Could investing in Bitcoin indirectly be the best move for you?
It wasn’t too long ago that Bitcoin (BTC 1.08%) was very difficult to invest in without owning the digital currency directly. But since the first Bitcoin ETFs were approved in early 2024, dozens of exchange-traded funds that invest in the digital currency or adjacent assets are available for investors to trade.
I personally don’t own any Bitcoin in my portfolio right now, but I’ve been thinking about adding some, mainly for diversification purposes. With that in mind, here are two Bitcoin ETFs on my radar that I’m considering, and one that I’m absolutely going to avoid.
The six largest Bitcoin ETFs on the market are all pure plays, also known as spot Bitcoin ETFs, meaning that they simply own Bitcoin and aim to track its price (net of investment fees) over time.
Of these, the largest and the one I’m considering is the iShares Bitcoin Trust ETF (IBIT 0.37%). And as you might expect, the fund holds just one asset — about $84 billion in Bitcoin.
To be sure, there are other solid pure-play Bitcoin ETFs, but the iShares Bitcoin Trust has a low 0.25% expense ratio, which means that you’ll pay $2.50 in fees for every $1,000 in invested assets. To be clear, this isn’t a fee you have to directly pay, but it will be reflected in the fund’s performance over time. Other pure-play Bitcoin ETFs have expense ratios as high as 1.5% (or even more), and this can have a big impact over a multi-year holding period.
Regardless of what happens with the price of Bitcoin over time, the cryptocurrency industry itself and the blockchain technology that powers much of it both have massive potential. So, another ETF I’m looking at is the ARK Next Generation Internet ETF (ARKW 1.58%), an actively managed ETF run by Cathie Wood with $2.35 billion in assets.
Now, this fund does have some of its assets (6.4%, to be exact) invested directly in Bitcoin. But the main focus is businesses that focus on modern technology infrastructure. The fund’s stated investment objectives include companies that operate in industries including cryptocurrencies, digital wallets, and smart contracts, among others.
Because of this, not all the ETF’s portfolio companies are cryptocurrency plays. But among the 10 largest holdings, in addition to Bitcoin, you’ll find leading crypto exchange Coinbase (COIN 1.12%), Robinhood (HOOD 15.72%), which operates a large crypto trading platform, and stablecoin company Circle Internet Group (CRCL -1.83%).
The Ark Next Generation Internet ETF has a 0.82% expense ratio, which is higher than a pure-play Bitcoin ETF, but is about average for an actively managed fund.
I’m a long-term investor, not a speculator. That’s why you won’t find any leveraged Bitcoin ETFs in my portfolio anytime soon. There are a few in the market, but the idea is that these funds use derivative securities to deliver twice the daily return of Bitcoin. So, if Bitcoin increases by 1% tomorrow, a 2X leveraged ETF should rise by 2%.
This might sound great, especially if you have a high conviction that Bitcoin is going to rise over time. But the key point to remember is that this fund is designed to double the daily returns of Bitcoin — not long-term returns. And the mathematics of leveraged daily returns rarely work out over the long run.
To illustrate this, as of this writing, Bitcoin has increased by 18% year-to-date. But a popular leveraged Bitcoin ETF is up by just 1%. And not only are the mathematics not favorable, but these ETFs tend to have excessive expense ratios — approaching 2% in some cases.
In a nutshell, leveraged ETFs are best left to day traders and professionals. If you want to invest in Bitcoin, just invest in Bitcoin — or in the companies that transact in it.
