The recent approval of spot Bitcoin exchange-traded funds (ETFs) by the U.S. Securities and Exchange Commission (SEC) has made investing in Bitcoin more accessible to average investors. Spot Bitcoin ETFs function similarly to other ETFs or securities, allowing investors to invest in Bitcoin through traditional platforms that provide various financial services. 

These ETFs are traded on mainstream exchanges like the New York Stock Exchange and Nasdaq, enabling investors to benefit from Bitcoin’s potential without directly holding or understanding cryptocurrency platforms. However, before investing, investors should educate themselves about how these ETFs operate and the associated risks. 

In this article, you’ll learn how to purchase Bitcoin ETFs (in the United States), help you gauge the pros and cons of these investment vehicles, and learn how you can start. Just follow the steps below:

Select a Brokerage and Open an Account

The first step is to get your broker account up and ready. Many online brokers, such as eToro, Robinhood, Charles Schwab, Fidelity, E*Trade, and Interactive Brokers, offer spot Bitcoin ETFs alongside traditional securities.

Different platforms have different fees and you should look into these to better understand the potential costs involved with transacting securities on these platforms. Some have next to no commissions, while others can be costly.

Open a Brokerage Account

If you don’t have an existing account with one of these brokers, you’ll need to open one. This usually involves providing personal information and may require identity verification through know-your-customer (KYC) checks.. 

After going through KYC, you must first deposit funds into your new account. Most brokerages accept bank transfers or credit cards to do so. 

As a note, brokerages offer search tools to find Bitcoin ETFs by name or ticker symbol. You can compare ETFs by considering expense ratios ranging from 0.20% to 1.50%. These ratios represent annual costs and can impact returns, particularly with more significant investments.

For example, in BlackRock’s iShares Bitcoin Trust, you can check out important information about the ETF, including real-time holdings, portfolio characteristics, ETF details, and fees.

Explore Bitcoin ETFs

There are various Bitcoin ETFs, including spot Bitcoin ETFs holding actual Bitcoin, and futures-based ETFs that invest in Bitcoin futures contracts. Some examples of ETFs include the ARK 21Shares Bitcoin ETF (ARKB), Bitwise Bitcoin ETF (BITB), and Fidelity Wise Origin Bitcoin Trust (FBTC). Research their performance, fees, and brokerage policies.

It’s worth noting that futures ETFs do not invest directly in Bitcoin and, as a result, may suffer from tracking errors or incur additional fees. Some distribute earnings generated through holdings of U.S. Treasury securities, for example.

Execute a Buy Order

Once you’ve chosen your desired Bitcoin ETF(s), log in to your brokerage account, find the ETF by name or ticker symbol, and place a buy order. You can opt for a market order, purchasing at the current price, or a limit order, setting a specific buying price.

Different types of orders have different advantages and disadvantages. For example, a market order will likely be filled fast than a limit order, but it’ll be executed at the current market price. Limit orders, on the other hand, give the buyer or seller more control over the price of execution.

Monitor Your Investment

Keep track of your Bitcoin ETFs’ performance through your brokerage account. Keep an eye out for the cryptocurrency market’s volatility.

Investing in Bitcoin ETFs carries risks, such as market volatility and potential loss of principal. While they provide exposure to Bitcoin’s price without directly buying it, they still entail cryptocurrency investment risks. Prioritize understanding your investment goals and risk tolerance, and seek guidance from a financial advisor if needed.

Spot vs. Futures ETFs

Spot Bitcoin ETFs and futures-based Bitcoin ETFs offer distinct avenues for investors to access Bitcoin, each with its characteristics and considerations. Understanding these disparities is essential for investors to align their choices with their investment objectives and risk tolerance.

Key Differences:

  • Direct vs. Indirect Exposure: Spot ETFs provide direct exposure to Bitcoin’s price by holding the cryptocurrency, while futures ETFs offer indirect exposure through futures contracts, which may not perfectly mirror Bitcoin’s spot price.
  • Complexity: Spot ETFs are generally simpler and offer a more straightforward Bitcoin investment experience, while futures ETFs involve additional complexities related to managing futures contracts.
  • Security and Storage: Spot ETFs necessitate secure storage solutions for actual Bitcoin, whereas futures ETFs deal with financial contracts and do not require physical cryptocurrency storage.

The decision between spot and futures Bitcoin ETFs hinges on investors’ preferences for direct or indirect exposure, tolerance for complexity and market risks, and their chosen investment strategy. Spot ETFs provide a transparent way to invest in Bitcoin, while futures ETFs offer a means to speculate on Bitcoin’s price movements without owning the cryptocurrency directly.

The Pros and Cons of Bitcoin ETFs

Before investing in Bitcoin ETFs, investors must be aware of several benefits and risks.

Advantages of Bitcoin ETFs:

  • Accessibility and Ease of Use: Bitcoin ETFs offer a convenient avenue for investors to access Bitcoin without direct purchasing, storage, and security complexities. This is particularly advantageous for those unfamiliar with crypto exchanges or prefer traditional brokerage accounts.
  • Diversification: Certain Bitcoin ETFs provide diversification by holding a range of assets, including Bitcoin futures, stocks, and other securities. This diversification helps manage risk and broaden investment portfolios.
  • Regulatory Oversight: Bitcoin ETFs operate within regulated financial systems, offering investors protection that is not always available with direct Bitcoin purchases. Regulatory oversight enhances investor confidence and security.
  • Tax Efficiency: SEC-regulated Bitcoin ETFs may offer tax advantages not typically associated with direct cryptocurrency investments, enhancing overall tax efficiency for investors.
  • Market Liquidity: Bitcoin ETFs can bolster market liquidity and contribute to price stability in the cryptocurrency market. They facilitate easy buying and selling during trading hours, which is crucial for reacting to market dynamics.

Disadvantages of Bitcoin ETFs:

Despite the many benefits, these investment vehicles have a few drawbacks.

  • Market Volatility: Bitcoin ETFs remain exposed to the extreme volatility of the cryptocurrency market, which can be unsettling for those unaccustomed to such fluctuations.
  • High Fees: Bitcoin ETFs often entail higher management fees than traditional ETFs, potentially impacting long-term returns.
  • Custodians: Investing in a Bitcoin ETF does not grant direct ownership of Bitcoin, missing out on some unique attributes of cryptocurrency ownership, such as hedging against inflation.
  • Limited Trading Flexibility: Bitcoin ETFs are restricted by market hours, unlike cryptocurrencies that can be traded round the clock, limiting trading flexibility.

While Bitcoin ETFs offer accessibility and regulatory oversight, they come with higher fees, potential tracking inaccuracies, and lack the direct ownership and trading flexibility of direct cryptocurrency investments. Investors should weigh these factors against their needs and risk tolerance when considering Bitcoin ETFs.

Alternatives to Spot Bitcoin ETFs

There are alternative approaches for those interested in Bitcoin exposure, including alternative methods for investing in Bitcoin, whether directly or indirectly, without relying on spot Bitcoin ETFs.

Direct Bitcoin Purchase

Purchasing Bitcoin directly offers the most straightforward path to crypto ownership, by allowing investors to manage it themselves. Either through a wallet or a cryptocurrency exchange, investors can move their BTC around and, if they choose a self-custodial solution, they may store their own private keys.

Direct acquisition requires thoroughly understanding Bitcoin’s mechanisms, choosing suitable custody solutions, and selecting a reliable cryptocurrency exchange or wallet. Direct ownership affords greater usage flexibility but may entail increased exposure to government regulations.

Investing in Cryptocurrency Company Stocks

Another avenue for gaining exposure to cryptocurrencies involves investing in stocks of cryptocurrency companies. Notable entities include Riot, Coinbase, and MicroStrategy. The performance of crypto-linked stocks typically follows market trends and can introduce volatility for investors.

It’s worth noting that the performance of cryptocurrency company shares doesn’t exactly reflect that of Bitcoin or other cryptocurrencies, as there are a number of other factors influencing performance, including the operations of these companies.

Purchase Cryptocurrency Equity or Index-Based Funds

Alternatively, investors may explore legacy ETFs for Bitcoin exposure that either offer exposure to several cryptocurrency firms, or are based on specific indexes.

Crypto Equity ETFs provide exposure to companies involved in the blockchain industry, such as miners, exchanges, and software developers. These offer a diversified play on the crypto market’s growth, potentially mitigating the risks associated with individual cryptocurrencies. Additionally, they benefit from traditional stock market regulations and transparency.

Index-based crypto funds, on the other hand, track the performance of a basket of cryptocurrencies, offering a more direct tie to the underlying assets. This can be advantageous for investors seeking to capitalize on the potential price appreciation of Bitcoin and other leading cryptos individually.

Featured image via Unsplash.