The SEC recently approved the first “spot bitcoin ETFs” to be traded on American securities exchanges. Spot bitcoin ETFs, also known as spot bitcoin ETPs, are investments whose share price tracks the price of bitcoin. These funds hold bitcoin as their underlying asset, but individual shareholders do not actually “own” any bitcoin—the funds do. The first 11 of these products are:
Investors traded approximately $4.6 billion in shares of the newly-listed products on the first day of trading. However, while the SEC’s approval has opened the flood gates for ordinary investors to take advantage of the price moves of bitcoin, spot bitcoin ETFs may still be unsuitable for many investors.
While the exchange traded products that most investors are accustomed to diversify their holdings across multiple asset groups, spot bitcoin ETFs concentrate all their holdings into one single asset: bitcoin. Bitcoin also experiences frequent and dramatic price swings. The SEC and several major financial institutions consider spot bitcoin ETFs to be highly speculative and volatile investments.
Due to higher costs of trading cryptocurrency, spot bitcoin ETFs may charge management fees higher than those of traditional ETFs. Competing funds may offer extremely low initial fees as an inducement to invest, only to raise them later. Any additional money investors pay in management fees will decrease the investment’s overall performance.
Policy makers are still deliberating how to regulate the cryptocurrency industry and investors may still be vulnerable to fraud and manipulation. Additionally, future regulations and taxes could affect a spot bitcoin ETF’s long-term performance.
While most of the bitcoin held by spot bitcoin ETFs is kept in “cold storage”—i.e. offline—and is therefore less vulnerable to cybercriminals, security breaches sometimes occur. A significant breach could undermine a spot bitcoin ETF’s stability. Pervasive crypto theft could also undermine investor confidence, which may affect a fund’s performance.
Due to the many risks associated with the new investment products, investors should be wary of any recommendation to invest in spot bitcoin ETFs.
ChapmanAlbin has been fighting for investor rights for more than 25 years. If you have concerns about your investment in a spot bitcoin ETF, contact ChapmanAlbin for a free consultation.
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