Bitcoin is now the largest and most well-known cryptocurrency. This cryptocurrency has a market cap of several hundred billion dollars and as a result, has massive potential for investors. However, investing in Bitcoin is slightly different than your average investment since cryptocurrencies can't be traded on a stock exchange. Instead, bitcoin must be bought on a cryptocurrency exchange unless it is purchased through an ETF. These investment vehicles have unique pros and cons that might make them an attractive option for one investor but not another. So, what do each of these investments look like in practice?
What is a Bitcoin ETF?
A bitcoin ETF is an investment vehicle that tracks the performance of the leading cryptocurrency. The ETF can be purchased or sold on a stock exchange without ever owning the underlying asset. As a result, in the 1990s the concept of an ETF took off as traders quickly saw the benefits of low fees and ease of use. Today, many new investors begin investing with an ETF since it is easy to gain the advantages of diversification with limited knowledge of the market.
However, when it comes to Bitcoin ETFs there are only recently options available to Canadian investors. So, before putting all your pool into an ETF, there are a couple of pros and cons to this investment vehicle that should be considered.
Bitcoin ETF Pro: Remove New Learnings
One of the main advantages of investing in Bitcoin ETFs is that it removes the technical issues that may require some learnings on the part of the investor. Purchasing an ETF avoids considerations such as the storage of coins, registration of wallets, compliance with safety rules and risks associated with underdeveloped cryptocurrency regulations. Instead, all the risks associated with purchasing Bitcoin are taken on by the founder of the ETF.
Additionally, investing in a Bitcoin ETF encourages the adoption of cryptocurrencies as a full-scale investment method.
Bitcoin ETF Pro: Can Be Purchased in a Registered Account
Currently, you cannot hold Bitcoin or any other digital asset in a Tax-Free Savings Account (TFSA) or any other registered account, for that matter. Unfortunately, this is problematic since cryptocurrencies are considered investments to the Canada Revenue Agency, meaning they are subject to capital gains tax. For those who are unfamiliar, this tax is 50% of the profit earned. This taxable amount can be a huge deterrent. Especially since Canadian citizens must keep a detailed record of all the bitcoin transactions that they conduct throughout the year. For those who day trade or swing trade on a regular basis this can be incredibly time-consuming.
However, blockchain or BTC ETFs might just be the way around it. Investors can trade Harvest Portfolio's Blockchain Technologies ETF and similar offerings within a registered account. Many industry analysts also suggest a bitcoin ETF should qualify in your TFSA but verification with an accountant or financial advisor is advised ahead of time. Foreign funds that track digital currencies are also an option for registered investments; however, these investments, at times may be associated with absurdly high fees or premiums.
Bitcoin ETF Pro: Less Volatility
Another benefit is the reduction of volatility that is common when purchasing bitcoin outright. While this makes for a safer investment, others consider this a negative feature since it is the volatility of the asset that makes it so attractive to new investors who want to get rich quick.
Bitcoin ETF Cons: High Fees Make Investments Costly
Bitcoin ETF's charge management fees. Each ETF is subject to a management fee, which, as the name implies, is the amount paid to the ETF fund manager and is expressed as a percentage of the fund's average assets for the year. For perspective, the typical management fee which might be anywhere from 0.7% to 1.95% which is fairly high but also expected for a passively managed fund. These fees can continue to accumulate and may end up taking a considerable chunk out of your investment. The management fee is only one of the fees that must be considered when purchasing an ETF.
Furthermore, Bitcoin ETFs may also have additional fees in the form of a tracking error. A tracking error is the difference between the returns of an index ETF and the index it tracks, which, if substantial, can result in increased costs to the investor. Other fees include the difference in the bid/ask spread and the trading expense ratio.
In some cases, a high combination of these fees can make it more advantageous to invest in Bitcoin directly. In comparison, purchasing bitcoin directly will not have the same "management fees" on a yearly basis.
Bitcoin ETF Cons: Owning Bitcoin Can Be Useful
On the other hand, bitcoin ETFs have one major downside. That is, cryptocurrencies were created to be independent of financial regulators. Therefore, this very concept is lost when control is brought back to governments which closely regulate the ETFs that are available to the public. Owning Bitcoin is also useful since it can be used as a hedge against central banks and the government in general. Therefore, only the investor has custody over their invested funds.
Bitcoin ETF Cons: ETFs Can Only Be Traded During Market Hours
Furthermore, ETFs can only be purchased or sold during market trading times. Whereas, Bitcoin can be purchased 24/7. Although this might not seem problematic, consider that if the price of bitcoin moves sharply in one directly, investors will not be able to act on the price change immediately. In some cases, waiting a few hours can result in major losses due to Bitcoin’s volatility.
Bitcoin ETFs Available to Investors In 2021
Many industry analysts have stated the theoretical benefits and drawbacks of Bitcoin ETFs since this investment vehicle hasn’t existed until now. Here are some of the recent developments in the world of Bitcoin ETFs.
North America is receiving its first bitcoin ETF from the Canadian company Purpose Investments. With regulatory approval, this institutional fund will allow users to purchase shares that are directly tied to Bitcoin, the first in the world of its kind. In fact, each dollar used to purchase the fund will be used to purchase one dollar’s worth of bitcoin. This is a unique feature, as other investment vehicles will often track futures which may run the risk of underperforming bitcoin over time.
Accelerate Financial Technologies has also received approval to release the Accelerate Bitcoin ETF (ABTC) on February 2. The proposed ETF is offered with a management fee of 0.70% and can be purchased in denominations of the US or Canadian dollar.
Back in January, the Canadian investment manager Arxnovum also filed for a Bitcoin ETF with the Ontario Securities Commission. Holders of the ETF will gain exposure to the US dollar price of bitcoin as the ETF invests in bitcoin and other derivatives that have exposure to bitcoin. Management fees for this ETF are set at 1.75%.
Horizons ETF Corporation, a leading provider of Benchmark, Active, and BetaPro ETFs, has also registered the BetaPro Bitcoin ETF (HBIT) and the BetaPro Inverse Bitcoin ETF (HIBT), also referred to as the Single Inverse ETF. Shares of either ETF will be available for purchase in Canadian dollars. Both track Bitcoin futures and have a management rate of 1.35%.
Evolve Funds Bitcoin ETF invests directly in the digital currency Bitcoin. Evolve Funds holdings are invested in Bitcoin that has been purchased through Gemini NuSTAR LLC and other reputable trading platforms and has an associated management fee of 1.75%.
Finally, 3iQ will also provide holdings that are directly backed by bitcoin purchased on reputable exchanges and over-the-counter trading partners. Management fees for the Bitcoin ETF will be 1.75%.
With many investment opportunities on the horizon, the notion of a Bitcoin ETF not existing will soon be a distant memory. However, it isn't the only investment option.
What is Spot BTC?
Bitcoin spot trading is the most basic type of cryptocurrency investment you can make. In this type of investment, investors directly own, buy, sell and hold Bitcoin in the hopes that it will increase in value.
Pros: You Can Claim Capital Losses
While bitcoin has seen an uptick lately, the asset itself is still volatile. As CRA tax laws indicate, you can claim capital losses if the asset is not held in a registered account. These capital losses can reduce your taxable income and result in savings in some cases. Luckily for investors, Bitcoin cannot be stored in a registered account.
Pros: You Can Trade Bitcoin for Other Cryptocurrencies
Bitcoin is only one of thousands of different cryptocurrencies, each offering a unique benefit to the market. Bitcoin can be traded on an exchange for any of these other currencies. These cryptocurrencies are not available on stock exchanges and can therefore only be traded on a cryptocurrency exchange that offers these pairings, which commonly include Bitcoin.
Pros: There is Huge Profit Potential
Bitcoin continues to skyrocket in price. This can be attributed to its limited supply of 21 million coins and growing demand from retail investors and businesses alike. JP Morgan suggests that in the long term, Bitcoin is likely to reach 146,000 USD.
Cons: Hackers or Theft
Depending on the exchange used, hacking and theft are possible. Although many agree that it is beneficial that transactions are secure and can't be reversed, they also cannot be recovered if they are stolen. That said, buyer protection and other reputation management tools are currently being developed.
Cons: Cryptocurrencies are Unregulated
Unfortunately, cryptocurrencies are still unregulated by the government. This means that in the event that something goes wrong with your investment, investors will find themselves unprotected legally. Regulations are also in question often by the government, meaning constant review and consideration of rules around bitcoin usage and associated tax implications should continue to be top of mind.
While this might scare some, keep in mind the added bonus is that Bitcoin is the one asset that cannot be seized by force if government regulations are followed. Transactions are also not censored and cannot be revoked.
Cons: Loss of a Private Key Means Loss of Funds
Purchasing Bitcoin is different from ETF investments in another way as well. That is, assets are managed through a private key, a large randomly generated number that acts as a password to the user's funds and also is the sole determining factor in the ownership of a cryptocurrency asset. Unfortunately, once a private key is lost, the coins in the wallet cannot be recovered.
Cons: External Charting Tools May Be An Added Expense
While some of the more advanced exchanges come with charting tools, it is not uncommon for a cryptocurrency exchange to not include the advanced tools needed to make investment decisions. In these cases, investors may be required to purchase a different analysis platform to get access to trading systems, order flow and other pro-quality indicators.
Purchasing on an Exchange
The Canadian cryptocurrency exchange, Bitbuy, offers users a secure way to invest directly in BTC. To begin purchasing, users simply need to create an account using their email, phone number and password. In accordance with Canadian laws, users will also be required to verify their identity in compliance with Know Your Customer (KYC) regulations. Funds can then be added through Interac eTransfer or Bank Wire. Once funds have been added, users can select Bitcoin (or any other cryptocurrency they would like to purchase).
While small amounts of Bitcoin can be stored directly on the platform, it is important to note that for long-term holds of the asset; it is advisable to use an offline storage method for added security.
Other Options for Investing in Bitcoin
Sitting between the two investments of a Bitcoin ETF and buying bitcoin directly is a Bitcoin Fund. One of the most common is 3iQ's "The Bitcoin Fund," QBTC, which is listed on the Toronto Stock Exchange. The fund was created when a group of people purchased a lot of Bitcoin through 3iQ. The Bitcoin that was purchased was then listed on the Toronto Stock Exchange, which investors could purchase with confidence that the price would roughly track the price of Bitcoin. QBTC, also differs from an ETF since there are a predefined amount of shares, whereas an ETF can continually issue new shares.
Bitcoin ETFs are also comparatively passive and should charge lower fees than a Bitcoin Fund (The Bitcoin Fund charges 1.95%, which is believed to be on the higher side).
In the end, it all comes down to the trader's preferences when it comes to the question of Bitcoin ETFs vs. Spot BTC. Each type of trading can be advantageous in some cases, but it is up to the decision of the investor to decide what makes the most sense for their portfolio and investment goals.
Jordan Anderson is COO of Bitbuy, currently oversees OTC sales and customer experience. He has worked with Silicon Valley's largest Tech companies.
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