When spot Bitcoin (BTC-USD) ETFs were approved on Jan. 10, many thought it signaled a new era for Coinbase (NASDAQ:COIN), the custodian behind eight of the 11 new funds. Millions of investors could now buy cryptocurrency straight from regular trading accounts, and Coinbase’s management went so far as to proclaim that the “future of money is here.” Prices of Bitcoin rose from $25,000 to $49,000 in anticipation of the approval.
But so far, the future of money hasn’t been particularly bright. Since Jan. 11, shares of Coinbase have slid 12%, erasing over $7 billion of market capitalization.
Some will see it as another example of “buy the rumor, sell the news.” Bitcoin ETFs had been so well-hyped going into their launch that all potential buyers might have already bought. InvestorPlace.com writer Omor Ibne Ehsan sees far greater potential in seven crypto stocks.
However, the biggest problem has been interest in the ETFs themselves. After an initial $1.25 billion of inflows during the first week of launch, crypto funds have since seen a steady drip of withdrawals. According to CoinShares, Bitcoin ETFs have seen a net $21 million in outflows in the past week.
That’s because most investors have seen little need to add Bitcoin ETF holdings. Most crypto converts already own the world’s largest cryptocurrency directly. And those who aren’t convinced of Bitcoin’s fundamental value haven’t been swayed by new funds. Crypto sentiment also remains relatively downbeat. A study by Deutsche Bank found that over one-third of investors believe that Bitcoin will fall below $20,000 by next year.
Nevertheless, our writers at InvestorPlace.com believe that inflows will eventually ramp back up. As Chris MacDonald notes, fiduciaries and financial institutions that were previously instructed to avoid cryptocurrency no longer have that issue. And if the $30 trillion wealth management industry jumps onboard, crypto prices could soar.
Ranking the Top Bitcoin ETFs
To ride this wave, investors now have several choices of ETFs, ranging from the plain awful to far better options.
Worst: Bitcoin Futures ETFs
The previous generation of Bitcoin ETFs relied on near-term futures contracts – derivatives that began trading on the CME in 2017. By buying up short-term contracts and constantly rolling them forward, these ETF providers hoped to capture as much of Bitcoin’s movements as possible without breaking SEC rules. After all, near-term futures prices typically converge to spot prices.
However, Bitcoin’s limited supply means its futures contracts constantly trade in contango, where futures prices are higher than spot ones. (In other words, it’s more expensive to buy Bitcoin for future delivery). That poses a significant issue for futures-based ETFs like the ProShares Bitcoin Strategy ETF (NYSEARCA:BITO), which constantly must sell spot Bitcoin cheaply and buy more expensive futures contracts. This sell-low-buy-high strategy compounds over time, and causes these funds to underperform.
Indeed, futures-based ETFs have seen enormous outflows. Since Jan. 11, BITO has lost roughly 20% of assets under management. Institutional investors know that these ETFs are a bad deal, and are trading them out for better holdings.
Less Bad: Bitcoin Spot ETFs
The latest generation of ETFs now allow sponsors to hold Bitcoin directly. This removes the contango issue and means these funds will track spot Bitcoin with less decay.
But “less” doesn’t mean “none.” The Grayscale Bitcoin Trust ETF (NYSEARCA:GBTC) has expense ratios of 1.5% – even higher than many actively managed funds. That means investors are guaranteed to underperform Bitcoin by at least 16% over a decade. And eight of the 11 new ETF funds have fees that ratchet up after the first three to six months. The Fidelity Wise Origin Bitcoin Fund (NYSE:FBTC), for instance, will see fees go from 0% to 0.25% this August.
Together, that means Bitcoin ETFs will always underperform the actual coin.
Investors have already started fleeing the most expensive funds. According to the ETFs Markets Monitor, the pricier Grayscale Bitcoin Trust ETF has lost 14% of assets under management in less than two weeks. And other high-priced offerings will likely see similar outflows.
That said, Bitcoin ETFs do have their uses, especially with high-frequency trading. Most of these funds are highly liquid, with over $20 billion traded as of this week, according to The Block. And ETFs have a habit of cycling between premiums and discounts to net asset value, which gives plenty of “alpha” for traders to collect. The WisdomTree Bitcoin Fund (CBOE:BTCW), for example, has traded as high as 0.45% over assets and as low as -0.51% at market close – well over its typical 0.22% bid/ask spread.
Bitcoin ETFs are also available directly on any stock trading platform. There’s no need to create a crypto account to gain exposure to the cryptocurrency. And perhaps most importantly, Bitcoin spot ETFs are protected by the Securities Investor Protection Act (SIPC), which can cover customers up to $500,000 in the loss of missing securities. So, if you do decide to buy a spot-based Bitcoin ETF, focus on timing the market so that you’re acquiring shares at a discount to net asset value, and seek out the largest ETFs with the lowest fees.
Editor’s choice: Fidelity Advantage Bitcoin ETF (NYSEFBTC) and the iShares Bitcoin Trust ETF (NASDAQ:IBIT) are favored for their relatively low fees and ample liquidity.
| Name | Ticker | Assets as of Jan. 25 (Millions) | Expense Ratio |
| ARK 21Shares Bitcoin ETF | ARKB | 485 | 0%, then 0.21% after 6 months |
| Bitwise Bitcoin ETF | BITB | 443 | 0%, then 0.20% after 6 months |
| Blackrock’s iShares Bitcoin Trust | IBIT | 1584 | 0.12%, then 0.25% after 12 months |
| Franklin Bitcoin ETF | EZBC | 52 | 0%, then 0.19% after 6 months |
| Fidelity Wise Origin Bitcoin Trust | FBTC | 1350 | 0%, then 0.25% after 6 months |
| Grayscale Bitcoin Trust | GBTC | 21178 | 1.50% |
| Hashdex Bitcoin ETF | DEFI | 16 | 0.90% |
| Invesco Galaxy Bitcoin ETF | BTCO | 251 | 0%, then 0.39% after 6 months |
| VanEck Bitcoin Trust | HODL | 108 | 0.25% |
| Valkyrie Bitcoin Fund | BRRR | 87 | 0%, then 0.25% after 3 months |
| WisdomTree Bitcoin Fund | BTCW | 8 | 0%, then 0.30% after 3 months |
Best: Bitcoin (Direct or Exchange)
Nevertheless, Bitcoin ETFs do have drawbacks beyond fees. Many crypto enthusiasts will point to the counterparty risk; eight of the 11 new spot bitcoin ETFs use Coinbase as their custodian, which concentrates the risk of blowups. Anyone investing more than the SIPC limit could potentially lose money if the system collapses. ETFs can also trade at permanent discounts to their net asset value if investors suspect something wrong with its underlying assets. The Grayscale Bitcoin Trust itself traded at a 47% discount to net asset value as recently as March 2023.
That leaves direct ownership of Bitcoin as the single-best option for individual investors. Owning Bitcoin outright triggers no fees, taxes or trading expenses while you hold them. And the taxes that are triggered on sale are the same you would accrue from selling Bitcoin ETFs. Crypto holdings have been taxed at the regular capital gains rates since 2014, regardless of whether they are held as coins or as ETFs.
Counterparty risk is also reduced, especially if you have protected access to your Bitcoin wallet. Bitcoin wallet passwords are practically unbreakable with today’s technology, and most analysts believe SHA-256 encryption – the security layer that protects Bitcoin wallets – is safe even against quantum computing. Just be sure to work with reputable exchanges in establishing your holdings.
Finally, direct owners of Bitcoin pay no fees for the privilege of owning the cryptocurrency. A cold wallet simply sits there as numbers on a sheet of paper, or an encrypted file on a computer. In fact, Bitcoin owners can even lend out their crypto on certain platforms… provided they’re comfortable with the risks involved.
Should You Buy Bitcoin in 2024?
The jury’s still out on Bitcoin – an asset whose price depends entirely on what others will pay.
Some see these new ETFs as solidifying the crypto’s claim as “digital gold.” If the SEC allows these ETFs to run, surely each coin could be worth $50,000, $100,000… or even $1.5 million.
Others see the cryptocurrency more as pet rocks with no utility. Indeed, even gold bullion – the longstanding equivalent to crypto – has underperformed the stock market by at least a 6-to-1 ratio.
Personally, I view Bitcoin as a speculative investment that will likely rise in the coming years, and then eventually taper off. In the short run, Bitcoin has wind in its sails, driven by a $103 trillion wealth management industry that’s all too happy to sell you the next big thing. We’ve seen the same story with products like “portfolio insurance,” municipal bonds, and using permanent life insurance policies to invest in stocks. New assets typically carry lots of momentum, since wealthy investors who see their friends making money from a new financial will often go and try doing the same. So, if you’re worried about missing the boat on crypto, now’s a reasonable time to jump in before others do.
But in the long run, Bitcoin’s fundamental flaws will come back to haunt it. Much like a bushel of wheat in a warehouse, crypto produces no earnings or dividends. BTC is also energy intensive and has built-in limits to the number of transactions it can handle. Better to buy the farm and produce a new bushel of wheat every year.
On the date of publication, Thomas Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
