Bitcoin ETF basics
Bitcoins are extremely volatile, and the cryptocurrency market is not under any regulation. This can prevent new investors from wanting to enter the market. However, when you opt to invest in Bitcoin-related ETFs, you can easily take part in a regulated environment. It is essential that you first find the best broker by doing a comprehensive comparison.
As a trader, you should know that in the UK, Bitcoin ETFs are usually passive investments. Here, the broker tracks the value of the Bitcoins. On the other hand, if an ETF is active, then the fund manager is the one who tracks the Bitcoins’ value. There are no fees to manage or track Bitcoin ETFs, even though you can actively trade them.
All ETFs are associated with an index, and the performance of the ETF depends on the performance of the index that it links to. In the case of a Bitcoin ETF, the index could be associated with the price of Bitcoins, or it could be a portfolio comprising mixed cryptocurrencies.
With Bitcoin ETFs, there is no need to worry about getting an e-wallet to store the virtual cryptocurrency or be concerned about the security of the wallet. An ETF helps make investing in Bitcoins more secure, as it is always associated with the price of the cryptocurrency rather than the cryptocurrency itself. With no exchange or wallets for hackers to access, the investment stays safe.
Top 3 ETF Broker Comparison
How Bitcoin ETFs work
If you check any Bitcoin ETF guide, then it will tell you that these ETFs are among the safest cryptocurrency investment vehicles. They do not involve digital wallets or buying and selling the currency. As stated, you do not buy Bitcoins. Instead, your investment will be based on one of the following:
- Physical-backed Bitcoin ETFs: Here, the fund owns the digital coins that the ETF tracks, and investors purchase shares or units in the ETF. If the value of the Bitcoins owned by the fund increases, then the value of the units that you own will proportionately increase. Likewise, if the value of the cryptocurrency falls, then the value of your shares or units will also plunge.
- Futures-backed Bitcoin ETFs: With this type of ETF, the shares are based on the Bitcoin futures contracts instead of the actual coins. This type of contract is an agreement with a fixed price and date to buy and sell Bitcoins. Futures allow investors to profit if prices fluctuate while preventing the risk of someone hacking or stealing the cryptocurrency.
You can buy Bitcoin ETF units via a securities exchange market. However, you will have to pay brokerage and management fees to the ETF’s issuer. Fortunately, most ETFs have lower fees compared to traditionally managed funds. You can buy and sell units throughout the day as the price of an ETF keeps fluctuating. Find the right broker and ensure that you have a thorough understanding of Bitcoin ETF trading strategies.
How to invest in Bitcoin ETF
You can trade ETFs on security exchanges, and it is possible to buy ETF units through a traditional online brokerage account. However, it is imperative that you sign for a trading account through an online broker that offers Bitcoin ETFs. Make sure that you do a broker comparison before choosing an online broker. The right broker will have guides, tutorials and outstanding customer care to ensure that you have all the tools required to make an informed investment decision.
There are even exchanges, including OKEx, that have launched their own index funds allowing you to invest in Bitcoin ETFs. This may necessitate you registering with the exchange to begin trading. Again, you will need to do due diligence to find a reliable and reputable exchange.
Some ETF focus solely on blockchain companies. So, if you are interested in the technology that goes into Bitcoins and blockchains, then you may want to invest in these ETFs. Blockchain systems and Bitcoins have a close association, and this technology has had a profound effect on the cryptocurrency industry. Therefore, you may want to invest in tech-focused ETFs that allow you to make investments related to blockchains. In any case, it is important that you do your research well.
Benefits of investing in Bitcoin ETFs
Like any other investment vehicle, Bitcoin ETFs have a range of advantages. Some of them are as follows:
- Simplicity: There is a steep learning curve when it comes to buying and selling Bitcoins. However, with Bitcoin ETFs, you can invest in this cryptocurrency without having to own these coins and still make money. The entire process of investing is simple and hassle-free.
- A diversified investment portfolio: It is difficult to keep track of and maintain different cryptocurrencies. With an ETF, however, not only can you invest in Bitcoins but also in other cryptocurrencies such as Ethereum. Through ETFs, you can keep track of multiple cryptocurrencies and save time and effort.
- No risk of hacking: With Bitcoin ETFs, you do not have to worry about the wallet or exchange getting hacked. Although Bitcoins are extremely susceptible to hacking. with no ownership involved, cybercriminals are not an issue.
- Lower fees: All ETFs, including Bitcoin ETFs, have lower fees when compared to regular managed funds. Therefore, it is possible to invest in the cryptocurrency industry without burning a hole in your pocket.
Know these advantages of how to invest in Bitcoin ETFs can help you enjoy online trading. However, you should also be aware of the disadvantages so that you can weigh the pros and cons and accordingly make an investment decision.
Disadvantages of investing in Bitcoin ETFs
Here are some of the disadvantages of investing in Bitcoin ETFs that you should be aware of:
- Limited selection: While the online investment industry is waking up to the potential of Bitcoin ETFs, there are limited choices. The UK has a number of ETFs, and if the US Securities Exchange Commission gives approval to cryptocurrency ETFs, then the choice for prospective investors will widen.
- Volatility: Within a short span of time, the price fluctuation of Bitcoins can be huge. When you are investing in a Bitcoin ETF, you should remember that if the market goes south, then the value of the ETF units will nosedive.
- Cryptocurrency-related risks: While you do not own Bitcoins, you still might face a few risks. Your broker will need to have state-of-the-art online security to minimise the chances of hacking. This will help keep your investment and purse safe.
- Applicable fees: There is no escaping fees. You will have to pay for annual management and also consider brokerage fees when you buy and sell Bitcoin ETFs. Make sure that you find a broker offering the lowest fees while still allowing you to enjoy a seamless ETF trading experience.
In addition, when you buy and sell ETFs and make a profit, you will have to disclose the earnings in your tax filings. Not only do you have to pay taxes in the UK, but you may also be liable to pay taxes in the country where the ETF is located.
Strategies for trading in Bitcoin ETFs
Here are a few strategies that new traders and investors can adopt when they want to trade in Bitcoin ETFs:
Invest monthly: ETFs have low investment thresholds, and it is advisable to invest the minimal amount each month in Bitcoin ETFs. If you have more experience, time and risk tolerance, then you can invest a greater amount. However, if you are a novice, then it is best to start low and gradually build up your ETF holdings. This way, you can increase your confidence in buying and selling the units without risking too much.
Swing trading: As stated earlier, Bitcoins experience extreme price volatility throughout the day, and if you are a prudent investor, then you will be able to take advantage of these swings. In fact, Bitcoin ETFs are suitable for swing trading due to tight bid-ask spreads. However, you will have to keep a close eye on the price swings to be able to benefit from this trading strategy.
Short selling: It is risky for beginners to indulge in short selling, but when it comes to Bitcoin ETFs, this practice is preferable because of the reduced risk when compared to individual stocks. You can take a short position through a reliable brokerage. However, if you are uncomfortable with short selling, then stay away from it, as it does have its inherent risks.
Additional strategies to consider
To really stay on top of your game when thinking how to invest in Bitcoin ETFs, you will want to keep the following strategies in mind as well:
Watching seasonal trends: You should keep a close watch on Bitcoin prices to figure out the seasonal trends. During the festive season, when people are more conducive to shopping online, Bitcoin prices can spike. Also, anything affecting the dollar rate can have an impact on Bitcoins. Once you become aware of these trends, you will be able to buy and sell Bitcoin-related ETF units and make a tidy profit.
Hedging: It is quite possible that you may have to hedge if there are chances of Bitcoin prices sliding. When you anticipate a Bitcoin price slide, you have the option of selling before this occurs to safeguard your investment or buying more Bitcoins with the hope that the price will surge after the decline. Either way, Bitcoin ETFs offer you an easy way to hedge.
It is important to find a brokerage that offers you tutorials on these ETF trading tips and several others. Make sure that you read these tutorials and also browse forums to find out what experienced investors and traders recommend. Based on this knowledge, you can carve out your own strategy and ensure that you benefit from buying and selling Bitcoin-related ETFs.
The bottom line
Bitcoin ETFs have many features that make them a good investment instrument for beginning traders. Just make sure that you find the right platform to begin trading. While Bitcoins are volatile and the industry is unregulated, you can enjoy some semblance of security with ETFs. They are appropriate for individual traders as well as institutional traders, but it is imperative that you select the right brokerage to help you access the security that you need. Due diligence is important, so you should also take the time to ensure that your broker has resources and tools that can help you possibly enjoy a nice little profit at the end of the day. Your success is the most important factor. Also, it is essential to remember that you should only invest money that you can afford to lose. All types of investments, including Bitcoin ETFs, have risks that you should prepare for by adopting investment strategies to help mitigate those risks. As with any other investment type, you will have to put time and effort into becoming successful and use resources to learn continuously so that you can always stay motivated to improve your Bitcoin-related ETF trading strategies.