Sun, April 21, 2024

Bitcoin ETF essentials: should you trade with them?

Bitcoin ETF essentials: should you trade with them?

Bitcoin ETFs are heading the recent news. What are they? Traders are wondering what ETFs are, how can they trade in them, and today, we will answer these major questions!

What Is a Crypto ETF?

Let’s first discuss the idea of ETF. An exchange-traded fund (ETF) is a fund-based financial product whose stocks are listed on mainstream stock exchanges together with traditional stocks. This provides them with more liquidity than mutual funds. You can buy and sell ETF stocks as easily as stocks. Mutual funds usually have strict trading rules, which limits their liquidity to a certain extent.

As a fund-based product, ETF is composed of a series of assets. The fund will invest in a portfolio of securities selected around a specific theme. For example, you might create a technology ETF, in which case the fund will consist of assets in and around a high-tech company. Or, you might own an S&P 500 index fund that holds multiple assets designed to track the S&P 500 index.

The return of any given ETF is based on the overall return of its various assets. This return is usually more stable than investing in a single asset. If a stock rises, you may lose the out-of-control gains you might get, but you also reduce the risk of a substantial depreciation of the single stock.

A cryptocurrency ETF is a fund that obtains value from the crypto market

What does it mean? First, it means that the fund may invest exclusively in cryptocurrencies. It will be entirely composed of products such as Bitcoin and Ethereum tokens, so the fund’s value will reflect the value of the cryptocurrency it holds.

Second, The fund may invest in cryptocurrencies as an asset class. This means that the fund may invest directly in cryptocurrencies, but it will also invest in companies surrounding the crypto market. For example, it may hold stocks in cryptocurrency market companies or companies that manufacture crypto wallets and other trading tools.

Or the fund may invest in futures and options contracts built around cryptocurrencies. The overall goal will be to reflect the value of cryptocurrency as an asset while avoiding some of the risks involved in purchasing specific products.

How to trade bitcoin ETFs? Step by Step

On October 19th, ProShares launched the Bitcoin Exchange Traded Fund, the first ETF in the United States linked to a $1.1 trillion cryptocurrency. The fund is traded under the ticker symbol BITO, providing investors with Bitcoin exposure without purchasing highly volatile digital currencies. ProShares ETF does not imitate the price of bitcoin but tracks the price of bitcoin futures-a contract between two parties to buy and sell cryptocurrencies at an agreed price.

Holding BITO in your investment portfolio will be very expensive

With an expense ratio of 0.95%, investors will pay ProShares $95 per year for every $10,000 they own in the fund. This is much higher than ordinary mutual funds or ETFs. In 2020, the asset-weighted average expense ratio of all open-end mutual funds and ETFs in the United States was 0.41%.

Like any ETF, you can buy BITO stock through an online broker. If you do not have a brokerage account, you need to set up one on Robinhood, Fidelity, or E*TRADE.

After you have an account, determine how many shares of BITO you want to buy and at what price you are willing to buy. The BITO Fund’s stock traded at $40.88 when it debuted on October 19th, while Bitcoin soared by more than 4% later that day to more than $63,800.

A market order allows you to buy fund shares at the current market price. On the other hand, limit orders will enable you to set the highest price you are willing to pay for the stock.

But you don’t have to go alone. Financial advisors can execute transactions on your behalf and provide expert advice, not just buying and selling BITO stock.

How stabilized is Bitcoin ETF?

As we all know, cryptocurrency is decentralized. There is no central trading agency. Compared with the market on a single main trading floor, this will lead to more instability and price fluctuations. The Bitcoin ETF has stabilized a bit. The ETF itself still participates in the decentralized crypto market, but individual investors have a central agency to cooperate.

This may help increase market liquidity and make it easier for individual investors to enter the cryptocurrency space. In particular, it allows people to invest in cryptocurrencies through their ordinary investment portfolios instead of the current system requiring investors to learn a new trading language.

The ProShares Fund may be the first ETF, linked to Bitcoin, but it may not last. Grayscale Investments and the New York Stock Exchange are seeking to convert the US$40 billion Grayscale Bitcoin Trust into an ETF, but first need to obtain federal government approval. If they gain the approval, investors will use ETFs that invest directly in Bitcoin, not just futures contracts.


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