bitcoin ETFs are not the way to own cryptocurrency

bitcoin exchanged traded funds have been increasingly coming to the market, promising liquidity and marketability to new cryptocurrency investors. bitcoin maximalists might initially welcome increased access to the cryptosphere through such mechanisms, however for both new and existing investors they are an inferior way to gain exposure to bitcoin.  

bitcoin’s mission statement is to be the world’s decentralised digital currency, enabling peer to peer payments. The bitcoin white abstract’s first sentence explicitly mentions avoiding financial institutions.  

By owning bitcoin through an ETF you are layering on multiple financial institutions, centralising a decentralised asset. Proshares the ETF provider is involved, there is a centralised exchange alongside your share trading platform. Each provider is creating interdependencies and counterparty risk. If you believe in the long-term utility of bitcoin as either a store of wealth or indeed it’s intended purpose (payments) then owning it via an ETF is at odds with the modus operandi.  

Proshares charges a baseline management fee of 0.95% and Purpose Investments charge a 1%. Standard ETFs (iShares IVV 0.03%) charge much lower amounts, however higher fees are not unjustified. 

There will undoubtedly be higher costs associated with running a bitcoin fund, compared with the standard US S&P 500; from both a regulatory and operational perspective. Additionally, standard ETFs operate in a competitive market, whereas bitcoin ETFs are nascent and so providers have a period where they could theoretically charge more for a novel product. 

You could alternatively purchase bitcoin via Coinbase or many other crypto-dedicated exchanges and then not incur recurring management fees. 

Some bitcoin ETFs are asset-backed by underlying holdings in bitcoin. Purpose investments, in Canada, launched the world’s inaugural physically settled ETF. However ProShares another large fund, which is regulated by the SEC, prohibits ETFs that are asset backed. Instead Proshares BITO is a synthetic exposure to bitcoin via futures contracts. 

Synthetic means artificial. Futures contracts are ways for you to bet on the financial outcome of an asset. You could buy a futures contract on gold and make money if the price goes up, and vice versa. 

Synthetic ETFs are useful for investors to speculate short-term and can provide liquidity, however long-term holders of these funds tend to underperform as these contracts need to be rolled over. Rolling over, requires settling existing contracts and purchasing new ones and doing so incurs costs. Over time the price performance of the underlying asset and the fund diverge, to the fund’s detriment. It is subtle and a few % but that compounds over time dramatically. 

Additionally, the price of the futures contract can vary depending on volatility within the market. As bitcoin is a highly volatile asset, which recently has positively correlated with equities very strongly, the price of these contracts becomes more expensive hampering returns when compared to holding the underling coins themselves. 

For bitcoin investors, they don’t have control over the asset here and cannot manage their position. For large institutional investors cold storage is likely the ideal path, as it removes the risk of your wallet getting hacked – when you hold large sums of bitcoin you worry about it more than Joe Blow. Purpose is adding value by handling the cold storage and will be doing so more professionally than most. Many bitcoin investors enjoy yield enhancing their bitcoin holdings via staking, or even contributing bitcoin into DeFi. By not holding the asset yourself you don’t have the option; it’s decided for you. 

The one bright spot for bitcoin ETFs is the tax advantaged nature they could provide. Many governments around the world provide tax subsidised vehicles individuals can use to grow their retirement savings. These structures don’t exist for pure cryptocurrency accounts today. However, as these bitcoin ETFs are traded like shares, they may qualify for whatever favourable tax treatment is afforded to shares, depending on your jurisdiction. 

Buying into a bitcoin ETF is a well-crafted financial piece of irony, centralising the world’s premier decentralised asset.