What are bitcoin ETFs?
Bitcoin ETFs are exchange-traded funds (ETFs) that trade on Bitcoin futures. They are different from more traditional stock or commodity-based ETFs invested in equity or physically backed funds. That’s because they don’t offer actual exposure to Bitcoin—at least not yet.
In the most basic terms, an ETF is a security that tracks a commodity, index, sector or other asset—such as gold or cryptocurrency. As with traditional stocks, ETFs can be bought or sold on a stock exchange.
It’s worth noting that a Bitcoin ETF does not give you actual exposure to BTC but, rather, Bitcoin futures. As of early 2024, the current wave of BTC futures ETFs comprise a form of “synthetic” Bitcoin. Backed by a mix of securities and other assets as collateral, this synthetic Bitcoin is designed to deliver returns similar to Bitcoin’s actual returns during the period of the contract. It is somewhat ironic that the collateral held by BTC futures ETFs usually consists of treasury bills and fiat currencies, in addition to futures.
In other words, with a Bitcoin futures ETF, you’re betting on what the price of Bitcoin will be when a given contract expires.
Bitcoin ETF Pros
- Easy to invest in via the stock market
- Typically offer straightforward pricing
- Familiar to those who prefer investing through traditional brokerages
Bitcoin ETF Cons
- Can be more expensive than buying Bitcoin directly
- Don’t offer exposure to actual Bitcoin
- Potential illiquidity compared to holding actual BTC
- Futures markets are highly speculative
- Perhaps unlikely to outperform the actual day-to-day Bitcoin market
- Contract lengths negate much of the long-term potential of HODLing
If you want exposure to crypto without the hassle of wallets or the tax reporting requirements associated with cryptocurrency investing, a self-directed IRA could be your better option. By investing in Bitcoin and other cryptocurrencies from an IRA account, you’re able to benefit from all the tax advantages associated with an IRA.