Cryptocurrencies have continued to volatility in recent months, but the frenzy over digital currencies doesn't appear to be daunted. And crypto fans have more investment options than ever before as the list of bitcoin and other cryptocurrency exchange-traded funds (ETFs) continues to swell.
Some investors may feel safer getting exposure to Bitcoin in their portfolios by purchasing a professionally managed ETF than they do owning actual BTC. Widespread adoption of Bitcoin as an investment is relatively recent, and some people may be concerned about hacking or losing passwords or private keys needed to access their investment when it’s stored in a secure Bitcoin wallet.
To help tigers understand this new corner of the ETF universe, we profile the popular Bitcoin ETFs as follows.
$ProShares Bitcoin Strategy ETF(BITO)$
The ProShares Bitcoin Strategy ETF (BITO) launched on October 2021, is the first Bitcoin ETF approved to trade in U.S. markets. BITO kicked off a flurry of new funds coming to market. It became one of the most heavily traded ETFs in market history.
BITO is an actively managed fund that aims to track the price of Bitcoin as closely as possible by investing in BTC futures contracts. It may also hold Treasury securities and cash.$Grayscale Bitcoin Trust (BTC)(GBTC)$
Grayscale Bitcoin Trust debuted as The Bitcoin Investment Trust on Sept. 25, 2013 as a private placement to accredited investors and, later on, received FINRA approval for eligible shares to trade publicly. It was one of the first securities solely invested in and deriving value from the price of BTC.
Grayscale Investments calls it a traditional investment vehicle with shares titled in the investor's name. Although the Trust is not an ETF itself, it's modeled on popular commodity investment products like the SPDR Gold Trust, a physically backed ETF. Grayscale Bitcoin Trust is solely and passively invested in BTC, enabling investors to gain exposure to BTC in the form of a security while avoiding the challenges of buying, storing, and safekeeping BTC, directly.$VanEck Bitcoin Strategy ETF(XBTF)$
VanEck Bitcoin Strategy ETF (XBTF) is an actively managed fund that launched in November 2021. XBTF aims to track the price of Bitcoin by investing in BTC futures and may invest some of its assets in Treasuries and cash.
One advantage of XBTF is that it’s structured as a C-corp, unlike many other ETFs that are registered investment corporations. This is a tax-efficient structure because C-corps are not required to distribute long-term capital gains to investors as dividends. For investors, this approach may lower taxable distributions and allow them to keep more money invested in the fund.
$Simplify U.S. Equity PLUS GBTC ETF(SPBC)$
Simplify U.S. Equity PLUS GBTC ETF (SPBC) is an actively managed fund that launched in May 2021. SPBC invests 100% of its assets in stocks and other ETFs with exposure to Bitcoin and blockchain.
That sounds nice in theory, but the fact is that SPBC currently invests nearly 90% of its assets in the iShares Core S&P 500 ETF (IVV), one of the leadingS&P 500 ETFs, and about 9% in the Grayscale Bitcoin Trust. The rest of its balance is in S&P 500 futures contracts and cash. With an expense ratio of 0.50%, this strikes us as an wildly expensive and inefficient road to getting Bitcoin exposure—especially when IVV’s expense ratio is 0.03%.$Valkyrie Bitcoin Strategy ETF(BTF)$
The Valkyrie Bitcoin Strategy ETF (BTF) is an actively managed ETF that launched in October 2021, hot on the heels of BITO. The Valkyrie Bitcoin Strategy fund aims to spend as close to 100% of its net assets as it can in Bitcoin futures contracts. Any remaining assets will be held in U.S. government securities,money market funds and corporate bonds.
Note that BTF, along with BITO and XBTF, aim to invest primarily in Bitcoin futures. The other two ETFs own a combination of BTC futures contracts and other stocks with exposure to Bitcoin.$GLOBAL X BLOCKCHAIN & BITCOIN STRATEGY ETF(BITS)$
The Global X Blockchain & Bitcoin Strategy ETF (BITS) is an actively managed fund that launched in November 2021. BITS splits its holdings between Bitcoin futures contracts and indirect holdings in blockchain companies. Indirect in this case means that BITS owns shares in its sister ETF, the Global X Blockchain ETF (BKCH), which itself invests in a range of blockchain stocks, including companies involved in digital asset mining, cryptocurrency exchanges and companies developing new blockchain applications.
As of December 2021, approximately 51% of BITS’ assets were invested in CME Bitcoin futures contracts and 49% were in BKCH.$Valkyrie Balance Sheet Opportunities ETF(VBB)$
The Valkyrie Balance Sheet Opportunities ETF (VBB) is an actively managed ETF that launched in December 2021. The fund aims to invest 80% of its net assets in companies that are holding Bitcoin on their balance sheets and the remainder in companies active in the Bitcoin ecosystem. As of February 2022, VBB’s top three holding included:
Microstrategy Inc (MSTR). Microstrategy develops cloud computing solutions and holds a large amount of Bitcoin on its balance sheet. As of Feb. 1, 2022, MSTR owned $4.8 billion in Bitcoin, up from $2.41 billion at the end of September 2021.
Tesla Inc. (TSLA). In its most recent SEC filing, Tesla noted that it held $1.9 billion in Bitcoin on its balance sheet as of the end of 2021.
Coinbase Global Inc. (COIN). Coinbase is a major cryptocurrency exchange that as of September 2021 held nearly $800 million in Bitcoin on its balance sheet.As noted above, most of the BTC ETFs is not own actual Bitcoin, excluding GBTC. Instead, they hold Bitcoin futures contracts, and in some cases the shares of companies and other ETFs active in the cryptocurrency space.
Bitcoin ETFs don’t own Bitcoin because the SEC is concerned that BTC is traded on non-regulated cryptocurrency exchanges. SEC Chair Gary Gensler is on the record stating that given the novel character of cryptocurrency, relying on the proven and highly regulated futures market is a much safer approach for Bitcoin exchange-traded funds.
Futures are an agreement between two parties to sell a particular asset at a future date. They allow traders to speculate about how prices may move in the future with minimal upfront investment because they frequently use leverage, or borrowed money.
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