As of Thursday, the Securities and Exchange Commission has approved a batch of 11 spot bitcoin exchange-traded funds for trading in the U.S.
Cryptocurrency investors had been eagerly awaiting this moment. In anticipation of the ruling, traders bid up the price of bitcoin 155% in calendar year 2023, to more than $42,000. On the first day of trading, $4.6 billion worth of shares of the new ETFs changed hands, according to investing research firm CFRA.
"This is a key milestone in the ETF industry," says Todd Rosenbluth, head of research at VettaFI. "For a generation of investors who have been embracing ETFs as their go-to investment vehicle, this opens the door for them to get exposure to this emerging asset class."
In other words, these funds are a big deal. Here's why, and what you should know about them.
Bitcoin ETFs aren't new, but these are different
If you thought you'd seen a bitcoin ETF before Thursday's announcement, you're right — kind of. The previous generation of ETFs were designed to track the price of bitcoin by holding bitcoin derivatives. In general, the managers of these ETFs continuously bought and sold bitcoin futures contracts to try to replicate movements in bitcoin's value.
This imperfect process often resulted in investment returns that didn't accurately track fluctuations in bitcoin's price.
"It was a broken product that never really worked," says Stephane Ouellette, founder and CEO of FRNT Financial. "Buying bitcoin products in most retail accounts was very difficult."
The new slate of ETFs clears up that problem. So-called spot ETFs track the price of bitcoin by actually owning bitcoin. "It's perhaps a cleaner way of getting exposure to the asset," Rosenbluth says.
ETFs are a convenient way to get crypto exposure
Unlike many popular ETFs, which track the performance of a diverse array of investments, the new bitcoin funds track one thing: the price of bitcoin. Which raises the question: Why not just own bitcoin?
The answer, for many retail investors, will be convenience. Bitcoin ETFs can be purchased directly through your brokerage account and can live on your portfolio dashboard right next to all of your other investments.
"The investor that's likely to find this appealing is the one who has already bought other ETFs, whether it's tied to the S&P 500 or emerging markets or bonds or what have you," says Rosenbluth. "This is going to work just like any other ETF of yours. You buy and sell it on the market during trading hours, you get exposure to the underlying investment and you can sell whatever it is you want in a tax-efficient way."
One drawback of owning an ETF rather than owning bitcoin directly in a separate account is that an ETF charges an annual management fee. Expense ratios on the 11 new funds range from 0.2% of your assets in the fund to 1.5%, though several firms are temporarily waiving or lowering their fees to get customers in the door.
Notably, some popular crypto exchanges, such as Coinbase, charge investors fees for trading bitcoin and other digital currencies.
More ETFs are likely coming
The first wave of ETFs which track the price of bitcoin are only the beginning, says Ouellette.
"If this race to cut fees continues, these ETFs are going to be loss-leading products," he says. "Within the next year, [major fund companies] are going to be looking to build out a very broad suite of crypto products."
That may include funds which mix a bitcoin holding with a portfolio of other assets, or that incorporate trading strategies which use derivatives to bet on some areas of the market while betting against others.
For now, if you're interested in adding bitcoin to your portfolio in a way that comports with your tolerance for risk, adding one ETF to your portfolio versus another is going to come down to personal preference. Rosenbluth points out that you may get the best deal cost-wise with one of the funds that's waiving fees, but that you may feel comfortable investing with a name you trust.
"There are benefits of familiarity," he says. "If you've invested in ETFs beforehand, there's a good chance you've heard of some of these firms among the handful that have launched products."
As new, more complicated funds emerge, you'll have to do a little more digging to determine if it's a product that's right for your goals.
"There's gonna be new managers that come out and convince people that they are going to do a good job, and they may very well do," says Ouellette. "But if you're trying to look at track record, you really want to see them having performed throughout a variety of different market environments. Market dynamics in this space change drastically from trading window to trading window."
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CHECK OUT: 11 newly approved bitcoin ETFs start trading today—but experts say to ‘approach with caution’
