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Wondering if you should invest in a Bitcoin ETF?
The difference between a Futures Bitcoin ETF and a Spot Bitcoin ETF. The risks and rewards of investing in a Bitcoin futures ETF.
With the recent launch of the BITO Bitcoin ETF and its record setting inflows and trading, the average joe is wondering if they should buy a Bitcoin ETF for their investment portfolio. In the simplest of terms, or a Bitcoin ETFs for dummies, I am going to tell you the good and bad of buying a Bitcoin ETF. I will also break down the difference between the current Bitcoin Futures ETFs (Like BITO) and the forthcoming Spot Bitcoin ETFs.
Should you add the BITO ETF or other Bitcoin ETF to your Portfolio?
Nobody can tell you exactly what to do, or at least I can’t. I am an average person, like you, and not a financial advisor. As I have wrote here on my website though, you are probably as likely as any financial advisor to correctly figure out what to invest in.
Advisors are either all just copying what the smartest person is doing, or following some computer program. You can do your own research on Bitcoin ETFs and after reading some articles know about as much as the average financial advisor.
So the question of should you buy one of these new Bitcoin ETFs, is really up to you. If you are interested in Bitcoin and adverse to anything technical or new, then yes, purchasing an ETF is an easy way to get exposure to Bitcoin.
Websites like Coinbase, have made it very easy to buy Bitcoin directly, but some people don’t want to sign up for new accounts and still don’t understand what owning Bitcoin means. Especially when they hear about wallets or keys.
Products like BITO, or other Bitcoin ETFs, will allow you to have Bitcoin exposure through traditional investing methods. You won’t own any Bitcoin directly, but you can easily buy these new Bitcoin ETFs through your Fidelity or Robinhood account.
BITO will give you exposure to Bitcoin and its price, just like the USO ETF will track the price of oil.
But there are some important things to know about futures ETFs.
Futures Bitcoin ETFs Have Flaws
Every commodity, like gold, oil, wheat, or in this case Bitcoin, is priced in spot price and its futures price.
What is the difference between spot and future price? Both the spot price and the futures price are quotes for a purchase contract. What makes them different is the timing of the transaction and the delivery date of the commodity. One applies to a deal that’s going to be executed immediately (spot); the other, to a deal that’s going to happen down the road (futures).
In general, the futures prices and spot prices are different numbers because the market is always forward-looking. People are buying future contracts and predicting if the price will go up or down, based on speculation, market conditions, etc.
Basically a Bitcoin futures ETF like BITO, seeks to reflect the changes in percentage terms of the spot price of Bitcoin as measured by the changes in the price of the futures contract for Bitcoin on the CME.
If you have ever bought or sold an ETF like OIL or USO, which both deal in oil, you already understand (hopefully) some of this. You also (like me) might have gotten into them the first time not fully understanding how they worked and if you held them for any length of time got really confused watching the prices not match up with the current price of oil. Futures ETFs are not simple at all, there is contango, backwardation, and more.
The most common thing to be aware of with a Bitcoin futures ETF is contango. If the quoted future price of Bitcoin is higher than the spot price of Bitcoin, then the ETF for Bitcoin is in contango. The Bitcoin market will find itself in contango when people think the spot price will be higher in the future. Contango will occur in a market where the price of the asset is high and volatile, like Bitcoin.
With contango, investors buying and holding long will lose money every time the ETFs current contracts expire and the ETF must buy new contracts at higher prices. The ETF will have to sell lower-priced futures and buy higher-priced ones, which will erode your return every time contracts roll off.
Some people won’t care about losing a percent of their money because buying and selling an ETF is so easy. But it is something to be aware of, as the longer you hold the ETF the more likely (especially in a bull market) your losses will add up over time.
Some of these ETFs or ETNs, can also have weird tax implications. ETNs are often referred to as ETFs by the average person, but they are quite different. As more Bitcoin ETFs come to market it will be important to know which one you are buying. Especially when using options. You could end up with a crazy form that is impossible to make sense of at tax time.
I play around with a lot of different products in my accounts and a few of them have thrown some really complicated and confusing tax forms at me at the end of the year. This can come into play with ETNs and using options related to any of these products as well. Just be aware, especially if you do your own taxes.
Beware Leveraged Bitcoin ETFs
These have not arrived yet, but my guess is they will at some point down the road. With Oil, Gold, the VIX, there are leveraged 2x-3x ETFs. These products let you leverage up and double or triple what a regular ETF might return over the same period. The problem with these ETFs are that your losses also are 2 or 3 times greater, and contango can happen at even greater pace.
It is quite easy to get burned by these products (I have) but they can get you some good returns if you are quick to be in and out during a bull (or bear) market. I used them with Oil to make some amazing gains when it crashed in the summer or 2020. I also use them with the VIX. I used bearish ETFs (ETFs can be positive or negative a price) to bet against the Oil market and within a week or two when oil quickly crashed I made some impressive gains. The key to these types of ETFs is to be in and out of them quickly. The longer they are held the more your gains erode. I also generally trade them within an IRA to avoid all the taxes with buying and selling them all the time.
Anyway, that is just a side note and a buyer beware for the future when these products will surely be available for Bitcoin and Ethereum. We are not there yet, but once Bitcoin ETFs start to roll out and become common, we will have more and more speculative products for the average investor.
What else is a good Bitcoin investment?
Well Bitcoin itself is a good investment. You can hold it and own it with your own wallet. Yes, it takes a few steps, but it is not too difficult and I would encourage you to read and learn about it.
Another way to invest in Bitcoin besides ETFs, is by investing in some of the many crypto stocks that are coming out. One of my favorites is GLXY, but there are quite a few other crypto stocks to invest in. I also am looking forward to some new ETFs that track all these crypto companies as an easy way to track the sector.
As always, nothing is advice. I am not a professional. This is my own opinion, do your own research.