ProShares Bitcoin Strategy ETF (BITO): 3 Things Singaporean Investors Should Know About The First Bitcoin ETF

On 19 October 2021, the first bitcoin ETF – ProShares Bitcoin Strategy ETF (BITO) made its market debut. This marks a new milestone for cryptocurrencies as this is the first ETF that lets investors buy bitcoin without using a cryptocurrency exchange. Prior to ProShares Bitcoin Strategy ETF (BITO), retail investors who were interested in cryptocurrencies could only invest through other means, such as through stocks or ETFs that had significant bitcoin exposure like Coinbase (COIN), ARK Next Generation Internet ETF (ARKW) or Grayscale Bitcoin Trust (GBTC).

The ProShares Bitcoin Strategy ETF (BITO) is listed on the NYSE Acra, one of the US exchanges and its listing marked a step towards gaining mainstream acceptance. This listing also generated a wave of confidence amongst crypto investors that caused a surge in bitcoin price on the day after the launch, reaching a high of US$66,000 on 20 October 2021.

However, before we get swept up in the hype, here are 3 things investors should know about the ProShares Bitcoin Strategy ETF (BITO).

Read Also: Understanding Cryptocurrency As A Singaporean Investor

Buying BITO Doesn’t Mean That You Own Bitcoin

While the ProShares Bitcoin Strategy ETF (BITO) is the first bitcoin-linked ETF, it doesn’t actually invest directly in bitcoin. Instead, it aims to track the CF Bitcoin-Dollar US Settlement Price Index, which reflects the spot price of bitcoin. Instead of buying and owning bitcoin, the BTIO is actively managed and invests in bitcoin futures contracts. Futures are contracts in which a buyer commits to purchase a specified quantity of assets, or a seller to sell those assets at a pre-determined future date and price.

As the BITO invests in bitcoin futures contracts, this means that the prices can differ from spot or the actual price of bitcoin. This is clearly indicated on ProShares’s website: “the price and performance of bitcoin futures should be expected to differ from the current “spot” price of bitcoin”. As futures contracts are leveraged and typically used for more speculative purposes, there may also be higher volatility in futures prices compared to spot prices

This is unlike the Grayscale Bitcoin Trust (GBTC) which is a mutual fund available on the market that invests in bitcoin. GBTC actually buys and holds underlying bitcoin that is held in offline or “cold” storage.

Read Also: Coinbase: 5 Things You Need To Know About This Cryptocurrency Exchange Platform Before Investing In Its Stock

You Have To Pay Fees

Unlike owning and holding bitcoin directly, holding BITO incurs annual fees. This is because the ETF charges an annual management fee of 0.95%. Whereas if you actually buy and hold Bitcoin in a digital wallet, there is no holding fee, but you would incur a transaction fee for moving your bitcoin in and out of the wallet.

This means that if you plan to HODL bitcoin for the long term, holding actual bitcoin may be a better option cos there’s a fee for holding your own bitcoin. By holding BITO, you would be incurring a 0.95% annual fee every year. Still, it may be a better option than GBTC which charges a 2% annual fee.

Depending on the bitcoin network, the transactional cost of buying and selling of bitcoin may be as high as the equivalent of over US$60 – bitcoin transaction fees are charged in bitcoin and are determined by network availability. During times of network congestion, buying and selling BITO may be cheaper than buying and selling bitcoin. This is because the fees charged by most stock brokerages are quite low (or free in some cases).

Read Also: Binance.com On The Investor Alert List: What Exactly Is Happening And What Are The MAS Regulations Around Cryptocurrency Exchanges

This Is Not A Diversified ETF

Another thing to note about BITO is that it is fully exposed to bitcoin alone. Most investors are familiar with ETFs because of index ETFs that provide portfolio diversification. For investors who are waiting for a cryptocurrency index fund that tracks a diversity of cryptocurrencies, BITO will not be suitable as it only tracks bitcoin.

This means that if you wish to gain exposure to the overall cryptocurrency ecosystem, BITO would not be sufficient. Even though bitcoin is currently the dominant cryptocurrency with about 45% of the total market capitalisation, investing in BITO alone would mean that you would not have exposure to the many altcoins which could catch up or overtake bitcoin in the future.

Read Also: 5 Digital Currencies You Can Invest In Besides Bitcoin (And Their Performance In 2020)

For investors who are interested in bitcoin, the ProShares Bitcoin Strategy ETF (BITO) could be an opportunity to get into bitcoin using their existing investment platforms and brokerages, instead of using cryptocurrency exchanges.

As it is listed on the NYSE Arca, Singapore investors who have access to US exchanges through existing brokerages would be able to buy and sell the BITO. However, before investing in BITO, do take note of the risks of investing in cryptocurrencies and these risks may be amplified because the underlying instruments are futures contracts and there is no diversification.

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