Bitcoin ETFs: What You Should Know

By Hightower Great Lakes on June 26, 2024

Earlier this year, the U.S. Security and Exchange Commission (SEC) approved Bitcoin ETFs after resisting action for over a decade. Before the January approval, you could only invest in ETFs that that traded Bitcoin futures.

This has dramatically changed the investment landscape with billions of dollars changing hands the first week of trading alone.¹ Many investors that wanted part of the action on cryptocurrency but were uneasy about the process of buying and storing the coins are now able to gain exposure to the market much more easily.

What is a Bitcoin ETF?

An Exchange Traded Fund is a type of security that tracks the underlying performance of a collection of assets or commodities. A spot ETF allows for shares of the fund to be created or redeemed based on market demand.

Therefore, a spot Bitcoin ETF allows investors to gain exposure to the current price of Bitcoin with having to hold the asset itself, which registered custodians manage.¹

Should You Invest in a Bitcoin ETF?

Choosing to invest in a particular investment product is a personal decision that ideally would be made after a consultation with your trusted financial advisor. Basing investment decisions on outside factors like the choices of friends or family, or from what you hear about online, is generally not advised.

Everyone’s financial picture is different, and choosing a new investment vehicle, especially one that is known to be as volatile as cryptocurrency, should be made only if it makes sense for your personal situation.

Speaking with your financial advisor about your portfolio and retirement timeline can be helpful for determining if this is the right financial move for your family. Your financial advisor can explain your options by going through your risk tolerance and portfolio exposure. They can also help walk you through the different Bitcoin ETF options on the market so you can make an informed decision.

Compliance with the SEC

The SEC outlined provided an outline of how sponsors of bitcoin ETPs will be regulated.

First, they will be required to provide full, fair, and truthful disclosure about the products. As stated by the SEC, investors in any bitcoin ETP (exchanged-traded product) that is listed and traded will benefit from the disclosure included in public registration statements and required periodic filings.³

While the SEC noted that these disclosures are required, the agency also stated that their approval does not mean that they endorse the disclosed ETP arrangements, such as custody arrangements. This is likely why they were reluctant to take action prior to their January reversal.

Second, these products will be listed and traded on registered national securities exchanges. Such regulated exchanges are required to have rules designed to prevent fraud and manipulation, and the SEC will monitor them closely to ensure that they are enforcing those rules.

Furthermore, the SEC has stated they will fully investigate any fraud or manipulation in the securities markets, including schemes that use social media platforms. Such regulated exchanges also have rules designed to address certain conflicts of interest as well as to protect investors and the public interest.³

How to Invest

You can invest in a Bitcoin ETF the same way you would for any other ETF.  This includes through online brokerages like Fidelity and Charles Schwab, robo-advisor platforms or via your financial advisor. You can also choose to include Bitcoin ETFs in many retirement accounts as well in accounts that include Bitcoin IRAs, traditional IRAs, Roth IRA accounts and solo 401(k) plans.

However, keep in mind that not all brokerages offer Bitcoin ETFs. Vanguard’s brokerage arm, for example, has noted that they will not offer trading in ETFs that invest directly in Bitcoin.²

U.S. regulators have approved 11 ETFs. Many brokerages give you at least two to three options, with different fees depending on which one you choose.  

We recommend speaking with your financial advisor first if you’re interested in adding Bitcoin ETFs to your investment portfolio. Your advisor will be able to recommend certain products and invest on your behalf to make the process easier.

Is it Safe to Invest in a Bitcoin ETF?

The cryptocurrency market continues to be fairly volatile compared to the U.S. equity market. “Bitcoin gained 60% in 2021, lost 64% in 2022, and more than doubled in 2023.  — and that type of fluctuation may be too much for the average retail investor.¹

While investing in an ETF is easier in that you won’t need to set up a Bitcoin wallet or purchase it from a centralized cryptocurrency exchange, it doesn’t mean you’re insulated from the volatility of the markets.

Note the language of SEC Chair Gary Gensler when the decision approving Bitcoin ETFs was announced: ‘While we approved the listing and trading of certain spot Bitcoin ETP shares today, we did not approve or endorse Bitcoin. Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto.’”²

Furthermore, as this is a new market, there could be additional regulatory scrutiny in the future that may affect your investment. The SEC is still hesitant about the cryptocurrency market and may regulate the asset class in a way that could affect your ability to invest in Bitcoin ETFs.

If your risk tolerance is high and you’re informed that you could lose your investment if the market drops, then this can be a viable option for you to consider.

What’s Next for Cryptocurrency?

Bitcoin is not the only cryptocurrency out there. On May 23^rd, the SEC approved 19b-4 proposals for the first spot Ethereum ETFs in the U.S.⁷ Spot ether ETFs support the Ethereum blockchain just as spot Bitcoin ETFs support the Bitcoin blockchain. The essential difference is the type of cryptocurrency being tracked.

While spot Ethereum ETFs have overcome the main hurdle to begin trading, there is no set date for when investors will be able to purchase them.⁷ The SEC must still approve the rule changes, and estimates range from a few weeks to months before that will be complete.

As the SEC remains uncomfortable with this asset class, it’s unlikely that they will rush to approve other products willingly. However, these pending lawsuits could force their hand, as they did with the spot Bitcoin ETF.

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Sources:

¹ https://www.forbes.com/advisor/investing/cryptocurrency/spot-bitcoin-etfs/

² https://www.investopedia.com/where-to-buy-the-new-spot-bitcoin-etfs-8557203

³ https://www.sec.gov/news/statement/gensler-statement-spot-bitcoin-011023

⁴ https://www.wealthmanagement.com/etfs/what-tell-investor-clients-about-bitcoin-etfs

⁵ https://www.bankrate.com/investing/bitcoin-etfs/#other-types-of-crypto-related-investments

⁶ https://www.cnbc.com/2024/06/01/major-cryptocurrency-shift-due-to-sec-ethereum-etf-ruling-vaneck-ceo.html

⁷ https://www.morningstar.com/funds/whats-next-spot-ether-etfs

Hightower Great Lakes is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities.

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