The Securities and Exchange Commission (SEC) approved the first Bitcoin futures Exchange-Traded Fund (ETF), ProShares’ Bitcoin Strategy ETF (BITO) in 2021. Trading began on Tuesday, Oct. 19.
The fund brought in around $570 million of assets on its first day and was the second most heavily traded ETF on record according to Bloomberg.
Now, a second bitcoin futures ETF has launched with more on the way. Cryptocurrency, bitcoin enthusiasts, and investors of all stripes are excited, but is it right for you?
I can’t answer that for you, but you can answer that after some due diligence. Here are four questions to ask yourself while you weigh your options.
What is a Bitcoin Futures ETF? Do I understand the investment?
The short version is: BITO and other Bitcoin futures ETFs do NOT invest directly in Bitcoins. If you invest in a Bitcoin futures ETF you will NOT own bitcoins. This type of ETF invests in Bitcoin futures contracts.
Futures contracts can be complicated but put simply: a futures contract is an agreement to buy or sell something at a future date and at a price agreed upon in advance. On the day the contract comes due, the value of the asset will be lower, higher, or the same (rarely).
If the value of the asset is lower than the agreed price, the buyer will lose money and the seller will make money. If the value of the asset is higher than the agreed price, the buyer will make money, and the seller will lose money.
The Bitcoin Futures ETF will invest in contracts to buy and sell bitcoin at a set price, but BITO does not have investments in bitcoin, bitcoin mining, bitcoin utilities or bitcoin exchanges.
When you invest in any company you are basically betting on the company’s success or failure. This is especially true with a Bitcoin Futures ETF. You are betting on the ability of the ETF to be successful in investing in Bitcoin futures.
The fund managers need to determine what will happen with the bitcoin market, which futures contracts will result in a gain if they buy them and then when to buy them.
Between buys, the mix of investments in the fund may include short-term money instruments (like U.S. Treasury bills with one year or less to maturity).
Like other ETFs, investing in a Bitcoin Futures ETF allows you to spread your risk across multiple investments – in this case, multiple bitcoin futures contracts. Spreading the risk around reduces your overall risk, because if one investment is a big loss, potential gains among hundreds of others in the fund could make up for the loss.
One of the best places to start getting a solid understanding of a fund like this one is with its prospectus (a formal document required by the SEC that provides details of an investment offering to the public).
Do I understand cryptocurrency and Bitcoin?
Maybe you’ve known about cryptocurrency for years or even for couple of decades, but
cryptocurrency is relatively new in the world of investing. Make an effort to fully understand what cryptocurrency is about before investing in it or in this ETF.
If you can’t make sense of it, consider consulting a financial advisor or avoiding cryptocurrency investment altogether. The (SEC) is an unbiased source of information on cryptocurrency and bitcoin futures.
What are the Risks for a Bitcoin Futures ETF?
Many financial advisors and professional investors view cryptocurrencies as speculative investments that carry a high risk of loss. So far, cryptocurrency track records back that up. The investments are highly volatile (their value can and does go up and down a lot).
Futures are also highly speculative investments.
One principle of investing is to determine the level of risk you find acceptable. Since speculative investments are generally viewed as high risk, investors should carefully consider how much of their portfolio to allocate to Bitcoin Futures ETFs.
“The principles are the principles for a reason, and their main purpose is to keep you away from scenarios that can be financially ruinous,” said Navy veteran Sean Gillespie, a financial planner with Redeployment Wealth Strategies who specializes in financial planning for military and veteran families.
“Layering a speculative bet on futures on top of (another) speculative bet on an unproven asset class is super risky,” Gillespie said. “Sure, you might see a big payoff – (or) you might see your position go to zero.”
The fund’s prospectus and the SEC are two good sources to help you consider the risks of investing in a Bitcoin Futures ETF.
Does a Bitcoin Futures ETF fit with my
If you feel uncomfortable with Bitcoin Futures ETFs after taking the time to understand and consider futures, cryptocurrency and the involved risks, it probably doesn’t make sense to include it in your investment strategy.
If you have a financial advisor then you should have a strategy on which both you and the advisor have agreed. Many advisors prefer that cryptocurrency and futures be a small percentage of your portfolio due to the risks associated with both.
“We’ve had a few of these conversations with clients,” said Gillespie. “We typically say ‘no more than 10%’ when a client wants to include a few specific stocks in their portfolio. When it’s a cryptocurrency they want to include, we’re typically trying to keep that to no more than 1% or 2%.”
If you don’t have an investment strategy then this may be a good time to develop one.
This is an exciting time for cryptocurrency and investing, but don’t forget the fundamentals when making investment decisions.
Just because everyone else is talking about an investment doesn’t make it right for you
Along with the four questions above, be sure to consider any investment’s fees and taxes.
If you have a financial advisor make sure that you consult with them about any important investment decisions..