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The First Bitcoin ETF – What You Need to Know

The US cryptocurrency industry has been trying to launch a bitcoin ETF for almost a decade in order to facilitate mass investment in the cryptocurrency. Finally, yesterday, the United States’ first bitcoin ($BTC) ETF, the ProShares Bitcoin Strategy ETF (BITO), began trading, marking a major milestone for bitcoin and the cryptocurrency industry broadly.

Now that the US bitcoin ETF is here what do you need to know?

The most important thing to know about BITO is that it is an ETF based on bitcoin futures – not real bitcoin. The BITO info page describes the ETF as “offering investors an opportunity to gain exposure to bitcoin returns in a convenient, liquid and transparent way” and notes that 1) “The fund does not invest directly in bitcoin” and 2) ‘The price and performance of bitcoin futures should be expected to differ from the current “spot” price of bitcoin.’

In plain English it means when you invest in BITO you are not directly investing in bitcoin – instead you are investing in a complicated derivative product whose price is based on bitcoin but may differ. BITO also has a 0.95% expense ratio which means annually the ETF managers are taking 0.95% of the fund’s value in fees.

Three specific things to consider when investing in a commodity (bitcoin is a commodity) futures ETF like BITO are:

1) contango

2) backwardation

3) roll costs (these are in addition to the 0.95% expense ratio)

These are complicated subjects you can read more about in Fidelity’s “Commodity ETFs: A guide to contango and backwardation” but in short it means the ETF has extra costs and risks compared to real bitcoin because it uses futures. Specifically, for example, the BITO prospectus states “Bitcoin futures have historically experienced extended periods of contango. Contango in the bitcoin futures market may have a significant adverse impact on the performance of the Fund and may cause bitcoin futures to underperform spot bitcoin” (emphasis added).

BITO is an option for people and institutions that cannot directly invest in bitcoin to get exposure and it will thus greatly expand the number of bitcoin investors and grow the cryptocurrency industry. However, if you have the ability to directly invest in real bitcoin, you may want to consider it to avoid the extra futures ETF costs and risks.

The good news is that if you are an approved Passfolio user you can easily invest directly in bitcoin through Passfolio Financial! Just open the app and search for bitcoin. Passfolio makes real bitcoin investing fast, easy, and secure so you can own the real coin.

Investing involves risk, including the possible loss of principal. Bitcoin and bitcoin futures are a relatively new asset class and the market for bitcoin is subject to rapid changes and uncertainty. Bitcoin and bitcoin futures are subject to unique and substantial risks, including significant price volatility and lack of liquidity. The value of an investment in the ETF could decline significantly and without warning, including to zero. You should be prepared to lose your entire investment.

As with all your investments, you must make your own determination whether an investment is appropriate for you. Passfolio Securities is not recommending or endorsing this security by making it available to customers. You should conduct research and perform a thorough investigation as to the characteristics of any securities you intend to purchase.

Investors should consider the investment objectives, risks, and charges and expenses of an Exchange Traded Fund (“ETF”) carefully before investing. Before investing in any ETF, you should consider its investment objective, risks, charges and expenses. Contact us at support@passfolio.com for a prospectus containing this information. Read it carefully.

Currency and cryptocurrency exchange services provided by Passfolio Financial LLC (“Passfolio Crypto”), a US Money Services Business registered with FinCEN.