Dubai: The high price of a single Bitcoin has often made the crypto investment beyond the reach of most investors worldwide. This is why there has been a lot of interest in finding alternative ways to invest in Bitcoin and reduce the risks that come with directly buying the top cryptocurrency.
Bitcoin exchange-traded fund (ETF) is one such alternative. With it, investors can get exposure to cryptocurrencies without having to go through the trouble of setting up a wallet or dealing with erratic exchanges. But they are not without risks, flag industry experts.
“By buying shares of a Bitcoin ETF, you can gain exposure to the price movements of Bitcoin, but investors looking to utilise ETFs to access cryptocurrencies are not necessarily getting what wanted,” explained Brian Deshell, a UAE-based cryptocurrency trader and analyst.
“Investors should be convinced that by investing in a regulated product like a Bitcoin ETF, their money will be safe. However, it’s not proven to be effective as means to exponentially grow your money in the crypto market. Moreover, there has hardly been any progress in regulatory approvals.”
10 years since launch, but hardly any progress
It was in mid-2013 when the first approval was sought for a Bitcoin exchange-traded fund (ETF) in the US. Although it’s been a decade since the first application for an ETF was made, the US is still waiting for the first Bitcoin ETF product. The reason being the securities regulator isn’t convinced.
“While Bitcoin ETFs have existed for some time outside the US, in Canada, Europe, and elsewhere in the world, they have failed to attract large investor interest,” added Deshell. But why has interest suddenly sparked again in the investment?
In the last few weeks, over half a dozen new applications for a Bitcoin ETFs were filed in the US to the securities regulator. BlackRock, the world's biggest asset manager, and US-based Fidelity Investments were the latest firms to apply.
While any regulator worldwide has yet to approve such an ETF – despite receiving numerous applications – there is now more optimism the regulator will approve one because some of the previous concerns are assumed to have been addressed in recent filings, top investment bank JPMorgan noted recently.
ETF doesn’t always mean a safer investment
“Why investors are not convinced with Bitcoin ETFs as an investment is because they are not able to profit as much as those who buy Bitcoin directly. Bitcoin ETFs do not currently own Bitcoin itself as regulators are concerned that Bitcoin is traded on non-regulated crypto exchanges,” added Deshell.
“Instead, Bitcoin ETFs own companies and other ETFs that are related to Bitcoin or cryptocurrency in general. There is also the added risk of ETFs trading on the market, which adds to their volatility. In that case, mutual funds fare better as they are not traded directly on a stock exchange.”
Although a Bitcoin ETF isn’t a direct investment in cryptocurrency, it’s still risky due to the exposure to Bitcoin, opined Brody Dunn, an investment manager at a UAE-based asset advisory firm, who went on to explain why.
“Those that may have been waiting to invest in Bitcoin ETFs and thought that this was the thing that’s going to make it incredibly safe for them, without really doing the due diligence, that’s where the concern is,” cautioned Dunn.
Big investors may profit more from crypto ETFs
Though Dunn notes that the introduction of a Bitcoin ETF is good for the overall Bitcoin and crypto market, he warns that it may not benefit investors individually.
“An ETF is going to drive more of that institutional money in, but they’re going to make a ton of money,” he added. “It does help the market, but what about the average investor? It’s supposed to help them, but that’s not necessarily what is happening here.”
Crypto experts like Deshell, along with some others in the crypto community, agree with Dunn. Some argue that the major firms involved in a potential ETF investment, including hedge funds and providers, would benefit more than individual investors.
“Direct exposure is the best way for a new investor to get into Bitcoin,” Dunn added. “Bitcoin ETF is just a product to help hedge funds and other middlemen make more money, and newbie investors shouldn’t be buying without understanding.”
Bitcoin ETF is just a product to help hedge funds and other middlemen make more money, and newbie investors shouldn’t be buying without understanding
Bottom line: Good to buy Bitcoin ETFs now?
“If you don't want to actively manage your crypto investment, but you want a way to diversify your portfolio with a high-risk, high-reward asset, a Bitcoin ETF is a better option than directly buying Bitcoin,” said Deshell.
Among the several benefits of Bitcoin ETFs, the key perks are low cost of ownership, being able to diversify your crypto investments, while having somebody with knowledge of the market to manage them, which also enables you to save time picking crypto tokens.
“Also, owning crypto ETFs saves investors from costs like network charges and transaction fees. An ETF provider is responsible for the safety of the fund, offering a sense of security to investors. These are factors that should drive you to invest. But it isn’t always that straight-forward,” he said.
“Bitcoin ETFs are now observed to amplify volatility in prices and create risks for investors if the fund is a large share of the market. Recent trends suggest that ETFs can exacerbate price movements and create additional volatility when they have a large footprint in the underlying asset.”
Regardless, whether you invest in the Bitcoin ETF or in cryptocurrency directly, financial experts have widely recommended that you only invest what you can afford to lose.