“1993 is remembered for the first equity ETF, 2002 for the first bond ETF, and 2004 for the first gold ETF.
Despite the potential shortcomings of futures-based bitcoin ETFs, let’s start with an undeniable fact: whether or not you believe bitcoin or bitcoin futures should be wrapped in an ETF, there is a segment of investors who want this exposure.
Go to Coinbase or CashApp, setup an account in a few minutes, and start buying.
When you purchase bitcoin at Coinbase or CashApp, they manage the private keys – not investors.
Yes, you can move bitcoin off-exchange, but how many people actually do that? Talk to most bitcoin owners and they’ll tell you they own bitcoin for the price exposure – they want to make money! Coinbase, CashApp, and others are centralized exchanges.
There are more Coinbase accounts than Schwab accounts, Coinbase is currently Apple’s #1 downloaded app, and a bitcoin futures ETF just smashed a 17-year-old ETF record.
They value the convenience of logging-in to Charles Schwab, for example, and viewing their entire portfolio.
Can you fault some investors for being a bit skittish? There’s also a subset of investors scared to go through the “know your customer” process at crypto exchanges they don’t know or trust.
Nobody knows where the price of bitcoin will go from here, but it would have been a massive advantage if investors had exposure in their IRAs and 401ks over the past decade.
For some investors, the only way to get them interested and familiar with crypto is through ETFs.
While some of these reasons may not apply to you, they do apply to a subset of investors.
The investment thesis for bitcoin is beyond the scope of this piece, but I will highlight that allocating a small portion of a well-diversified portfolio to bitcoin would have improved an investor’s risk-adjusted returns.
All of this brings us to costs, which always matter in investing.
It’s the opening salvo in what I expect will be a brutal bitcoin ETF fee war.
That said, fees are fees and bitcoin funds and ETFs definitely have them.
“Coinbase may charge fees when you buy, sell, or convert cryptocurrencies.
When you buy or sell bitcoin using Cash App, the price is derived from the quoted mid-market price, inclusive of a margin, or spread.
This represents the Gemini market price of $4000 USD, plus the 0.50% Convenience Fee that she will receive for her buy Web Order.
While Robinhood Crypto doesn’t explicitly charge transaction fees, they sell order flow to market makers which could potentially result in subpar trade execution for investors.
Now, there is an important distinction between bitcoin funds and purchasing bitcoin via exchanges: bitcoin funds charge annually.
One last point on fees: obviously, none of the above includes other third-party intermediaries – for example, financial advisors or services helping provide exposure to bitcoin.
The SEC doesn’t believe they can properly surveil crypto exchanges in an effort to spot fraud and manipulation.
However, the SEC is comfortable with the CME bitcoin futures market, which is regulated by the Commodity Futures Trading Commission and can be surveilled.
In order for an ETF to maintain exposure to the price of bitcoin, they must sell their bitcoin futures contracts prior to expiration and “roll” the proceeds into new contracts.
Prior to that date, the ETF must sell those holdings and buy December futures to maintain bitcoin price exposure.
Now, this can also work in reverse, if the futures curve is in a state of “backwardation” – where near-dated contracts are pricier than later dated ones.
If these ETFs had been available a year ago, investors could have scooped-up the nearly 275% gain shown above.
However, investors would have also left some money on the table due to the negative impact of ETFs rolling futures contracts.
Until the SEC approves a physical bitcoin ETF, investors are left to decide whether to gain bitcoin price exposure using inferior products or go “direct” to crypto exchanges, which may present some inconveniences.
My expectation is that physical bitcoin ETFs will ultimately be delivered at a similar fund fee to physical gold ETFs, the cheapest of which is now 0.15%.
In the meantime, what’s getting lost in this entire discussion is _*the importance of the bridge*_.
If crypto’s goal is to go mainstream, then bitcoin ETFs help with that.