PARIS, FRANCE – DECEMBER 22: In this photo illustration, a visual representation of the digital … [+]
In past weeks, three new Bitcoin Exchanged Traded Funds (ETFs) have launched. All follow a similar model in tracking Bitcoin futures, rather than tracking the spot price of Bitcoin. Assuming you want Bitcoin exposure in your portfolio, which ETF is best?
First Mover
Often the first ETF in a category can gain the most assets. We’ve seen that with Bitcoin ETFs, the ProShares Bitcoin Strategy ETF (BITO), which was the first to launch now holds over a billion in assets. That’s a very fast ramp up for a new fund.
However, we now also have the VanEck Bitcoin Strategy ETF (XBTF) and the Valkyrie Bitcoin Strategy ETF (BTF). At a high level these are all very similar, holding Bitcoin futures as a way to track the Bitcoin price.
Conceptually, there are other approaches out there, such as tracking the Bitcoin spot price. However, the SEC has not approved those implementations in a U.S. ETF structure so far, so are current ETFs track futures.
If you want to track the Bitcoin price, the Grayscale Bitcoin Trust (GBTC) is one investment option. However, it charges a relatively high 2% annual fee and is not structured as an ETF currently. Also, since February of this year it has generally been trading at a discount to the value of its Bitcoin holdings.
Lowest Cost
Given that the investment strategies of the three Bitcoin ETFs are similar performance may be too, so going with the least expensive ETF can be a sound approach. In this case that’s the VanEck Bitcoing Strategy ETF, which charges 0.65% a year currently. That means you’ll pay around $65 each year for every $10,000 you invest.
Fees on the ProShares and Valkyrie’s offering are currently higher at 0.95%. The expense ratio is likely your main cost if you’re a long-term holder of the ETF. However, if you trade very frequently, then the ProShares offering may be the best choice because its currently larger size may lead to improved liquidity and lower bid/ask spreads. The three ETFs also have slightly different tax structures too, which may have implications for long-term holders.
Further Changes
We are likely still in the early innings of cryptocurrency funds. An ETF that tracks spot Bitcoin rather than the futures market is likely to receive approval at some point in the coming years. Though there are pros and cons to tracking spot prices rather than futures. A fund that tracks spot Bitcoin isn’t necessarily better.
In addition, an ETF that combines various cryptocurrency assets and hence offers broader diversification may also be launched at some point. However, for now with three ETFs following broadly similar Bitcoin strategies, owning the lowest fee option from VanEck may make sense for now for many investors when returns across all three ETF may be similar.
That said, innovation is moving quite fast and more innovative and lower costs cryptocurrency ETFs may be coming relatively soon. So today’s analysis on the most appropriate ETF may soon be outdated. Even so the general principle of picking lower cost ETFs when investment strategies are similar, may help your long-term returns.
