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Bitcoin ETF Strategies

Mariela Naydenova trader
Updated 5 Jul 2022

An exchange traded fund (ETF) is an investment vehicle that lets prospective investors enter the market without risk, as they do not buy the asset itself but just a basket of securities. An ETF tracks the movement of the investment, in this case Bitcoin, but it does not require the investor to buy the cryptocurrency. It is a passive form of investment. It mitigates risks while still allowing investors to experience profits and cryptocurrency trading. ETFs are usually used by investors for diversification strategies and risk-hedging.

  • ETFs – Essence
  • How a Bitcoin ETF helps an investor
  • Risk-free cryptocurrency trading
  • Investment vehicle for cautious investors
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Bitcoin ETF – Basics

Bitcoin is extremely volatile, and the cryptocurrency market is not under any uniform strict regulation as of now. This can prevent new investors from entering 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 passive investments. Here, the broker tracks the value of the Bitcoin. 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 Bitcoin, 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.

Bitcoin ETF – How does it work?

ETFs are among the safest investment vehicles. They do not involve digital wallets or trading a cryptocurrency. Once you invest in a Bitcoin ETF, you do not actually buy it. Instead, the investment is based one of the following:

  • Physical-backed Bitcoin ETFs: The fund owns the digital coins that the ETF tracks, and investors purchase shares or units in the ETF. If the value of the Bitcoin 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.

Bitcoin ETF 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. 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. These may require you to register before you can trade. Again, you will need to do due diligence to find a reliable and reputable exchange.
  • Some ETFs 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.

Benefits of investing in Bitcoin ETFs

Some of the advantages of investing in Bitcoin ETFs 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 the cryptocurrency without having to own the 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.
  • Minimized 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.

how to invest in bitcoin etf

Disadvantages of investing in Bitcoin ETFs

  • 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. However, the SEC has already rejected several Bitcoin ETF proposals.
  • Volatility:Within a short span of time, the price fluctuation of Bitcoin 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:You will have to pay for annual management and also consider brokerage fees when you buy and sell Bitcoin ETFs.

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 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.
  • Hedging: Bitcoin ETFs can help investors hedge the risk of falling Bitcoin prices.
  • Seasonal trends: Investors may want to keep track of seasonal events, which have proven to affect Bitcoin’s price.

Conclusion

While Bitcoin is a highly volatile currency, Bitcoin ETFs offer some security when it comes to investing. They are appropriate for individual traders as well as institutional traders, but it is imperative that an investor selects the right brokerage to help you access the security that you need. 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.

Mariela Naydenova trader
Mariela is a former investment banking analyst and has been a cryptocurrency writer with LeapRate and Asktraders for the past two years