Bitcoin ETFs for Beginners
What are they? And should you buy them?
Happy Monday! This week’s edition of Matt’s Money Manifesto will focus on cryptocurrency investing, and more specifically Bitcoin ETFs.
Cryptocurrency, specifically Bitcoin, is a hot topic right now. Over the past year, Bitcoin is up nearly 250%, significantly outperforming the stock market.
With the recent approval of “Bitcoin ETFs”, many investors are now starting to consider investing in crypto as part of their investment portfolios.
Today, we’ll go over:
1. The Basics of Bitcoin ETFs
2. The Pros of them
3. The Cons of them
4. Should You Buy Them?
1. The Basics of Bitcoin ETFs
What is an ETF?
An ETF, or “exchange-traded fund” is more commonly associated with stocks. In its simplest definition, an ETF is a basket of stocks bought under one umbrella, by pooling a group of investors’ money together.
Instead of individually buying Tesla, Google, Nvidia, McDonald’s, and Apple, you could buy a single ETF that groups those companies together, alongside hundreds or thousands of other companies.
What is a Bitcoin ETF?
Bitcoin ETFs are a little different. Bitcoin ETFs don’t hold multiple stocks (or cryptocurrencies), instead, they hold one single cryptocurrency, which is Bitcoin.
However, it still maintains the same “ETF” definition, because it similarly pools investors’ money together.
Why are they important?
Before Bitcoin ETFs, if you wanted to purchase Bitcoin you would have to visit a crypto exchange, buy the bitcoin, and store it yourself.
This might not seem that bad, but it is. Most of these exchanges were very complex. There are also a lot of security concerns associated with owning and holding cryptocurrencies by yourself.
Bitcoin ETFs removed this complex barrier, and allow people to easily buy and sell Bitcoin, without the hassle and stress.
How does it work?
Let’s use an example. The Bitcoin ETF called IBIT 0.00%↑ was created by Blackrock. By purchasing this ETF, you would be giving your money to Blackrock to purchase and hold Bitcoin on your behalf.
Makes sense right?
2. The Pros of Them
Bitcoin ETFs have a lot of great benefits.
a. Tax-Free?
Before the Bitcoin ETFs, you couldn’t purchase cryptocurrency in your registered accounts such as the TFSA and RRSP. Now, with these ETFs, you have the ability to potentially shelter your gains from cryptocurrency investments from being taxed.
b. Easy to Manage
It’s never been easier to start investing in the crypto market. These ETFs make it easily accessible to anyone, without the previous hassle that was involved in purchasing crypto.
3. The Cons of Them
Bitcoin ETFs also have a lot of downsides…
a. Ownership
You don’t own any of the Bitcoin you buy. Yes, you read that right.
If you buy a Bitcoin ETF, the creator of the fund (Blackrock in our example), owns and holds all of it. You don’t have true ownership.
But, if you buy Bitcoin on a crypto exchange (the way you did before ETFs came out), you OWN it and have the ability and freedom to move it around or do whatever you’d like.
b. Fees
Similar to traditional ETFs or mutual funds, Bitcoin ETFs carry fees. For instance, IBIT 0.00%↑ has an annual fee of 0.25%.
c. Restricted Times
The stock market is open from 9:30 am-4:00 pm every weekday, and Bitcoin ETFs are subject to the same time restrictions. This means that you cannot buy or sell Bitcoin ETFs outside of the specified time frame.
However, because nobody controls the “crypto market”, Bitcoin and other cryptocurrencies are traded 24/7.
4. So, Should You Buy Bitcoin ETFs?
I haven’t decided whether I think Bitcoin ETFs are good, or bad.
I think there are a lot of benefits to them. They opened up the cryptocurrency market to tons of new investors, and they provide a simple and easy way to get started.
But I also think that there are a lot of downsides. True ownership is a big debate, and the high fees are also a slight turn-off.
I also think these ETFs create a big risk by allowing potentially uneducated investors, who are unfamiliar with the risk and volatility associated with investing in crypto, to invest a little TOO easily.
If you choose to buy Bitcoin ETFs, ensure you understand the risk and the volatility that come with it. It is NOT like investing in stocks that have real companies behind them.
It is completely speculative.
Hopefully, this article helped you understand a bit more about the new Bitcoin ETFs!
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Cya next week!
- Matt
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