Bitcoin ETFs - buyer beware?

In 2023, global crypto ownership rose by 34% to 580 million, widely believed to have been driven by the expected approval of a Bitcoin spot exchange traded fund (ETF). Fast forward to day one of trading, and Reuters reported that the funds saw an astounding US$4.6 billion in volume transacted or inbound?. But while the ETF structure allows investors to gain exposure to Bitcoin through a more regulated and familiar investment vehicle, there are a few important facts being buried by the hype…

TLDR: If you’re looking to invest in Bitcoin, you don’t need to pay someone to do it for you. There are a lot of reputable exchanges that will enable you to purchase and securely store your assets in a matter of minutes. 

Firstly, what are Bitcoin ETFs and how do they work?

Exchange traded funds (ETF) are a financial product in America that allows people to buy Bitcoin through investing in a managed fund - similar to a Kiwisaver product. Approval of the ETF allows hundreds of millions of investors around the world who can buy American ETF products to access Bitcoin as easily as they can purchase any other managed fund and gives big investors (like pension funds) access to Bitcoin for the very first time. 

While Bitcoin ETFs have been around for a few years now, they have only been allowed to invest in derivatives of cryptocurrencies, e.g. futures, not the actual crypto assets themself. This has allowed investors to speculate around price without actually owning the cryptocurrency. ETFs that use investors’ money to purchase Bitcoin have, up until recently, not been approved for trading on major stock exchanges – regulators have considered them too risky. This is the first time the US Securities and Exchange Commission has approved Bitcoin funds for listing and trading in the US. (Source).

Beware the ‘gotchas’!

For overseas investors, Bitcoin ETFs (including Grayscale Bitcoin Trust - GBTC) are often easily accessible through a number of locally accessible investment apps (in New Zealand these include Sharesies, Hatch and Vault), but although these products represent an exciting step forward for the industry as a whole (for more about how they help drive legitimacy, trust, liquidity and demand here), due-diligence is still important.

> You don’t actually own the underlying assets…

When you invest in a Bitcoin ETF, you are purchasing shares in the ETF rather than directly owning any Bitcoin. The ETF holds Bitcoin as part of its portfolio and investors own shares in that. This is an important difference because it means that while you do benefit from the price movements of Bitcoin, you do not have any direct ownership or possession.

(For more experienced traders - because ETFs track the market, they make it difficult to ‘beat the market’ - something experienced traders aim to achieve through more actively managing their investments.)

> There may be extra costs 

There are also costs associated with investing in US markets, including a one-off fees for purchase, and ongoing fund management costs. There could also be multiple institutions profiting from your purchase, meaning overall fees could be more than buying your Bitcoin directly from a local crypto currency exchange. The biggest extra cost is often currency conversion fees -investing in US markets requires US dollars, and converting your NZ$ to US$, and then back again, incurs FX fees at every stage, not to mention exchange-rate fluctuations. (Source).

In praise of direct ownership (with guardrails)

Over the past few weeks, millions have made the jump from ‘Should I invest in crypto?’ to ‘Where can I invest with the lowest fees?’ For many, the answer has been to purchase Bitcoin (and other crypto) directly through a reputable exchange and (importantly) to utilise a self-custody wallet provider to store those assets securely themselves. 

Essentially, investing in Bitcoin through an ETF is paying someone else your hard-earned money to manage (this also incurs a fee) a digital asset on your behalf versus buying the crypto with direct ownership and control over your own Bitcoin holdings. 

Self-custody wallets allow you to hold and control your own assets and don’t require a third party to be involved when you send, receive or transact with your money. The blockchain is secure and transparent, making fraud near impossible. With these kinds of wallets, no one but you is in control of your money. 

It’s clear that the future of finance is evolving, and Bitcoin ETFs represent a tangible bridge between conventional investment practices and the dynamic realm of digital currencies. ETFs will help many, many mainstream investors take their first step into digital currency diversification; but there’s a big difference between participating via an ETF and directly holding  your own coins. The next step for investors keen on avoiding unnecessary fees would be to invest in the asset directly with a focus on securing these assets via self-custody. This is what will bring about true participation in crypto in every sense of the word.