Bitcoin ETFs are financial products that allow you to gain exposure to $BTC without owning it directly. Their primary function is to simplify the accessibility to a broader audience. When you purchase an ETF, you don't have a direct control on BTC because you rely on the fund manager you selected! So, your money are managed by someone else that owns BTCs (e.g. BlackRock). There are several pros and cons when you decide to purchase an ETF, but based on my personal experience and past mistakes, I will outline what you really should take care of in order to manage your risk effectively while maximizing your gains. Before we look at the pros and cons, I want to introduce an example that shows and tells how an ETF is issued.
Example: The Global Tech Bitcoin ETF 🤯
Let's imagine you have an ETF called the "Global Tech Bitcoin (GTB)". This fund includes shares from big companies like Apple, Microsoft and Google. When you buy a share of the GTB, you are basically buying a little piece of all these companies at once. If Apple's stock price goes up but Microsoft's goes down, it's okay because you own both! The fund spreads your investment across these different tech companies, reducing the risk if one company doesn't do well.
This simplified example now may supports you to understand better some of the following pros and cons:
Bitcoin ETFs Pros 😊
Bitcoin ETFs are regulated and insured! So it means that you are protected in case of theft or loss of the underlying Bitcoin. You trade off control (keys are not under your control) for security. Any breaches of security are backed up, they guarantee that you will get back your money! BTCs ETFs also allow you to enhance your portfolio in term of diversification. That's important because you can mitigate the risk of the volatility. The more diversified your portfolio is, the more the risk is spread across multiple assets! So, if bitcoin drastically drops, your total balance keeps stable.
Bitcoin ETFs Cons 😕
The first lesson I learned when I purchased my first ETFs was about fees. Managing ETF's fee is really important because in the long term, they can massively impact on your returns. I do really recommend you to make a precise evaluation of the cost-effectiveness of the selected asset! Also, don't forget that ETF's may fall into tax implications. Based on your country and on the structure of the ETF, you may could face extra taxes when selling it (e.g. capital gains, etc). Least, understanding risk metrics could require broader financial knowledge in order to evaluate an ETF. You should be at least familiar with beta (it measures an ETF's sensitivity to movements in the broader market) and the standard deviation (it measures the dispersion of returns around the average return of an ETF).
Conclusion
Personally I prefer an "hybrid approach", where part of my funds are into an ETF and where the rest is totally under my control. So, on one hand, I avoid counterparty risks and fee management, while on the other hand, I have insurance in case of theft/loss and a hedge against volatility! Also, before you purchase an ETF, verify the provider reputation and its liquidity. Trustful providers usually shows active and transparent communication with you. They keep you update with performance reports and insights about their investment strategies. ETF liquidity, instead, is important because it affects the ease and cost of trading. If an ETF has high liquidity, it means that there is high volume of trading activity, with many buyers and sellers in the market. Higher liquidity typically results in tighter bid-ask spreads and lower trading costs. Basically, you can buy or sell shares closer to the market price, resulting in lower trading costs!
And You, Would You Purchase a Bitcoin Spot ETF? 🤔 Let Me Know In Comments! 👇
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