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Firms across Wall Street have been eager to launch an exchange-traded fund tracking Bitcoin for almost a decade now. By the time they potentially succeed this fall, it may be too late for the product to be useful for everyday investors.
Since 2013, investment firms have argued that the products would make buying Bitcoin easier, eliminating the need for complicated digital wallets and keys. Then, as Bitcoin matured, platforms like Robinhood and COINBASE opened up access to anyone with a computer or smart phone.
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Throughout all of this, the Securities and Exchange Commission has repeatedly refused to approve a Bitcoin ETF, citing concerns about the cryptocurrency’s notorious volatility and its potential for price manipulation. But in August, SEC chair Gary Gensler signaled that he’s potentially open to an ETF tracking Bitcoin futures.
While it might seem like semantics, there are important differences between a fund tracking futures instead of holding actual Bitcoin. The price of Bitcoin futures — which have only existed since 2017 — tends to track Bitcoin itself. For instance, on Monday evening Bitcoin traded around $52,500, compared with Bitcoin futures at $52,650. Some people buy the futures to bet on a price increase, while others use them to short the price of Bitcoin, or hedge their other long positions.
For the SEC’s purposes, Bitcoin futures also offer an additional level of security because they are governed by the Chicago Mercantile Exchange and require investors to put down cash on margin to trade, as a form of collateral. For CME Micro Bitcoin futures, investors have to put up a minimum of 35% of the amount that the futures contract represents.
Since Gensler’s comments, at least seven firms including VanEck and Invesco have applied to launch Bitcoin futures products, adding to the more than two dozen filings for funds that would physically hold crypto assets.
Despite the enthusiasm, it’s unclear whether individual investors would need an ETF at this point. It’s now easier than ever to open up a Robinhood or Coinbase account to buy a coin or a fraction of a coin.
“It’s not like investing in Bitcoin is hard,” said Ben Johnson, Morningstar’s global director of ETF research, about a Bitcoin ETF. “A couple of weeks ago, I was like, how hard could this be really? How can I buy Bitcoin now sitting on my couch playing on my phone? So I bought some Bitcoin on my PayPal account.”
Industry experts say a Bitcoin futures ETF could receive the SEC’s approval by October or November. Here are some things to consider if you’re interested in buying:
What’s the case for buying?
If you’re an institutional investor. While some investors who own Tesla Inc. shares might not bat an eye at Elon Musk loading up the firm’s balance sheet with Bitcoin, other companies can’t buy the cryptocurrency as an investment, either due to internal rules or because their shareholders might object. A Bitcoin ETF could help get around those restrictions since the format is more widely accepted. “There are all sorts of custody and regulatory hurdles for big financial institutions to jump through,” said Ross Mayfield, investment strategy analyst at Robert W. Baird & Co. “If it were offered in an ETF, it clears a lot of that up for financial institutions.”
If you want all your investments in one place. Since more traditional investment platforms like that of Vanguard and Charles Schwab don’t allow Bitcoin purchases, customers have to search elsewhere. A Bitcoin ETF would change that, since it could potentially sit right alongside holdings of stocks or other ETFs tracking indices like the S&P 500.
If you want the SEC’s blessing. For those still skeptical about the Bitcoin market in general, a tried and true format like an ETF could offer peace of mind, according to David Mazza, head of product at Direxion. “Many people associate purchasing a fund with getting a stamp of approval,” he said. “There’s comfort in the structure.” Gensler has said that a filing through a 1940 law that governs mutual funds could be more likely to be approved, since that law has stronger investor protections and requires a fund’s board to oversee the investments.
If you want Bitcoin in your retirement accounts. It could be “just a way to get Bitcoin into more nooks and crannies than it's able to access today,” said Morningstar’s Johnson. Theoretically, investors could purchase the fund for their 401(k) — and save money in taxes — if their account offers a brokerage window, to sit alongside other stakes in funds like the Vanguard S&P 500 ETF and Invesco’s QQQ.
If you prefer active management. Unlike an ETF that actually holds Bitcoin, a futures one would need to constantly buy and sell the contracts to maintain exposure, requiring a human behind the scenes. While that would increase the cost of the fund, some investors may prefer that kind of supervision. Longer term, Nate Geraci, president of the ETF store, expects there to be actively managed funds containing a mixture of cryptocurrencies that could be adjusted based on market conditions. Imagine an ETF that’s made up of 60% Bitcoin, 30% Ether and 10% Dogecoin.
...and what are reasons to steer clear?
If you don’t want to pay fees for something you can buy yourself. Bitcoin ETFs will likely have expense ratios greater than 1% — meaning the funds will cost you $10 in annual fees for every $1,000 you invest, according to Bloomberg Intelligence. Meanwhile, Robinhood offers commission-free trading for cryptocurrencies. For Coinbase, it’s a bit more complicated. Fees are determined at the time of purchase by factors like the size of the order and current market conditions, but are typically between 0.5% and 4.5% for trading. Industry experts agree that a Bitcoin ETF would likely be more expensive than current crypto trading platforms. “There could also be additional cost to futures that are higher than the cost of holding physical Bitcoin,” said Matt Hougan, chief investment officer of Bitwise Asset Management, which creates crypto indexes. “If the only ETF we get is futures, I think you’ll see a lot of retail investors stick with Coinbase.”
If you don’t want to invest in futures. A large portion of everyday investors might not understand how the futures market works and may want to steer clear of complicated concepts like contango and backwardation. “With futures-based products, you introduced additional cost, more complexity, you have futures contracts that have to be rolled,” said the ETF store’s Geraci. “It’s just a sub-optimal option for investors.”
If you want a wide range of cryptocurrencies. A Bitcoin futures fund won’t be useful for someone who wants stakes in more up-and-coming coins like Cardano and BINANCE Coin. Although some U.S. firms had filed for ETFs tracking Ethereum futures, they recently withdrew them.
If you already have a Robinhood or Coinbase account or a digital wallet. For those who already own cryptocurrencies through another platform, an ETF might not benefit their investing goals. Many investors will stick with what they’re familiar with, said Sylvia Jablonski, chief investment officer for Defiance ETFs. “If an investor is very savvy already and using a digital wallet, then they’ll probably just do it directly,” she said.
