The cryptocurrency hit the New York Stock Exchange on October 1. 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 threshold, according to data from Bloomberg.
Offered by proshares, this new exchange-traded fund (ETF) marks a long-awaited milestone, experts say. Cryptocurrency enthusiasts in the United States have been trying to get approval for Bitcoin-linked investment products for several years now, says Theresa Morrison, a CFP with the Beckett Collective.
Reading: Bitcoin on new york stock exchange
Trading under the ticker symbol bito, the fund allows investors to buy bitcoin without having to buy it on a cryptocurrency exchange.
“Consumers should definitely approach it with some skepticism,” says Mike Hunsberger, owner and CFP of California-based Next Mission Financial Planning.
There have been some regulatory hurdles and delays by the SEC in making a bitcoin-linked etf available to investors. Unlike previous proposals that the SEC has rejected, bito does not directly own bitcoin, but instead trades bitcoin futures, an important distinction.
Here’s what investors need to know:
what are bitcoin futures?
bitcoin and bitcoin futures are not the same thing. With futures, you agree to buy or sell the asset in the future at a specified price. you are not directly buying and selling the underlying asset (bitcoin in this case).
When that specific date arrives, you must buy or sell the asset at the agreed price, no matter what the actual price of the asset is on that day. If your contract comes up and bitcoin is worth more than what you agreed to, as an investor, you make money. that’s called trading at a premium. If the price of bitcoin is lower than you thought it was going to be, you lose money and it’s called discount trading.
By investing in this new fund, you’re simply betting on the potential for your ETF shares to be worth more in the future. and the underlying driver behind its stock value is bitcoin.
there are many assets that are traded with futures, usually commodities such as oil, grain or coal. For example, you can buy a gold futures ETF instead of buying actual gold bullion.
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“futures contracts 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 can 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 rose 30%, the bitcoin futures etf might only rise 20%, says hunsberger. That’s because “futures ETFs have contracts that expire periodically and have to be bought back,” says Hunsberger. “this can increase the tracking error between the etf and the underlying asset, in this case bitcoin.”
should you buy a bitcoin linked etf?
Whether you are buying crypto outright or investing in a crypto-linked ETF, experts recommend that you never invest more than 5% of your total portfolio in speculative assets such as cryptocurrencies or specialized ETFs.
Bitcoin is still very new compared to conventional stock investing, so it lacks the historical track record that investors can use to anticipate future performance. Before you buy shares in a bitcoin ETF, cryptocurrency, or any other speculative investment, remember to invest only what you agree to lose, and never at the expense of other financial goals like paying off high-interest debt or saving for retirement.
bitcoin is very volatile and while there may be a difference between the price of bitcoin and the price of bito, the etf does not protect you from the ups and downs of bitcoin. This year alone, bitcoin saw an all-time high of over $60,000 in April, before abruptly losing half its value over the summer, though it has returned to hover around $60,000 in the months since. You should expect the same volatility even in the ETF.
That said, if you’re interested in exposing your current portfolio to crypto in any way and you’re okay with the risks, bito makes it easier than ever for investors. “While it’s not a direct investment in bitcoin, it can provide investors with little insight into how bitcoin is typically bought and sold on exchanges’ exposure,” Menard says.
If you’re 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 its brokerage. Plus, you can keep it in tax-advantaged accounts like a Roth IRA or 401(k), if you want.
“bito will open 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 and learning curve of setting up another account with a provider of cryptocurrencies and the creation of a bitcoin wallet”, proshares ceo michael l. sapir said in a statement Monday.
how is bito different from buying bitcoins?
Aside from the fact that you will be buying bitcoin futures and not buying an ETF that directly holds bitcoin, there are a few differences you need to consider before buying bito.
Buying bitcoin directly carries its own set of fees, depending on the exchange you use, account payment method, and other factors. bito comes with its own separate fees as well.
Specialized ETFs, like bito, often come with a higher expense ratio, which means they are more expensive for you. the bito expense ratio is 0.95%, which, according to experts, is very high. that is, $95 of every $10,000 invested will go to fund operating expenses. experts say the best low-cost index funds have expense ratios of less than 0.3%.
“Being a new asset class, there will be a lot of middlemen and the price of ETF futures will be high until more competition drives down fees and expenses a bit,” Menard says.
There may also be other bitcoin futures-linked etfs on the horizon. Three other applications are in the SEC file for October, according to Bloomberg.
You can buy, sell or trade bitcoins at any time. cryptocurrency is not subject to market hours.
“Bitcoin trades 24/7/365,” says Rockie Zeigler, a CFP with RP Zeigler Investment Services. “Bit won’t. While you can place orders outside of market hours, orders will not be filled until the stock market opens. you won’t be able to transact with your bito on weekends or nights like you can with bitcoin direct.”
There has yet to be radical regulation for cryptocurrency exchanges and as such each exchange operates with different rules. While none of the cryptocurrency you hold on any exchange is FDI insured, some exchanges offer private insurance to reimburse you if there is a hack or theft.
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on the other hand, a bitcoin-linked etf comes with protections more in line with other conventional investments. While only a cash balance in a traditional brokerage account (such as Fidelity, Charles Schwab, or Vanguard) is covered by fdic insurance, brokerage accounts are protected by the Securities Investor Protection Corporation (SIPC). This insurance covers accounts up to $500,000 in value if a brokerage closes due to bankruptcy or other financial hardship and client assets are missing from the accounts.
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While the first SEC-approved bitcoin-linked investment product is a big deal, crypto enthusiasts are already looking forward to the next hurdle: an investment product that directly owns and tracks the price of the actual asset.
some are frustrated by the futures asset, which adds another layer of complexity to an already complicated topic. “If the SEC really cared about individual investors, it would allow an ETF that had bitcoin in cash instead of a futures-based product that is confusing to most investors,” says Ryan Cole, CFP at Citrine Capital in San Francisco. . “In short, I see this as a win for Wall Street that will hurt individual investors.”
But with uncertainty over whether or when the SEC might approve a bitcoin spot ETF, investors who want a middle ground between crypto and traditional investing will have to settle for a futures-based product.