or the market could rise and rise and they end up selling their asset for less than it’s worth, but they have the security of locking in a given price for their mining effort. 

Investors could use bitcoin futures to hedge against their positions in the spot market – that’s the day to day, realtime market, if you like. 

Day traders are another player in this ecosystem and they could well be moving in and out of these futures contracts with high frequency in a bid to try to make some money, with a classic buy low, sell high approach.

It gets pretty wild!

Anyway, after all that what you are buying into with this ETF is exposure to these futures contracts. Someone, somewhere is getting involved in striking these deals and you are buying into that managed fund. It’s a far cry from buying an all world ETF such as VWRL where you are buying a tiny piece of thousands of companies across the world and owning a stake in those companies. With this ETF it feels to me like you own a piece of the relationship between these price movements of Bitcoin and how people are moving in and out of these deals. 

I have to say, this ETF doesn’t sound particularly appealing to me! 

The fees alone put me off. 0.95% is just too high for me for this kind of thing.

Consider the effect of high fees on your portfolio with this example from the SEC website:

An investor who saves $100,000, earns 4% a year and pays a 0.25% annual fee would have $30,000 more after two decades than the same person who pays a 1% fee (which is close to the cost of the bitcoin futures ETFs).

Neither do I love the actual content of the ETF, but that’s personal choice. Personally if I was deciding between this ETF or Bitcoin or any other crypto for that matter, I would certainly just be going to somewhere like Coinbase and buying my crypto there. It isn’t the cheapest, but it’s easy to use and once you buy it, you can move it off the exchange and onto your own hardware wallet. When you understand that process, it’s straightforward enough. There are tons of good resources online to help you with this.

By the way, Coinbase also offer some pretty cool educational material to learn about other cryptos and you can earn yourself a little bit more free crypto. I expect Coinbase they want you then to go on and become a regular customer but you don’t have to do that of course, anyway! I digress! Using the links are a decent way to support the channel if you are interested. But no pressure! I write these posts anyway! Honestly the single biggest thing you can do for me is share this content and there is no signup nor 1% ETF fee for that 🙂

So that’s not to say I think buying Bitcoin the asset, is necessarily a good idea. Not all investments are good for all people, but if pushed I prefer it to this ETF, It’s extremely volatile in the best case and it’s up to you to decide what kind of risk you would like to take. I just hope this video has helped you understand what this Bitcoin ETF actually is.

Something that might appeal to me is a broad crypto ETF where I would be invested in a broad range or different cryptos. Ethereum, Bitcoin, Polkadot, VeChain etc… a nice range of projects to track the market as a whole. This BITO doesn’t seem to do that and isn’t really capturing the sentiment of an ETF at all for me. 

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