Bitcoin ETFs: Passive investing in the world’s premier cryptocurrency

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For traditional market investors, cryptocurrencies can be overwhelming on account of the volatility in their prices and fast-changing sentiments that can result in swift profits or losses.

However, given the rising levels of crypto adoption and the importance of cryptocurrencies in a Web3 future, an increasing number of investors are raring to participate in this asset class.

Exchange traded funds (ETFs), which track a particular index, sector, commodity, or other asset, offer the best of both worlds. A few Bitcoin ETFs that have cropped up allow access to cryptocurrencies without the hassle of storing or securing crypto tokens through an online or hardware wallet.

The concept was introduced by ProShares Bitcoin Strategy ETF (BITO) in October 2021 and attracted investments of almost $1 billion in the first few days.

Actively traded on the New York Stock Exchange Arca network, investors can buy BITO shares through a brokerage or directly from ProShares.

With more than $800 million in assets under management, BITO is by far the largest actively managed BTC ETF that invests in BTC futures contracts, treasury securities and cash.

Shorting approach

The latest addition to the BTC ETF space is ProShares Short Bitcoin ETF (BITI), which was launched in June 2022. BITI adopts a shorting approach by trading in a cash-settled futures market to mimic the inverse of BTC’s daily performance. With assets of $62 million, BITI is gaining traction among investors who are more interested in profiting from a decline in BTC prices.

Apart from these two offerings, investors can invest in shares of Valkyrie Bitcoin Strategy ETF (BTF), VanEck Bitcoin Strategy ETF (XBTF), AdvisorShares Managed Bitcoin Strategy ETF (CRYP) or Global X Blockchain & Bitcoin Strategy ETF (BITS).

BTF aims to invest close to all of its capital in BTC futures and currently has AUM of $22 million. Both BTF and BITO are trading at about 70 percent below their listing prices, suffering from an almost equivalent decline in BTC’s price from its all-time high of $68,890 in November 2021.

XBTF is structured as a C Corporation, a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity. Long-term capital gains or dividends are reinvested into the fund, thereby reducing the tax outgo arising from taxable distributions for some investors.

Boasting of a lower expense ratio, XBTF is similar in size to BTF and has performed slightly better than BITO and BTF.

BITS splits its assets between Bitcoin futures contracts and indirect holdings in blockchain companies that are well-positioned to benefit from increasing adoption of the technology. The fund assumes long positions in BTC futures with the purpose of achieving long-term capital appreciation for its investors.

BITS has AUM of $8.4 million and holds more than 50 percent of its assets in Global X Blockchain ETF (BKCH).

The CRYP ETF has exposure to BTC via BTC futures ETFs, BTC futures contracts, short duration fixed income securities, and cash or cash equivalents. It is the smallest among the six BTC ETFs, with AUM of $172,000 and has only 10,000 outstanding shares available for trading.

Apart from the six BTC ETFs, there are more proposals awaiting approvals from the US Securities and Exchange Commission, which could add to the options available in the Bitcoin ETF space.

By choosing any Bitcoin ETF, investors globally can assume exposure to Bitcoin while benefitting from NYSE Arca’s fully automated, transparent open and closing auctions in these ETFs.

While none of these Bitcoin ETFs holds BTC directly due to the SEC’s concerns over BTC being traded on non-secured cryptocurrency exchanges, they do provide investors with exposure to the cryptocurrency’s price movements and potentially benefit from its long-term price appreciation.

None of these Bitcoin ETFs have returned positive capital appreciation since inception. However, the situation can change quickly when Bitcoin retraces its upward journey.