Bitcoin ETFs, Pros and Cons

Good to Know

How does a retail investor play in the cryptocurrency market? Contrary to popular belief, you do not have to be an accredited investor to participate, you can simply invest in a publicly traded Bitcoin ETF (Exchange-Traded Fund). Such an ETF does not hold Bitcoin but rather tracks the price of Bitcoin. It may appeal to investors unfamiliar with or unwilling to manage the complexities of cryptocurrency wallets and exchanges.

Interestingly, Bitcoin ETFs generally hold one of two types of assets:

Futures-Based Bitcoin ETFs: These ETFs currently dominate the cryptocurrency ETF market; they invest in Bitcoin futures contracts rather than holding the cryptocurrency itself. Futures contracts are agreements to buy or sell Bitcoin at a predetermined price on a specific date in the future.
Physical Bitcoin ETFs: These funds purchase and hold actual Bitcoin as the underlying asset. The value of the ETF shares is directly tied to the market price of Bitcoin. Investors benefit from price appreciation or depreciation without dealing with storage, security, or private keys.

Now we’ll consider the pros and cons.

Pros

- Regulatory Oversight
  - ETFs are subject to stringent regulations and oversight, providing investors with a level of transparency not always present in cryptocurrency exchanges.
- Easily Accessible
  - Bitcoin ETFs are traded on regulated stock exchanges, making it simple for retail investors to buy and sell them through standard brokerage accounts.
- Security
  - Investors avoid the risks associated with holding Bitcoin directly, such as losing private keys or having coins stolen through cyberattacks.
- Diversification
  - Bitcoin ETFs enable investors to incorporate cryptocurrency exposure into their portfolios without directly dealing with the technical aspects of the digital asset market.

Cons

Fees
- Management fees for Bitcoin ETFs can reduce overall returns, particularly for funds that actively manage futures contracts.
Regulatory Compliance
- The approval and operation of Bitcoin ETFs depend on regulatory bodies like the U.S. Securities and Exchange Commission (SEC). Some ETFs have faced delays or rejections due to concerns about market manipulation and investor protection.
Volatility
- Much like any other kind of ETF, a Bitcoin ETF does not protect the investor from price volatility, especially the potential for extremes in the cryptocurrency market, as is dramatically displayed in the chart below.

Is cryptocurrency the right investment for you? As with any investment, consult your financial advisor to help you determine if and how much should be allocated from your portfolio into a cryptocurrency such as Bitcoin.

Financial advisors and planners need a sound understanding of the competitive edge of joining the ranks of highly-trusted financial professionals. Get that sound understanding through our CFP® Certification Curriculum when you consider CFP® ^® certification. You’ll discover a select few of the reasons our student pass rates are much higher than the national

The material contained in this article is to raise awareness—it is informational, general in nature and does not constitute financial advice. It should not be relied upon or used without consulting a credentialed financial professional to consider your specific circumstances. This communication was published on the date specified and may not include any future changes in the topics, laws, rules or regulations covered.

Posted in Good to Know

About Bruce Starks, CPA, CFP®

View all posts by Bruce Starks, CPA, CFP® →