Jonathan Manzi Shares Why Bitcoin ETFs Require a Cautious Investment Approach
The first-ever bitcoin ETF in the US was rolled out on the 19th of October 2021. About three days later, another followed suit. A blockchain expert advises investors on how to approach the birth of these new bitcoin ETFs.
Jonathan Manzi is the CEO of Beyond Protocol, a company that relies on blockchain technology to reinvent the way digital devices communicate. He is history’s youngest person to amass a $1 million net worth through industry. A feat he achieved when he was only 16.
When prodded about bitcoin ETFs, Jonathan Manzi advised investors to “proceed with caution”.
What Are Bitcoin ETFs?
To help you understand what bitcoin ETFs are all about, let’s be sure we’re on the same page as to what ETFs mean.
“The primary function of ETFs to-date,” Jonathan said in an interview with Entrepreneur, “has been to provide exposure to an asset class by tracking a basket of investments with a common connection — e.g. oil, biotech, gold, or natural gas. There are also stock index ETFs which track broader markets, like the S&P 500”
In other words, when you’re looking to invest in a group of assets that have something in common, you could do them one after the other. Depending on the number of assets in the group, this could take forever. Or you could just invest in an Exchange Traded Fund (ETF) that tracks all the assets you intend to buy.
An ETF allows investors to profit from the collective performance of the assets it tracks without actually owning any of the individual assets.
With ETFs in mind, what then are bitcoin ETFs?
A bitcoin ETF is an investment that tracks the price of actual bitcoin, allowing investors to buy the cryptocurrency without actually owning or trading the asset. It allows investors to gain exposure to the cryptocurrency without the baggage that comes with it (crypto exchanges, how and where to buy and sell, private keys, etc.) from the relative safety and ease of ETFs.
Examples of Bitcoin ETFs
The first-ever bitcoin ETF to hit the ground in the US is ProShares Bitcoin Strategy ETF. It goes by the ticker BITO. And although it tracks bitcoin futures, not the digital asset itself, it’s still as close to bitcoin as we get with ETFs.
BITO was launched on the 19th of October 2021, but three days later, another bitcoin ETF, Valkyrie Bitcoin Strategy ETF, arrived on the scene.
With these two bitcoin ETFs now trading on many ETF brokerages, we expect more cryptocurrency ETFs to follow suit.
Why Trade Bitcoin ETFs?
Bitcoin is just one cryptocurrency. There are endless numbers of exchanges that allow you to trade the main asset. Why then do you need an ETF to trade it? What are the advantages of bitcoin ETFs?
Jonathan Manzi had this to say about why investors would rather trade bitcoin ETFs:
“Many traditional investors have yet to buy bitcoin; an ETF taps into this demographic, allowing those with accounts at large brokerage firms to continue to manage all of their assets under one roof, while still gaining exposure to bitcoin.”
And this makes a lot of sense. Although some don’t, many cryptocurrency exchanges require that you submit some form of KYC before you trade cryptocurrency on their platform. This could be an unnecessary hassle for ETF investors who have already gone through this process with their ETF brokerages.
Also, opening a new account on another trading platform means the investors have to monitor their assets in various places. Meanwhile, they could just as easily manage them under one single roof provided by their ETF brokerage.
Another reason investors may prefer trading a bitcoin ETF to trading the actual cryptocurrency is that the former is safer. It’s no news that crypto exchanges have been hacked and the hackers made away with traders’ money. Another possibility is the investor losing their private key, thus losing access to their crypto assets. These occurrences are not common among ETFs, giving them an edge over crypto exchanges.
Why You Should Be Wary of Bitcoin ETFs
There are prices to pay for the safety and security that bitcoin ETFs offer investors.
For instance, since a bitcoin ETF investor doesn’t own the actual bitcoin asset, they have limited exposure to the cryptocurrency. This means they can’t purchase items with bitcoin. Neither can they exchange their bitcoin ETF with other cryptocurrencies.
Also, the safety bitcoin ETFs provide comes at a premium. Proshares and Valkyrie ETFs, for instance, charge an annual expense ratio of 0.95%. This fee falls on the high end when compared with other ETFs.
Charlie Fitzgerald III, principal of Orlando-based Moisand Fitzgerald Tamayo agreed to this when he said “If it will be part of your portfolio for one, five, 10 years or longer, 1% is a big fee to pay for a mutual fund or an ETF.”
But as one might expect, Valkyrie thought otherwise, as a spokesperson from the management said “this is a small price to pay to hold an easily accessible, secure and regulated product, traded at a stock exchange, tracking a regulated investment vehicle.”
Where To Buy Bitcoin ETFs
Trading bitcoin ETFs is as easy as trading any other ETF. You only have to check if your brokerage offers BITO or BTF, and proceed with your trade as usual. Examples of ETF brokerages include Robinhood and E*TRADE.
Conclusion
Bitcoin ETFs track the price of bitcoin and allow investors to profit or gain from the performance of the cryptocurrency without actually owning it. While this form of exposure can be exciting for investors who only care about profits and losses and not the actual asset, it comes at the expense of high maintenance costs and limited exposure.
Jonathan Manzi counsels investors to “proceed with caution,” as these bitcoin ETFs are only at a very young stage in their existence. He also advised that investors “monitor the early stage performance of these new ETFs.” It’s always a sound decision to monitor at least a little bit before jumping in, so this is indeed sound financial advice.