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What Is a Bitcoin ETF?
Table of Contents
Key Highlights
- An exchange-traded fund tracks a single or multiple underlying asset and is traded on a stock exchange.
- A Bitcoin ETF tracks the bitcoin price, allowing investors to gain exposure to bitcoin without purchasing or storing bitcoin.
- Unlike investing in bitcoin directly, investing in a Bitcoin ETF limits trading hours, increases risk exposure, and can trade at a premium or discount.
What Is an ETF?
An Exchange-Traded Fund (ETF) is a type of security that can be traded on a stock exchange. ETFs typically track multiple underlying assets, such as an index fund, stock, commodity, bond, or other asset, but can be structured to track anything from a single commodity to a broad collection of securities. ETFs can track assets across a variety of industries, or focus on an individual industry or commodity. Because ETFs can track a theoretically limitless variety of assets across a diverse range of industries, they can offer investors portfolio diversification without direct asset ownership.
Unlike mutual funds, which are not traded on an exchange and trade only once per day, ETFs trade on an exchange and their price can fluctuate throughout the day as shares are bought and sold. As a result, exchange-traded funds are typically more liquid than mutual funds. ETFs can be globally traded or restricted to particular markets.
Types of ETFs
There are various types of ETFs available to investors. All of the different types can be used for similar purposes, such as income generation, speculation, and to hedge risk. Bond ETFs include government bonds, corporate bonds, and municipal bonds. Industry ETFs track a specific industry, such as technology, banking, or the oil sector. Commodity ETFs invest in hard commodities, such as metals, or soft commodities like crops. Currency ETFs invest in foreign currencies. Inverse ETFs try to earn gains by shorting specific stocks.
What Is a Bitcoin ETF?
A Bitcoin ETF is an exchange-traded fund that tracks the price of bitcoin. Investing in a Bitcoin ETF allows investors to gain exposure to the price of bitcoin without having to invest in the currency directly. By not owning bitcoin, investors can avoid having to manage or store any bitcoin. Bitcoin ETFs can be cash-settled or physically-settled, meaning investors can receive fiat currency or bitcoin, respectively.
Tax Implications of Bitcoin ETFs
Trading bitcoin versus trading a bitcoin ETF generates negligible differences in tax implications. Both direct ownership of bitcoin and ownership of a bitcoin ETF generate capital gains and losses taxes respectively, based on your specific trading activity.
➤ Learn more about Bitcoin Tax Accounting
Bitcoin ETF Regulation
Exchange-traded funds are regulated financial products. At the time of writing, a Bitcoin ETF has not been approved by the United States Securities and Exchange Commission (SEC). Dozens of companies have filed for approval to offer a Bitcoin ETF to U.S. investors, but preconceived notions about the use of bitcoin for fraud and manipulation have made regulators hesitant to approve a Bitcoin ETF on the grounds of the potential risk it posed to U.S. consumers. Changing regulatory attitudes have increased the optimism surrounding a U.S. bitcoin ETF offering in the near future.
Canada approved the world’s first two bitcoin ETFs in February 2020 and saw record first day trading volume after launch. In March 2020, the Brazil Securities and Exchange commission became the second country in the Americas to approve a Bitcoin ETF.
Drawbacks of Investing in a Bitcoin ETF
Actively managed ETFs incur management fees that are often taken directly from investors balances. Investing in a Bitcoin ETF is not equivalent to buying bitcoin; investors do not own any bitcoin themselves after purchasing shares of a Bitcoin ETF.
A Bitcoin ETF tracks the price of bitcoin, but does so imperfectly. Fund management, market conditions, and other external influences can impact the price of the ETF and create a premium or discount against the native asset value. The difference generates additional volatility and risk compared to direct bitcoin ownership. Finally, ETFs can only be bought and sold during market hours, while bitcoin can be bought and sold at any time.
Notice: River Financial does not provide investment, financial, tax, or legal advice. The information provided is general and illustrative in nature and therefore is not intended to provide, and should not be relied on for, tax advice. We encourage you to consult the appropriate tax professional to understand your personal tax circumstances.
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Real Bitcoin vs. Bitcoin Derivatives
As Bitcoin markets mature, financial institutions are creating new products that allow investors to gain exposure to the market. These derivative products have distinct features that potential investors must to be aware of.
