Bitcoin Futures ETF Can Be An Expensive Way To Gain Long-Term Crypto Exposure
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Crypto enthusiasts had reason to rejoice last week as digital currencies hit a new milestone: America’s first bitcoin exchange-traded futures fund.
Investors rushed. The ProShares Bitcoin Strategy (BITO) ETF had the second largest trading start for any ETF on record when it launched on October 19. Its share price jumped 4%. A similar fund, the Valkyrie Bitcoin Strategy ETF (BTF), started on Friday.
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However, cost-conscious investors who wish to gain exposure to bitcoin and other cryptocurrencies in their wallets may be better off buying them directly rather than through a futures ETF, according to some financial advisers.
This is mostly the case for buy-and-hold investors who would save money in the long run, the advisers said.
“They are always better off buying bitcoin directly,” said Ivory Johnson, certified financial planner and founder of Washington, DC-based Delancey Wealth Management.
The ProShares and Valkyrie ETFs, for example, each have an expense ratio of 0.95%. These are the fund fees of the asset manager; for every $ 10,000 someone invests, managers keep $ 95 per year.
It may not seem like much, but the costs can add up over decades of savings. The investor loses on fees, gains on those fees and compound interest.
here is a Example from the Securities and Exchange Commission: an investor who saves $ 100,000, earns 4% per annum, and pays an annual fee of 0.25% would have $ 30,000 more after two decades than the same person who pays a 1% fee (which roughly matches the cost of the bitcoin futures ETF).
“If it’s been in your portfolio for one, five, 10 or more years, 1% is a big fee to pay for a mutual fund or ETF,” said Charlie fitzgerald iii, CFP, Principal Member and Founder of Moisand Fitzgerald Tamayo, based in Orlando, Florida.
Of course, buying bitcoin or other cryptocurrencies directly (not through an ETF) is often not free. Crypto platforms and exchanges like Coinbase typically charge a one-time fee (but not always) which varies by provider. But it would generally be much cheaper for investors to buy and hold compared to the fund’s annual fee, Johnson said.
And the costs aren’t the only consideration. Investors may feel more secure in obtaining crypto access through a professionally managed ETF if they are concerned about hackers or the loss of passwords or private keys needed to access funds.
Short-term investors might also not be bothered by a 0.95% fee if they plan to sell the ETF in a few days or weeks. (The charge is 26 cents per day on a $ 10,000 investment.)
“The fees are irrelevant if you keep them for two weeks and then sell them,” Fitzgerald said.
In this case, a broker’s one-time trading fee is likely more substantial, he said.
Overall, there has been a general downward trend in investment costs. The average expense ratio of U.S. mutual funds and ETFs was 0.41% in 2020, less than half of the 0.93% in 2000, according to Morningstar. (These costs are asset-weighted, which means they represent the relative popularity of the fund.)
Another important distinction: bitcoin futures ETFs do not directly own bitcoin; they buy “futures” contracts, which are agreements to buy or sell the asset later for an agreed price. These funds will generally follow bitcoin prices, Fitzgerald said.
(It’s a similar concept to oil and gold futures, for example. These investors don’t own physical gold or barrels of oil.)
However, investors could neglect to pay a 0.95% fee for a fund that may or may not keep up with the price of bitcoin, Johnson said.