Should You Invest in a Bitcoin ETF?

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There’s a new way to invest in the world’s largest cryptocurrency — kind of.

ProShares launched its Bitcoin exchange-traded fund last month, the nation’s first ETF linked to the $1.1 trillion cryptocurrency.

The fund, known as the Bitcoin Strategy ETF, doesn’t directly invest in the cryptocurrency, though. Instead, it deals in Bitcoin futures traded on the Chicago Mercantile Exchange.

Here’s a look at how it works, and whether you should consider things like it as an investment.

How Does the Bitcoin ETF Work?

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The ProShares Bitcoin Strategy ETF debuted on the New York Stock Exchange to much fanfare and media attention. The fund, which trades under the ticker symbol BITO, offers investors exposure to Bitcoin without having to purchase the highly volatile digital currency.

Rather than mimicking the price of Bitcoin, the ProShares ETF tracks the price of Bitcoin futures – contracts between two parties to buy or sell the cryptocurrency at an agreed-upon price.

“BITO will open up exposure to bitcoin to a large segment of investors who have a brokerage account and are comfortable buying stocks and ETFs, but do not desire to go through the hassle and learning curve of establishing another account with a cryptocurrency provider and creating a bitcoin wallet or are concerned that these providers may be unregulated and subject to security risks,” ProShares CEO Michael L. Sapir said in a press release announcing the launch.

Holding BITO in your portfolio will come at a premium. With an expense ratio of 0.95%, investors will pay $95 to ProShares each year for every $10,000 they have in the fund.

That’s considerably higher than the average mutual fund or ETF. In 2020, the asset-weighted average expense ratio of all U.S. open-end mutual funds and ETFs was 0.41%, according to Morningstar.

What to Consider When Buying Bitcoin ETFs

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The ProShares fund may be the first ETF linked to Bitcoin, but it likely won’t be the last.

Grayscale Investments and the New York Stock Exchange are seeking to convert the $40 billion Grayscale Bitcoin Trust into an ETF, but will need federal approval first. If the move is approved, investors would have access to an ETF that invests directly in Bitcoin, not just futures contracts.

Bitcoin ETFs may be ideal for an investor looking for convenient and safe exposure to Bitcoin, says Erin Hay, a financial adviser and chartered financial analyst for Monument Wealth Management in Alexandria, Virginia.

“Buying a small, ‘starter’ position in an asset often incentivizes investors to continue their education and understanding of the investment,” Hay said. “A Bitcoin ETF, which is highly liquid and available through traditional trading channels, is an ideal method for creating a ‘starter position.'”

Hay warns that investors should keep in mind that BITO’s underlying assets are Bitcoin futures, not the cryptocurrency itself. This may lead to a tracking error or discrepancy between the performance of the ETF and the underlying Bitcoin, potentially suppressing the value of the ETF.

“Bitcoin and related vehicles that seek to track its performance will likely experience heightened volatility, as the asset class is still new, becoming mainstream and subject to both regulatory and retail investor hurdles,” Hay said.

How to Buy Shares of BITO

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Like any ETF, shares of BITO can be bought and sold during trading hours via online brokerages. If you don’t already have a brokerage account, you’ll need to set one up on a platform like Robinhood, Fidelity or E*TRADE.

Once you have an account, determine how many shares of BITO you want to purchase and at what price you’re comfortable buying.

A market order allows you to purchase shares of the fund at its current market price. A limit order, on the other hand, enables you to set a maximum price you’re willing to pay for a share.

But you don’t have to go it alone. A financial adviser can execute trades on your behalf and provide expert advice beyond just buying and selling shares of BITO.

Bottom Line

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The ProShares Bitcoin Strategy ETF is a first-of-its-kind fund that tracks the price of Bitcoin futures. The ETF company has touted the fund for the exposure it provides to Bitcoin, especially for investors who are hesitant to trade in cryptocurrencies directly.

While BITO may be well-suited for someone looking for initial Bitcoin exposure without having to actually buy any, there are still inherent risks to consider, including extreme volatility.

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