With Bitcoin hitting all-time highs, multiple countries approving Bitcoin ETFs, and an explosion of institutional demand for cryptos, all signals indicate that Bitcoin ETFs will take off as a primary investment vehicle for many investors hoping to hop on the Bitcoin train.
However, with the recent approval of a Bitcoin ETF in the US, crypto finance experts like Jonathan Manzi call for caution.
Is the Bitcoin ETF really a viable investment?
To answer this, we must first understand what Bitcoin ETFs are and how they work.
What are Bitcoin ETFs?
The Bitcoin ETF is an investment vehicle that follows and emulates the price of Bitcoin. The extended traded fund (ETF) model can be modified to track any type of asset (or group of assets) and sell on a stock exchange. Bitcoin ETFs will bring better accessibility and exposure to Bitcoin and reduce friction for traditional investors.
How Do Bitcoin ETFs Work?
Since Bitcoin ETFs are investment vehicles that track the price of Bitcoin, investors interested in the Bitcoin market can simply purchase Bitcoin ETFs instead of buying the crypto asset directly.
Purchasing a Bitcoin ETF means you own a “stock” or “share” in Bitcoin. This approach removes the need for buying Bitcoin directly from crypto exchanges or worrying about the safety of your storage methods. The Bitcoin ETF effectively lowers the barrier for entry for investors interested in this crypto asset.
Bitcoin ETFs: Why Not Buy Bitcoin Directly?
Bitcoin minimalists have long mocked Bitcoin ETFs as a mere shadow of the real thing.
Why buy a Bitcoin ETF when you can purchase the crypto asset directly on an exchange?
Well… there are a few reasons why some investors might prefer Bitcoin ETFs over the real deal.
- Knowledge Hassle: Buying and safely storing Bitcoin requires a bit of knowledge and experience. Some investors may not be interested in this learning curve, so ETFs will naturally be a more tantalizing alternative.
- Crypto Exchange KYC: Many crypto exchanges enforce strict KYC procedures, which can be intrusive and a turn-off for investors who are not looking to be tracked by KYC laws in their jurisdiction.
- Tax Advantage: Extended traded funds are regulated securities with tax exemption benefits. This is likely going to happen with Bitcoin ETFs too. This means investors don’t have to worry about paying capital tax gains if the price of Bitcoin goes up.
Bitcoin ETF Skepticism: Jonathan Manzi
Despite the glaring advantages of a Bitcoin ETF, blockchain entrepreneur and CEO of Beyond Protocol Jonathan Manzi has advised eager investors to remain cautious.
In an interview with entrepreneur magazine, Manzi warned that as an investor, you should ideally “proceed with caution” and “monitor the early stage performance of these new ETFs, and limit your BTC investments to spot holdings for the time being.”
Manzi isn’t alone.
Other crypto finance experts share similar opinions. One of the many reasons is that Bitcoin ETFs are a fairly new investment instrument, and as such, one cannot accurately gauge their performance in the long term.
Bitcoin ETFs: The Future
The uncertainty around Bitcoin ETF is not unmerited. Bitcoin ETFs come with their own hassles. For instance, expensive EFT management fees could be problematic, ETF price inaccuracy, and the lack of true asset ownership may raise some concerns.
These problems are further compounded when considering that the Bitcoin ETF vehicle approved in the US isn’t directly tied to Bitcoin but rather is a Bitcoin Futures ETF, meaning the Bitcoin ETF is linked to the future price of Bitcoin, having only a loose correlation to its current price.
Considering these issues, the future of Bitcoin ETFs as a viable investment mechanism remains elusive and underscores why interested investors should adopt a cautious approach. In the end, the feasibility of the Bitcoin ETF will be determined by its price performance, ETF accuracy, and how regulatory bodies treat this new investment vehicle moving forward.