Which spot bitcoin ETF is best? Are bitcoin investments right for your portfolio? While all the new bitcoin funds track the same benchmark asset, there are several key aspects, such as expense ratios and liquidity, for investors to know and understand before buying shares.
What Is a Spot Bitcoin ETF?
A spot bitcoin ETF, which first began trading on U.S. exchanges Jan. 11, 2024, is an exchange-traded fund that tracks the price of bitcoin by directly holding the cryptocurrency itself, unlike futures-based bitcoin ETFs that had already been trading on exchanges since 2021.
When an investor buys shares of a spot bitcoin ETF, they are buying a portion of the bitcoin held by the fund. Thus, a spot bitcoin fund works in a similar way as a physically backed gold ETF.
How to Choose the Best Spot Bitcoin ETF
Choosing the best spot bitcoin ETF involves several factors related to the fund’s expenses, assets under management, liquidity and other factors. Here are some key steps to help you select the right bitcoin spot ETF:
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Expense ratio: Compare the expense ratios of different spot bitcoin ETFs. Lower expenses are generally more favorable for investors, as they directly affect the overall return, and they are especially relevant for comparing ETFs that track the same benchmark asset.
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Size of the fund (AUM): Higher assets under management, or AUM, may indicate greater investor confidence and acceptance of the ETF, and higher assets generally translate to greater liquidity and higher trading volume.
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Liquidity: Higher liquidity typically results in narrower bid-ask spreads, reducing trading costs for investors.
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Issuer reputation: Choose a spot bitcoin ETF from a reputable issuer with a track record of managing exchange-traded funds, specifically crypto-related ETFs and spot commodity funds. Well-established issuers often have the expertise and infrastructure to manage assets effectively and have demonstrated their ability to track benchmark assets and indexes tightly.
List of Spot Bitcoin ETFs Available to Investors
Data as of April 17, 2024. Many spot bitcoin funds offer a temporary fee waiver.
How Can Investors Buy Spot Bitcoin ETFs?
Like buying other types of ETFs, investors need an investment account to buy spot bitcoin ETFs. However, unlike traditional ETFs, spot bitcoin funds are not available at all brokerage firms, so you’ll need to verify that your broker offers these funds on their platform. Like investing in stocks or mutual funds, the investment account may be an individual brokerage account, a joint brokerage account, or any variety of individual retirement account (IRA).
Once you have the investment account open, you will need to fund it with cash, and you’ll be ready to invest in a spot bitcoin ETFs.
The basic steps to invest in ETFs are:
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Open an investment account.
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Fund the investment account with cash.
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Select the ETF(s) to purchase.
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Execute the trade(s) to buy shares.
Are Spot Bitcoin ETFs Better Than Futures-Based Bitcoin ETFs?
Spot bitcoin ETFs will likely provide tighter tracking of bitcoin’s price with potentially less volatility compared to futures-based funds. For reference, in 2023, the largest bitcoin futures ETF, the ProShares Bitcoin Strategy ETF (BITO) gained 137% while bitcoin’s price rose 160%.
It’s possible that neither fund type is suitable for an investor’s portfolio. Both types of them have significant inherent risks. As always, choosing an investment depends on an investor’s individual goals and risk tolerance.
Note: For more details, see our article, Spot Bitcoin ETFs vs Bitcoin Futures ETFs and our educational piece on the Bitcoin Halving.
Is a Spot Bitcoin ETF a Good Investment?
Whether a spot bitcoin ETF is a good investment depends heavily on an individual’s financial situation, risk tolerance and investment goals. For example, the volatile nature of bitcoin’s price generally makes a spot bitcoin fund unsuitable for a risk-averse investor with short-term investment goals, whereas an aggressive investor with high risk tolerance and a long-term investment horizon may choose to add a spot bitcoin ETF to their portfolio.
No matter the investor’s degree of risk tolerance, financial advisors generally recommend no more than 5% portfolio allocation to high-risk investment types, such as crypto-related securities and technology sector funds.
Always conduct thorough research, and if needed, consult with a financial advisor to ensure that the chosen spot bitcoin ETF aligns with your investment goals and risk tolerance. Additionally, stay updated on market conditions and the performance of the ETF over time.