The introduction of Bitcoin ETFs was one of the most momentous events in the history of cryptocurrencies. It was the first major merger of traditional financial institutions and Bitcoin. ETFs allowed Bitcoin to be effectively traded on the stock market without the investors having to buy coins.
However, the question remains: are ETFs a good investment to make right now? As is usually the case, no universal answer will cover every investor. The decision is best made on a case-by-case basis, taking into account both the advantages of ETFs and their risks.
What is an ETF?
ETF stands for exchange-traded fund. It’s similar to a mutual fund, but they are traded on the stock market. ETF follows the value of a cryptocurrency company; therefore, those who purchase it profit from the rise of crypto without having to buy it.
Cryptocurrencies have been used as payment methods in different industries for a long time. For instance it’s possible to play slots with crypto or pay for recurring services, but the introduction of ETFs allows the investment using cryptos as a vessel.
What is a Bitcoin ETF?
Bitcoin ETFs are ETFs with value tied to the value of Bitcoin. The regulatory agency has recently approved them in a long-term and strategic move by Bitcoin. At this point, it’s the first cryptocurrency that offers this service.
There are many ways to earn from owning cryptocurrencies, but with Bitcoin ETFs, all the complicated trading parts of the process are left to the stock market. However, investors do pay a fee for this purpose. This makes the crypto market more accessible to traditional investors who are not interested in cryptocurrency’s tech side.
How is That Different from Futures?
A similar financial tool already existed for a few years now, and that has led to some confusion with the less familiar traders. Bitcoin futures have been around since 2021. As in any other future, Bitcoin futures are agreements to buy or sell an asset at a certain price sometime later. The asset in question here is Bitcoin.
The new product is called “spot” Bitcoin ETF, as the user is not holding a derivative but Bitcoin itself. That’s a novelty in the cryptocurrency market and one that other cryptos will also try to create.
What are Investor Protections?
Before investing in Bitcoin ETFs, investors should be aware of what kind of investor protections are put in place. These are much more loosely regulated than mutual funds, even though the two are often compared. There are fewer restrictions when it comes to fees or conflicts of interest. The Securities and Exchange Commission doesn’t have the authority to conduct these products’ examinations as with typical E.T.F.s.
All of the ETFs come with a document called product prospectus. It’s a dense document with a lot of legal language, but it helps to try and read it if you’re looking to invest a small amount in crypto ETFs.
Is S.E.C. Approval A Sign Of Safety?
S.E.C. needed to approve Bitcoin ETFs before they became available on the stock market. This was a long and complicated legal process, and it got delayed more than a few times. Some investors may feel that the fact that the government agency approved the ETFs guarantees their safety.
This is a mistake. The fact that there’s an innovative way to invest in Bitcoin now doesn’t change anything about the underlying asset. It’s still a fascinating financial tool with many applications and is still volatile. Investors are still deciding to take on those risks.
S.E.C. Process
S.E.C. went through a process that allowed the use of Bitcoin ETFs in the first place. The potential risks of investing in ETFs were discussed in detail during that process. All of the concerns raised by S.E.C. are still valid, and investors should take them into account when choosing whether to invest or not.
The S.E.C. chair Gary Gensler, who voted in favor of the approval, said the agency’s product approvals were not an endorsement of Bitcoin, and he called it “primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.”
There are many ETFs
S.E.C. introduced eleven new ETFs, and all of them are similar in price and structure. The ones supported by BlackRock and Fidelity stood apart, not due to their own quality, but because of the support from these huge investment companies.
They were eclipsed by Grayscale Bitcoin Trust BTC, which had a head start. The value of this ETF asset is about $26 billion. The ETFs do differ from each other when it comes to the fees that they charge to investors. They range from 0.3 percent to 1.5 percent. It can make a difference even for a mid-size investor.
Who’s holding the Bitcoin?
Even though there are risks involved in investing in ETFs related to Bitcoin, none comes from the coins being hacked or stolen. There’s always some risk to that happening, but it’s not greater for ETFs than when using Bitcoin on a regular basis.
Most of the Bitcoin that is used for this purpose will be held by Coinbase. It’s the company that the funds investing and spotting for ETFs have hired to do the technical part of the job. Some have also started similar arrangements with Gemini, another famous and trusted company.
How Are These Profits Taxed?
When it comes to taxing the profits made from crypto and ETFs alike, the IRS doesn’t treat cryptocurrencies as currencies but as assets or property. Therefore, ETFs will be taxed the same way as if the investors have bought Bitcoin directly.
When you hold Bitcoin in a non-taxable account for over a year, the gains would be taxed like capital gains. This means that the tax rate depends on your overall tax bracket and is progressive, ranging from zero to twenty percent, with those who earn more being taxed more. There are no risks when it comes to taxation, as the tax policy is clear and predictable.
How do Financial Planners View ETFs?
Financial planners still do not recommend that their clients buy Bitcoin ETFs. There are many reasons why this is still the case. Some of them are the ones we mentioned above, which are serious concerns and risks.
Others are simply about the fact that financial planners are risk-averse, and they don’t usually recommend new and trendy investments just because others are getting into them. Bitcoin is volatile on its own, which is another concern financial planners are prone to avoid.
Conclusion
Bitcoin ETFs are available for investors to buy and sell for about a month now. They have been a huge milestone for cryptocurrencies. Cryptos can now be bought and sold on the traditional stock market. However, many aren’t convinced that it’s a good investment to get into. There are risks involved, and the investors should take them into account.
Some of these risks were outlined when the SEC debated allowing Bitcoin ETFs. These are about crypto’s volatility and the crypto market’s speculative nature. There are no risks about taxation or about keeping the crypto wallets themselves safe. The profits made from ETFs will be taxed as capital gains.
