After months of rumors and efforts by multiple companies, ProShares released its first Bitcoin ETF this week. This is the ETF of the Bitcoin ProShares strategy (ticker: BITO). You can now use Bitcoin in your broker account.
First of all, it helps with the hassle of owning Bitcoin, but doesn’t eliminate the potential costs. ETFs (Exchange Traded Funds) charge 0.95% per year. That said, if you put $10,000 in the fund and the price doesn’t change, you will be charged $95 per year to maintain your investment. This is quite high for an ETF, but with the advent of other Bitcoin ETFs, fees could come down. The bid/ask spread is also worth mentioning as this ETF will continue to trade over time. So far, the fund has had a large volume.
Technically, the fund doesn’t actually own any bitcoins. The fund holds bitcoin futures based on the Chicago Board of Trade bitcoin reference rate. This could be one of the reasons the SEC first approved the money and withdrew the money from the complex Bitcoin management business. However, this means the ETF is exposed to risks inherent in the futures market such as counterparty risk, potential margin, and collateral requirements.
There is also a risk that futures price movements will not accurately reflect the evolution of Bitcoin’s price depending on the way futures are traded. Futures and ETFs are well-established financial instruments, so the overall risk here is low.
Future prices that do not match the spot price are very common for a variety of reasons. So don’t expect returns when buying an ETF to fully track the price of Bitcoin. You will of course find out in due time if this is working for you. In some cases, Spot Bitcoin will increase productivity, while in other cases, futures will dominate.
However, some research suggests that up-and-coming and other practices can reduce returns if other market participants know how ETFs trade futures. Extreme market events such as financial crises can also cause ETFs to deviate from the Bitcoin price.
Also, keep in mind that unlike many ETFs, this is not a decentralized strategy. For example, if you own an S&P 500 ETF, at Apple
If there are bad days (or years), Amazon can have good days and take advantage of the progress of high-performing companies over time. With this ETF, you can only bet on Bitcoin. For example, if Ethereum or any other cryptocurrency is better than Bitcoin, you will not be able to make a profit.
Therefore, owning Bitcoin is a relatively expensive option due to the 0.95% annual fee put into the ETF. Given the use of futures and annual fees, it is unlikely that the spot price of Bitcoin will be closely tracked.
However, it is also an easy way to add Bitcoin to your portfolio and become an important stage in financial innovation. Perhaps most importantly, this ETF approval should pave the way for other innovations in the crypto space that will make this asset more accessible to investors.