Bitcoin ETFs: Spot vs Futures crypto ETFs explained
Want to gain exposure to Bitcoin or Ethereum through an ETF? Here's what you need to know.
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After a 5-year battle, Australia has now followed Canada and Europe to allow investors to access the volatility of crypto assets through a physically-backed ETF.
One of the first to launch locally was the Cosmos-Purchase Bitcoin Access ETF (Ticker: CBTC, Cboe Australia), which allows investors to invest in "physical" cryptocurrency. This means the fund owns Bitcoin on your behalf.
But while investors have been waiting for a physically-backed product, they now have the choice between investing in futures-based, physically-backed or crypto-themed "picks and shovels" ETFs.
So how can you decide which one is right for you?
Finder chatted with Cosmos Asset Management CEO, Dan Annan, to help demystify the new range of ETFs providing exposure to the volatility of crypto markets.
How does each ETF type work?
Let's break down how these 3 models work. Each will allow investors to gain access to Bitcoin, but what you actually own is very different.
- Physically backed. This is probably the simplest form of ETF for investors to get their heads around. In this instance, the fund will buy Bitcoin on behalf of investors and hold it in an offline wallet.
- Futures contracts. In the case of a futures contract, you don't actually own Bitcoin, but contracts based on its future price. Should the price of Bitcoin increase, so will the next contract, lifting the price of what the ETF holds. The inverse is also true should the price of Bitcoin fall.
- Picks and Shovels. In this instance, you're looking at companies that are mining Bitcoin. You are investing in the underlying tech instead of the outcome. Basically, you're making money selling the picks and shovels instead of the gold they unlock.
Futures vs physical vs picks and shovels
Deciding which approach to take greatly depends on the individual investor since all 3 have their good points.
Annan highlights that in a rising market, the contango effect can take place, where the future price of a commodity can be higher than the spot price.
However, this comes at a cost with investors paying for each futures contract. The provider has to pay the rolling costs on executing these contracts. These costs are passed onto the investor.
"The difference is because of the cost structure embedded in the futures, all the assessments from a due diligence says own the physical asset, own the physical exposure through the ETF," Annan said.
Annan is quick to also point out that investors should not ignore the picks and shovels approach.
"What the picks and shovels do is, it gives you a different exposure to the asset class. Now you're playing in the field of equities or growth assets. It gives you a list of companies that have a sole purpose in providing the infrastructure for the coin network or the infrastructure network."
Another perk of a picks and shovels approach is that it best matches traditional growth assets from a valuation perspective, with Annan using the example of data storage businesses. "What we've seen from our analysis of the digital miners index relative to Bitcoin itself is that in up markets, the picks and shovels of the coins tend to deliver a 2x times performance and it's almost 1 for 1 on the downside," Annan points out.
But this doesn't mean you should go with one strategy.
"The picks and shovels and the physical asset coin through the ETF exposure can coexist in a portfolio and you can put those together based on how you want to position your personal portfolio," Annan said.
Main benefits of all 3 approaches
Regardless of which approach you take, Annan points out that all 3 have similar benefits for investors looking to get into the space.
"By delivering Bitcoin, Ethereum or cryptocurrency exposure through an ETF vehicle, what you're doing is delivering to the market a financial product that is not available to investors.
"You simplify that process for them."
According to the CEO, there are 3 main benefits for those who choose an ETF approach.
"1. It brings you a familiar ground of investing [by using] an ETF wrapper."
"2. You're now able to see the asset in a portfolio alongside your other asset classes, evaluate risk and make the right assessment as to where this asset fits within your asset allocation."
"3. The ETF gives you the security of the market infrastructure to have that exposure, without having to worry about losing your password, without having to worry about exchanging fiat and without having to worry about your ID because that is all done for you."