Should You Own A Bitcoin ETF?

August 07, 2019

By October 2019, the Securities and Exchange Commission is expected to decide whether to approve two bitcoin ETF applications.

Filed by Bitwise Asset Management and VanEck, these ETFs would give investors a simpler way to gain exposure to bitcoin cryptocurrency. Approval doesn’t mean immediate launch—that could take time. But if approved and launched, should you invest in it?

 

Background

I first wrote about Bitcoin nearly two years ago. Though I expected to slam it, I walked away with far more respect for this cryptocurrency than anticipated. Why? The blockchain technology behind bitcoin drastically lowers transaction costs by disintermediating traditional financial institutions.

For example, when buying something from Amazon, the largest retailer on the planet, my credit card gives me 2% cash back, so I assume Amazon is paying more than this amount to the credit card company. By comparison, a bitcoin transaction would cost less than a dime.

What’s New?

Last year, the SEC rejected a bitcoin ETF application, filed by the Winklevoss twins of Facebook fame. At the time, the SEC said the proposed ETF had not met the commission’s requirements to prevent fraudulent and manipulative acts and practices.

But the SEC also stated that its rejection did not hinge on whether cryptocurrencies or blockchain technology have value as an innovation or investment.

I wanted to learn more, so I spoke to Matt Hougan, who is global head of research at Bitwise Asset Management

Cracking The SEC Nut

Hougan says that Bitwise believes it has solved the problems noted by the SEC in the Winklevoss rejection, in part, by using a regulated, insured, third-party custodian to store its bitcoin.

I asked Hougan why not just buy bitcoin through an exchange rather than using the ETF wrapper with an ongoing expense ratio? Hougan responded that there were several advantages, including:

  • Custodial safety (if you lose your bitcoin private key bought directly, the bitcoin is forever lost)
  • Ease of trading execution and far lower transaction fees than on the retail market
  • Automated tax reporting
  • It’s far easier, and can be used by financial advisors using traditional custodians

Hougan did not disclose a target expense ratio for the proposed ETF, but says he hopes it would be equal to or lower than its current non-ETF offerings, which are 1.5% annually for less than $1 million invested, and 1.0% for more than $1 million.

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