What is the best Bitcoin ETF? A beginner's guide to exchange-traded funds

Bitcoin ETFs, which are traded on traditional stock exchanges, track the price of BTC. Learn how to buy Bitcoin ETF by reading this guide.

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What is a Bitcoin ETF and how does it work?

ETFs are popular among flexible traders who want to diversify their portfolios at a lower cost and with tax advantages. But what exactly is an ETF? The term ETF refers to exchange-traded funds, which are a collection of assets whose shares are traded on a stock exchange. They combine the features and potential benefits of mutual funds, stocks, and bonds.

ETF shares, like individual stocks, are traded at varying prices throughout the day based on market supply and demand. Similarly, Bitcoin (BTC) ETFs track the value of Bitcoin and trade on traditional stock exchanges rather than crypto exchanges, indicating that they are not cryptocurrency exchange-traded funds. Furthermore, they enable investors to invest in Bitcoin without the hassle of using a cryptocurrency exchange, while also providing price leverage.

A Bitcoin ETF is the ProShares Bitcoin Strategy ETF (ticker: BITO), which trades on the NYSEArca. It is important to note, however, that the Securities and Exchange Commission (SEC) of the United States has previously rejected multiple proposals for Bitcoin ETFs, citing the crypto market's lack of regulation as the primary reason for their opposition.

The majority of Bitcoin ETFs use futures to simulate the performance of the cryptocurrency. Futures contracts allow investors to hedge against volatile markets by ensuring that they can buy or sell a specific cryptocurrency at a specific price in the future.

Investing in cryptocurrency and blockchain companies that provide crypto market leverage is another way to gain exposure to Bitcoin without actually purchasing it.

An ETF keeps track of the price of an underlying asset or index. A Bitcoin ETF, for example, would work similarly, with the price of one share of the exchange-traded fund fluctuating in lockstep with the price of BTC.

If the value of Bitcoin rises, so will the value of the ETF, and vice versa. The ETF, on the other hand, would be traded on a stock exchange such as the NYSE. ETFs for various assets and industries, including commodities and currencies, are now available.

In this article, we will define Bitcoin exchange-traded funds (ETFs), discuss the benefits of Bitcoin ETFs, the SEC's approval of Bitcoin ETFs, Bitcoin spot ETFs, Bitcoin futures ETFs, and how to buy Bitcoin ETFs.

Bitcoin futures and Bitcoin spot ETFs

A futures ETF is a fund that represents the value of a cryptocurrency and can be purchased or sold based on contract terms. When you buy or sell futures, you do not own the underlying crypto asset. Instead, you have a contract that states that you will buy or sell cryptocurrency at some point in the future.

As a result, futures are protected from market volatility and price fluctuations. Futures, on the other hand, do not allow you to stake or use coins for voting in the same way that you would if you owned the currency outright.

Spots, as opposed to futures contracts, are one-time purchases of digital assets that give buyers and sellers direct ownership of the cryptocurrency. This works in the same way as any other cryptocurrency exchange.

The Bitcoin futures ETF structure has been chastised because holding BTC futures to price rather than spot Bitcoin can result in underperformance. Another reason traders dislike futures is that they frequently trade at a higher price than the underlying asset, though they can trade at a lower price as well.

As a result, the primary distinction between a Bitcoin futures ETF and a spot ETF is that a futures ETF is backed by derivatives (in this case, Bitcoin futures contracts), whereas a spot-based ETF is backed by real BTC.

More importantly, the price of Bitcoin futures contracts may deviate from the current market price due to investor emotions, and it may occasionally track the price incorrectly. This risk, however, does not exist in the case of a spot-based ETF.

How does Bitcoin futures ETF work?

If you invest in Bitcoin ETFs, you are agreeing to buy or sell BTC at a specific price on a specific date, regardless of market conditions. The contract settlement date, also known as the expiration date, is the agreed-upon deadline by which both parties must fulfill their obligations.

The party agreeing to buy BTC at the expiration of a Bitcoin futures contract must do so at a discount or premium. When the futures price is trading higher than the Spot price, the market is said to be "premium."

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A "discount," on the other hand, occurs when the spot price is higher than the futures price. In the commodity derivative market, the term is backwardation, whereas in the equity derivative market, the term is discount. When the futures price converges with the current price, the situation is considered normal.

The amount due is determined by the spot price and the value of futures contracts purchased by the buyer. Furthermore, if the spread between the ETF and the underlying asset becomes too wide, investors could theoretically arbitrage away the spread; the price of an ETF will generally maintain a high correlation with the price movement of the underlying asset.

Downsides of the Bitcoin futures ETF

The most noticeable issue with Bitcoin futures ETFs is the inaccuracy of their price trackers. A negative indicator for Bitcoin futures investors, known as a "contango," appears when the price of Bitcoin futures is greater than the spot price, indicating that the ETF is incorrectly following the price of BTC. However, "backwardation" occurs when the futures price is lower than the current Bitcoin price.

If the new contract's price is higher than the price of the Bitcoin futures contract, the proceeds from selling contracts that are about to expire will not be sufficient to purchase the same number of contracts that will expire at a later date. As a result of this situation, the ETF's performance will suffer.

How does Bitcoin spot ETF work?

There are currently no spot Bitcoin mutual funds or ETFs available in the United States, and there are unlikely to be for some time. The Fidelity Advantage Bitcoin ETF (FBTC), on the other hand, is intended to invest in physical spot BTC, a strategy that has been rejected by the SEC. The New York Digital Investment Group and fund manager Global X's application for spot Bitcoin ETF listings were also denied by the US regulator.

Nonetheless, the FBTC will be launched in Australia soon; however, certain jurisdictions, including the United Kingdom, have not even approved them, with the UK regulator warning that anyone investing in crypto assets "should be prepared to lose all of their money."

Bitcoin futures ETFs are preferred over spot ETFs because the futures market is regulated by the Commodity Futures Trading Commission and has massive trading volumes, making it a prime location for price discovery.

A regular spot-based Bitcoin ETF would track the actual, tangible BTC price to provide investors with access to Bitcoin through a financially familiar and regulated product without requiring them to hold the underlying asset. Furthermore, in spot-based investing, users cannot bet on the price falling. If an ETF is available, investors can short the ETF's shares to profit from downward swings.

Spot BTC ETFs are currently available in Canada. Purpose Bitcoin, 3iQ Coinshares, and CI Galaxy Bitcoin are three large funds that are all directly invested in spot Bitcoin. Furthermore, the 21Shares Bitcoin exchange-traded products, which are 100 percent exposed to spot BTC, are listed on several German exchanges and the Swiss Exchange, with approximately $500 million in assets under management.

Investing in Bitcoin ETFs

BTC exchange-traded funds can be purchased in the United States through the Bitcoin Strategy ETF, which is listed on the Mercantile Exchange of Chicago. Another fund, BITO, allows investors to gain exposure to Bitcoin without purchasing the notoriously volatile digital currency.

BITO, like any other ETF, can be purchased through online brokerages. If you don't already have one, you'll need to open a brokerage account with a platform like Robinhood or Fidelity. Once you've opened an account, decide how many shares of BITO you want to buy and at what price you're willing to pay.

A market order can be used to purchase shares of a mutual fund at the current market price. A limit order, on the other hand, allows you to specify the most you're willing to pay for a stock.

Please read "Crypto trading basics: A beginner's guide to cryptocurrency order types" to better understand the various order types.

So, is it a good idea to buy a Bitcoin ETF? Futures-based ETFs are a bad choice if you want to invest in Bitcoin for the long term. Traders should also consider the possibility of deviating from the net asset value, fund fees, and roll expenses before investing in ETFs.

Pros and cons of Bitcoin ETFs

Investing in a Bitcoin ETF gives you exposure to the Bitcoin price without having to deal with a cryptocurrency exchange, learning how BTC works, or taking on the risks of directly owning Bitcoin. Investing in Bitcoin is now easier than ever thanks to Bitcoin futures and spot ETFs, which remove the fear of losing your wallet password.

Furthermore, because an ETF is a collection of various securities such as Google stocks, Bitcoin, and others, it enables investors to diversify their portfolios and reduce their risk exposure. Because Bitcoin futures ETFs are regulated by the SEC and trade on traditional exchanges, they qualify for tax benefits.

The presence of a large number of Bitcoin ETFs entails high management fees. Furthermore, because an ETF has multiple holdings, a rise or fall in the price of BTC may result in price inaccuracy. Furthermore, because an ETF is not a cryptocurrency (rather, an investment fund that tracks the price of BTC), a Bitcoin ETF would be prohibited from being traded in exchange for other virtual currencies.

Bitcoin eliminates third parties and provides decentralization and security via the Bitcoin blockchain, but these benefits would be lost if a Bitcoin ETF were regulated by the government.

Alternatives to Bitcoin ETFs

Owning Bitcoin provides investors with direct access to the cryptocurrency market. If you don't want to invest in Bitcoin ETFs, you can invest directly in other virtual assets such as BTC, Ether (ETH), or Tether (USDT) via cryptocurrency exchanges such as Binance, Coinbase, and KuCoin.

Alternatively, you can purchase stock in publicly traded cryptocurrency exchanges such as Coinbase. These are known as blockchain ETFs, and they can provide you with technology exposure without directly investing in currencies.

Bitcoin ETFs vs. Blockchain ETFs

While Bitcoin exchange-traded funds are still in their infancy, the number of blockchain ETFs is growing. Blockchain technology is neither prohibited nor subject to regulatory scrutiny. Virtual currencies, on the other hand, have been restricted or outright banned in a number of countries.

Bitcoin ETFs track the price of Bitcoin and trade on traditional stock exchanges, whereas Blockchain ETFs, such as the Bitwise Crypto Industry Innovators ETF, track the stock market prices of corporations that have invested in blockchain technology.

The road ahead

Bitcoin ETFs can assist investors in finding a happy medium between the volatile cryptocurrency market and traditional investment vehicles. Buying and selling ETFs through your preferred brokerage is similar to trading stocks, so it's a simple process. The future of this type of investment, however, is uncertain.

As more applications for Bitcoin ETFs based on spot trading emerge, the environment may quickly shift. Additionally, more futures-based ETFs are being approved by regulators such as the SEC. So, before you invest, make sure you understand the risks associated with this type of investment instrument.

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