The landscape of Bitcoin investment has transformed significantly since the approval of the first Bitcoin exchange-traded funds (ETFs) in early 2024. This milestone has opened the floodgates for investors, allowing them to engage with Bitcoin without the need to hold the digital currency directly. Currently, numerous ETFs catering to Bitcoin and related assets are available for trade.
While some investors may add Bitcoin to their portfolios for diversification, many are considering various investment options in this new market. Among the prominent choices are two specific Bitcoin ETFs that stand out, along with a cautionary note on an investment type to avoid.
The iShares Bitcoin Trust ETF (IBIT) is noted as one of the largest and most appealing options for those looking purely at Bitcoin exposure. With approximately $84 billion in Bitcoin assets, this ETF aims to track the price of Bitcoin directly, minus investment fees. Its low expense ratio of 0.25% means that for every $1,000 invested, only $2.50 would go toward fees. This is significantly lower compared to some other pure-play Bitcoin ETFs, which can have fees exceeding 1.5%. The impact of these fees can be profound over extended holding periods, making iShares an attractive choice for long-term investors.
In contrast, the ARK Next Generation Internet ETF (ARKW), managed by prominent investor Cathie Wood, offers a different angle. This actively managed ETF has $2.35 billion in assets and allocates 6.4% directly to Bitcoin. However, its primary focus is on companies engaged in modern technology infrastructure, including sectors such as cryptocurrencies, digital wallets, and smart contracts. Significant holdings include crypto exchange Coinbase and trading platform Robinhood, alongside stablecoin issuer Circle Internet Group. Despite having a higher expense ratio of 0.82%, ARKW provides exposure not just to Bitcoin but also to the broader potential of the tech-driven landscape surrounding it.
However, there’s a word of caution regarding leveraged Bitcoin ETFs, which use derivative securities to amplify daily returns. These funds are designed to deliver double the daily performance of Bitcoin—meaning if Bitcoin rises by 1%, the leveraged ETF aims for a 2% increase. While enticing for those bullish on short-term price surges, the structure of these ETFs can lead to unfavorable outcomes over the long haul. For instance, Bitcoin has gained 18% year-to-date, whereas a commonly traded leveraged Bitcoin ETF is up only 1%. The underlying mathematics of leveraged daily returns often complicate their performance over extended periods. Moreover, they frequently come with high expense ratios, reaching nearly 2%, making them less suitable for long-term investors.
As interest in Bitcoin continues to rise, it is crucial for investors to navigate this new terrain thoughtfully. For those looking to put money into Bitcoin, a direct investment in Bitcoin itself or in companies that actively engage with the digital currency may be a more prudent approach than venturing into leveraged ETFs, which are best suited for day traders and seasoned professionals.
