May 12, 2021 - 4 min read
In our second article in a series focusing on Bitcoin (BTC) Exchange-Traded Funds (ETFs), we’ll take a deeper look at the advantages and disadvantages of these novel investment vehicles.
In our first article, we looked at what an ETF is, and the struggles that have accompanied attempts to launch the first BTC ETF. With the Securities and Exchange Commission (SEC) in the US hesitant to give their backing to a Bitcoin-tracking fund due to the risks involved in digital assets, many had begun to feel that the future of crypto custody didn’t involve ETFs.
That all changed in February, however, with the launch of the first BTC ETF on the Canadian stock market. The fund was an immediate and spectacular success and traded $80 million worth of shares in its first hour. Clearly, investors felt that a true BTC ETF was long overdue, even if it launched in a fairly marginal crypto market. But are they correct?
There are many advantages and disadvantages of investing in a BTC ETF, and the value of investing in one will depend on both your tolerance of risk and your financial aims. So let’s take a closer look.
The primary advantage of a BTC ETF is that it allows investors easy access to BTC holdings, without the complexity of buying these assets via a “traditional” crypto exchange. Many investors — and especially risk-averse institutional investors and pension funds — have essentially been barred from investing in BTC up until now due to this complexity. For more dynamic, risk-tolerant investors, the ease of buying and selling through a stock exchange, rather than a dedicated crypto exchange, also creates more liquidity and flexibility.
There are a number of other advantages to BTC ETFs, though. One is that like index funds more generally, BTC ETFs offer an automatic level of diversification because they can be built to include a wide range of assets that represent a similarly broad cross-section of both the crypto and traditional asset market. And finally, there is the tax efficiency of ETFs, which is far greater than standard crypto holdings, since the revenue generated by ETFs can be paid directly into various types of low-tax investment accounts.
It’s important to note, however, that BTC ETFs might also have disadvantages for some investors. In general, these are due to the inherent characteristics of ETFs, rather than of cryptocurrencies.
One of these is the fact that BTC ETFs — like most ETFs except the most basic tracker funds — charge management fees. Over the lifetime of an investment, a 1% fee can really add up, and reduce the profitability of a fund. It’s also possible that, like other types of ETF, a BTC ETF can diverge from the true value of BTC over time.
A related issue is that, unlike investing directly in cryptocurrencies, those holding shares in a BTC ETF don’t own the currency directly. Instead, BTC will be held by the fund on their behalf. In the unlikely event that a fund becomes insolvent, this could cause legal difficulties.
For those following the world of crypto, however, the short-term advantages and disadvantages of BTC ETFs will be less important than the potentially revolutionary effects that these funds could have on the adoption and visibility of BTC.
Because BTC ETFs are traded on traditional stock platforms, in fact, they could act as the primary mechanism through which institutional investors buy up BTC, and thereby drive mainstream adoption of the currency.
As a company that builds systems to manage and protect digital assets, the launch of the first BTC ETF is also very exciting for us. On the grander scale of things, it shows how the market is moving forward. On the more granular level, it will facilitate easier access to crypto so more people can join in on the crypto journey. We’re excited by every milestone we’ve reached from now to mass adoption.
That’s not to say, of course, that there aren’t still problems to overcome. Specifically, companies and individuals alike will need to ensure that they invest and hold BTC ETFs in a secure way. But our systems are already driving wider adoption of BTC and other cryptocurrencies, and it’s likely that they will eventually work alongside BTC ETFs in diversified digital portfolios.
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