After years of waiting, it’s finally here—the long-awaited spot Bitcoin ETF.
And its 10 fraternal twins.
Whether you’re wondering what I’m talking about, or you know exactly what I’m talking about and want to learn more, read on as we discuss one of the most important Wall Street developments in years.
The U.S. Securities and Exchange Commission on Wednesday announced the approval of 11 exchange-traded funds (ETFs), dubbed “spot Bitcoin ETFs,” that are designed to track the “spot” price of the Bitcoin cryptocurrency—which means it’s trying to replicate the actual trading price of Bitcoin.
Among other things, it makes it easier than ever for people to gain access to at least one digital coin—and that’s a considerable step toward bringing cryptocurrency more into the mainstream.
Before Wednesday, Bitcoin and other cryptocurrencies could be held in a handful of places: specialized accounts (read: digital wallets), money apps such as PayPal and Venmo, or a few brokerage accounts, including Robinhood, TradeStation, and Webull
Most investors with a standard brokerage account or individual retirement account (IRA) had slim pickings. There was an “over-the-counter” fund that had trouble accurately reflecting the price of Bitcoin. And there were Bitcoin futures ETFs, which trade not on the spot price of Bitcoin, but futures contracts tied to Bitcoin.
But a nearly decade-long fight for a fund that tracks spot prices—the closest to 1-for-1 exposure an investor can get without holding the underlying asset itself—is finally over.
On Wednesday, the SEC green-lit not one, not two, but a “banker’s dozen”: 11 spot Bitcoin ETFs¹. I’m listing them below from cheapest to most expensive—but note that several of them, in the hopes of drawing more business, are actually waiving most if not all of their fees for a limited time:
With brand-new products come brand-new questions. Today, we’ll use this space to answer some of the most pressing questions about these new funds.
Who is buying these ETFs?
Expect these new funds to have appeal to Wall Street and Main Street alike.
“It’s for the institutional allocators who want the comfort of an ETF,” says Leah Wald, CEO and Co-Founder of Valkyrie, which boasts one of the newly minted spot Bitcoin ETFs. “But I would also note the importance of a retail market—even if you hold Bitcoin (in a digital wallet), the ETF is obviously a fan favorite IRAs and other retirement accounts, especially if you self-direct.”
Anyone with a brokerage, IRA, or other self-directed investment account can dip their toe—or their whole foot—into the world’s biggest cryptocurrency without needing to hold it in a digital wallet or payment app.
Vanguard account holders are being left in the cold, however. Vanguard said in a statement that “Spot Bitcoin ETFs will not be available for purchase on the Vanguard platform. We also have no plans to offer Vanguard Bitcoin ETFs or other crypto-related products.”
What matters when evaluating spot Bitcoin ETFs?
Fees, for one.
All else equal, the less you’re paying a fund provider, the more you’re keeping for yourself. And the rush of 11 issuers launching ETFs simultaneously triggered what Aniket Ullal, Head, ETF Data & Analytics for CFRA, characterized as a “fierce fee war.”
Bitwise’s BITB is at the bottom with a mere 0.20% in expenses, or just $2 annually on $1,000 invested. Eight of the 11 are under 0.40%. And more than half the field is sweetening the pot by waiving expenses for a certain amount of time or until the fund hits a certain level of assets—six will temporarily make their funds free, while iShares will roughly halve their expenses.
But fees aren’t everything.
“BlackRock, Fidelity, Invesco are trusted names within the institutional space,” says Valkyrie CEO and Co-Founder Leah Wald. “But for some of the others, including Valkyrie, one point of differentiation is having crypto-native expertise. We’ve been working with Bitcoin for a long time; some of our traders have been in the space since right after it was first launched in 2013.
“Our comfortability with the underlying asset is an important point of differentiation because it’s a spot product,” says Wald, who adds that strength of cybersecurity will also likely be a consideration for some investors.
What about older Bitcoin ETFs?
Spot Bitcoin ETFs seem like the ideal type of fund for holding Bitcoin, but they’re not a slam dunk. They’re hardly guaranteed to wipe Bitcoin futures ETFs off the map.
Bitcoin is decentralized—there is no central bank that governs it, for better or worse. And one of the side effects is that there’s no centralized pricing.
“There are multiple prices for Bitcoin, but futures takes care of it by using an amalgamation of multiple prices for settlement,” says Simeon Hyman, Global Investment Strategist at ProShares. “And there’s academic evidence that futures assimilate information better than the spot market.”
On Thursday, ProShares’ BITO (the futures ETF) had higher volume than any single spot Bitcoin ETF.
And it wasn’t to dump the fund. BITO has actually gained about $300 million in assets under management since Wednesday’s announcement.
How will spot Bitcoin ETFs be taxed?
In sincerity, we mostly know, but we don’t completely know.
I asked Dave Nadig, Financial Futurist at VettaFi, about the tax implications of these funds. Nadig, noting that he’s not a Certified Public Accountant (CPA), said his understanding is that these will be taxed as if you own the underlying. (Similarly to how gold ETFs are taxed as if you actually hold gold.)
That means you’ll have to become familiar with your capital gains tax rates:
- If you sell a Bitcoin ETF after less than a year, you will be taxed at short-term capital gains rates, which are effectively just your federal tax rates on ordinary income.
- If you sell a Bitcoin ETF after at least a year or longer, you will be taxed at long-term capital gains rates—either 0%, 15%, or 20%, depending on your taxable income.
One thing we can’t provide a definitive answer on, however, is whether spot Bitcoin ETFs would be subject to the wash-sale rule, which prohibits you from deducting capital losses from the sale of an asset if you buy it (or a very similar asset) back within a 30-day period before or after the sale. While virtually anything you’d invest in through a brokerage account is subject to the wash-sale rule, Bitcoin isn’t. You can sell Bitcoin for a considerable loss and buy it right back, then apply those capital losses against other capital gains on your taxes.
So until that information becomes available, you might consider playing it safe and not trading spot Bitcoin ETFs in a way that would trigger the wash-sale rule.
Riley & Kyle
¹ The 11th ETF is something of a special case. Ullal says “the Hashdex Bitcoin Futures ETF (DEFI) also received listing approval from the SEC but will only convert to a spot product from its current strategy of tracking Bitcoin futures after its registration statement is approved by the SEC.”
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.