On Wednesday, January 10th 2024, the Securities and Exchange Commission (SEC) cleared the way for eleven Bitcoin exchange traded funds (ETFs) to start trading and they did so the following day.
The list of the initially-approved ETFs is as follows (in no particular order): Grayscale Bitcoin Trust (GBTC), BlackRock’s iShares Bitcoin Trust (IBIT), ARK 21Shares Bitcoin ETF (ARKB), Bitwise Bitcoin ETF (BITB), Invesco Galaxy Bitcoin ETF (BTCO), WisdomTree Bitcoin Fund (BTCW), VanEck Bitcoin Trust (HODL), Franklin Bitcoin ETF (EZBC), Fidelity Wise Origin Bitcoin Trust (FBTC), Valkyrie Bitcoin Fund (BRRR) and Hashdex Bitcoin ETF (DEFI).
What Are Bitcoin ETFs?
These are ETFs that own actual Bitcoin and that’s an important difference from what was available before the approval was granted. By means of these now publicly-traded securities, U.S. investors can own real Bitcoin and get true exposure to the price of the asset.
Prior to these ETFs, U.S. investors who don’t want to go through the sometimes laborious and opaque process of opening “wallets” or setting up accounts with crypto custody firms could only get loosely directional exposure to Bitcoin prices via Bitcoin futures or Bitcoin futures ETFs, exposure that notably failed to accurately reflect the ongoing price of the asset. In other words, U.S. investors could somewhat track moves in Bitcoin prices, but it i) was prone to really large spreads versus actual Bitcoin prices, ii) forced investors to pay exorbitantly high fees, and iii) was subject to regular futures contract “rolls” and other financial realities that rendered the exposure to Bitcoin very far from being true and pure.
How Do They Work?
These Bitcoin ETFs are very similar to existing ETFs like GLD (gold) or SLV (silver) in that, generally speaking, they operate as “trusts” or pools of capital that then take that capital, buy actual Bitcoin and store it.
Just like GLD accepts investor capital via share purchases to buy real, physical gold and store it in a vault, so too do these Bitcoin ETFs take capital and then go out, buy actual Bitcoin and then store it in a digital vault with a custody firm. This is how investors get true exposure (minus fees and the fund’s trading costs) to Bitcoin and, as such, Bitcoin prices - unlike with those futures-based alternatives that were the only option before.
What Does This Mean For The Bitcoin Price?
I don’t think there’s any doubt that it’s positive. Because these Bitcoin ETFs have to buy actual Bitcoin, it opens up a tremendous amount of potential investor demand in a market that’s still relatively niche.
Consider: The domestic U.S. ETF industry is around $7.3 trillion. At its peak in late 2021 (when Bitcoin prices were above $60,000) the value of all the Bitcoin in the world was only just over $500 billion. While obviously not all of that $7.3 trillion is going to go into Bitcoin, the point is clear: If just 10% of it flows to Bitcoin over the next several years, it’s a massive amount of demand for what is currently a pretty small market.
Notably, this is the same argument gold and silver bulls made for rallies in those metals when the ETFs came out in the early 2000s and many expected a straight-line, lower left to upper right rally upon the approval of the ETFs. But that did not happen. So, don’t be shocked if the “news” of the Bitcoin ETF approval initially seems rather disappointing in the context of the price of the asset in the very near term.
The experience with these metal ETFs indicates, however, indicates that there will be an impact over the longer term. Inflows from GLD and SLV provided consistently upward pressure on prices for several years after the release of the ETFs and we could well see something similar for Bitcoin prices over the coming years.
Here are some of my thoughts:
These ETFs do nothing whatsoever to address many of the legitimate concerns investors have with Bitcoin itself, including its rampant price manipulation and fraud, hacking and theft, a lack of transparency and its massively disproportionate use in illegal activities such as extortion, ransomware, money-laundering and terrorist financing. The SEC made it very clear that approving these ETFs was absolutely NOT an endorsement of Bitcoin or any other cryptocurrency or that instances of the above-mentioned problems had fallen to any kind of acceptable level.
Buckle up! Most regular investors will be totally unprepared for the kind of volatility generated by a Bitcoin ETF investment. As measured by standard deviation, the risk associated with the cryptocurrency is almost 4x that of the US stock market! The price has crashed by at least 45% on four separate occasions in just the last five years. You need to be ok with this kind of mega-volatility.
Bitcoin will trade while you can’t. Trading in Bitcoin goes on 24/7 all over the world. You can only trade these ETFs between 9:30am and 4pm Eastern Time and not at weekends or on U.S. public holidays. For example, if Bitcoin prices start to fly around at 4:15pm ET on a Friday before a long weekend (as we experienced just this week), you and everyone else who owns an ETF will not be able to react until after 9:30am on the following Tuesday, by which time a very violent move may have already been completed without you having been able to participate by taking any kind of either speculative or protective measures. And non-ETF traders of Bitcoin will be very aware of this and could trade circles round the ETF holders as a result of knowing exactly what will happen when the U.S. stock market opens.
FOMO is a very poor investment strategy. Not everyone should be investing in these ETFs. Bitcoin is impossible to value. It is a speculative investment. There is no fundamental reason why it is priced where it is, it’s simply based on the hope of buyers that someone will one day pay more for it than they did. It is completely at the whims of pure supply and demand. Every historical attempt to actually provide a valuation for Bitcoin has been flawed. Investors must understand that Bitcoin prices (and therefore the prices of these ETFs) are completely untethered from any kind of fundamental value. Don’t get involved if any of that makes you uneasy.
The Bitwise Bitcoin ETF has the lowest annual expense fee of 0.20%. But fees on the ETFs from ARK, Fidelity, VanEck and iShares all fall within 0.05% of that cost. Six of the ETFs (those from Bitwise, Ark, Fidelity, Wisdom Tree, Invesco and Valkyrie) will launch with a temporary “teaser” fee of 0.00% after limited waivers that will likely not last for more than six months. The one outlier is Grayscale, whose initial proposed fee is currently 1.50%. Investors get nothing in return for this higher fee. Don’t touch this one at that price.
Bitcoin ETFs aren’t as efficient as other ETFs. Without getting too far into the weeds (you can read more detail here if you like), the greatest quality of an ETF wrapper for an investment is the unique “creation and redemption process” which gives ETFs their very meaningful liquidity, cost and tax advantages. As of now, Bitcoin ETFs do not benefit from a creation and redemption process. That may change one day, but at the moment they are considerably less efficient than other ETFs.
There’s a huge reliance on the competence, security protocols and ethics of Coinbase, who will be the main custodian and those are qualities that have, shall we say, historically not always been in excess supply at that company.
If you are a Vanguard customer, you are out of luck. Not only did Vanguard announce that it will not be issuing a Bitcoin ETF of its own, but also that it will not even permit any of them to be traded on its platform.
Bitcoin ETFs provide a solution to one of the major problems with wallet-based crypto investment .. estate planning. The beneficiary designation on the brokerage account where the ETFs are held will be enough to easily and efficiently pass your Bitcoin holding on to your heirs upon your demise. Very much not the case with a wallet.
In summary, I believe the liquidity and transparency of ETFs make it by far the best way (only way?) to hold Bitcoin. But, as alluded to above, it is important to draw a strong distinction between the “vehicle” (a well-regulated ETF that is subject to proper oversight and transparency) from the “passenger” inside the vehicle (an unregulated asset that trades 24/7 in a completely uncontrolled environment with basically no rules that has been clearly shown to be highly subject to criminal fraud and manipulation and has been dominated by a relatively small number of big players - often revered as demi-gods in crypto-world - many of whom have been recently exposed as jail-bound fraudulent bad actors).
As an advisor with a fiduciary obligation to my clients, I have always taken the position that I was unable to advise clients to expose their assets to that kind of pre-ETF unregulated and risky environment. But if they are determined to do so, I now strongly recommend that the absolute maximum that they risk is 1-2% of their investable assets and use only a Bitcoin ETF to gain the exposure.
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