Which Bitcoin ETF is Better?

The story begins with confusion. You’ve heard about the hype, the headlines about Bitcoin ETFs finally being approved, but the choices are overwhelming. You start to wonder, “Which one should I invest in?” This isn't a simple decision anymore; the stakes are higher. Choosing between different Bitcoin ETFs is not just a matter of picking a winner—it’s about aligning with your investment goals, risk tolerance, and long-term vision for the cryptocurrency market.

Let’s be clear—the concept of a Bitcoin ETF (Exchange-Traded Fund) represents a significant step toward mainstream adoption of Bitcoin. By allowing investors to buy Bitcoin without actually holding the cryptocurrency, ETFs simplify the process and remove some of the complications that come with cryptocurrency exchanges. Yet, not all Bitcoin ETFs are created equal. Different ETFs have different management fees, tracking accuracy, and strategies for holding Bitcoin or Bitcoin futures, which can impact performance.

What’s the difference between a spot Bitcoin ETF and a futures Bitcoin ETF? This is where things get interesting. A spot Bitcoin ETF holds actual Bitcoin in its reserves, meaning that it directly tracks the value of Bitcoin. When Bitcoin goes up, the ETF goes up, and vice versa. A futures Bitcoin ETF, on the other hand, doesn’t hold Bitcoin at all. Instead, it buys Bitcoin futures contracts, which are agreements to buy Bitcoin at a predetermined price at a future date. The performance of a futures ETF can diverge from the price of Bitcoin due to factors like contango or backwardation, creating complexities for investors.

Let’s explore the top contenders in this new and rapidly evolving market: Grayscale Bitcoin Trust (GBTC), ProShares Bitcoin Strategy ETF (BITO), and VanEck Bitcoin Strategy ETF (XBTF). Which one is truly the best for you? Each has its strengths and drawbacks, so the choice comes down to understanding the nuances of their structure, fees, and performance potential.

Grayscale Bitcoin Trust (GBTC)

First on the list is Grayscale Bitcoin Trust, which has been a significant player in the crypto investment world for a while. GBTC is technically not an ETF but rather a trust, which comes with some distinct characteristics. It offers exposure to Bitcoin, but instead of directly tracking the price of Bitcoin, it operates at a premium or discount depending on demand and market conditions. At times, GBTC has traded at a significant discount to Bitcoin, which can be seen as either an opportunity or a risk.

Advantages of GBTC:

• Liquidity: GBTC is one of the oldest and most liquid Bitcoin-related products available.
• Familiarity: It’s a well-known name in the crypto space, which may offer some peace of mind to investors.

Disadvantages of GBTC:

• Premium/Discount: One of the biggest criticisms of GBTC is its tendency to trade at a discount or premium to the actual price of Bitcoin. Investors may not be able to accurately capture Bitcoin’s price movements due to this pricing difference.
• Management Fees: GBTC comes with higher management fees than some newer competitors, which can eat into long-term returns.

ProShares Bitcoin Strategy ETF (BITO)

In contrast, ProShares Bitcoin Strategy ETF (BITO) was the first U.S. futures-based Bitcoin ETF to hit the market in 2021. It doesn’t invest in Bitcoin directly but rather in Bitcoin futures contracts. This approach brings certain pros and cons.

Advantages of BITO:

• Regulatory Approval: BITO has the SEC’s stamp of approval, making it a safe option from a regulatory standpoint compared to holding actual Bitcoin on an exchange.
• Accessibility: Investors don’t need to worry about the complexities of holding or securing Bitcoin themselves.

Disadvantages of BITO:

• Futures Decay: Because BITO is based on futures contracts, it can suffer from something called futures decay, where the cost of rolling over contracts eats into returns.
• Tracking Error: Unlike a spot ETF, BITO’s price may not perfectly track the price of Bitcoin due to the nature of futures markets.

VanEck Bitcoin Strategy ETF (XBTF)

Lastly, we have the VanEck Bitcoin Strategy ETF (XBTF), another futures-based ETF that launched shortly after BITO. XBTF follows a similar strategy to BITO but with one important distinction: it has lower management fees.

Advantages of XBTF:

• Cost: With an expense ratio of around 0.65%, XBTF offers lower fees than many of its competitors, making it a cost-effective way to gain exposure to Bitcoin futures.
• Tax Efficiency: XBTF is structured as a C-corp, which can have tax advantages over other ETF structures.

Disadvantages of XBTF:

• Futures-Based Risks: Like BITO, XBTF is subject to the risks inherent in futures contracts, such as tracking errors and potential futures decay.
• Newer Product: XBTF is relatively new, so it has less of a track record compared to GBTC or even BITO.

Performance and Costs Comparison Table:

ETF Name	Type	Management Fees	Performance Tracking Method	Risk of Tracking Error	Premium/Discount Issue	Launch Date
Grayscale Bitcoin Trust (GBTC)	Trust	2%+	Bitcoin	Low	Yes	2013
ProShares Bitcoin Strategy ETF (BITO)	Futures ETF	0.95%	Bitcoin Futures	High	No	2021
VanEck Bitcoin Strategy ETF (XBTF)	Futures ETF	0.65%	Bitcoin Futures	Moderate	No	2021

So, which one should you choose?
It depends on your investment strategy and tolerance for risk. If you're looking for a long-term investment and are concerned about tracking Bitcoin’s price accurately, a spot Bitcoin ETF (if one becomes available) would be the ideal choice. However, between GBTC, BITO, and XBTF, each one presents unique advantages.

• GBTC is an attractive option for those who want direct Bitcoin exposure but are comfortable with the premium/discount issue.
• BITO and XBTF, as futures-based ETFs, are better for short-term strategies or for investors seeking regulatory safety without the responsibility of handling actual Bitcoin. XBTF may appeal more to cost-conscious investors due to its lower fees.

The Future of Bitcoin ETFs

As the regulatory landscape evolves, the potential for spot Bitcoin ETFs to be approved could change the game entirely. While futures-based ETFs offer indirect exposure, a spot Bitcoin ETF would allow investors to track Bitcoin’s price directly, minimizing tracking errors and avoiding the complexities of futures markets. Investors should stay informed about new developments, as these products are still evolving.

In the end, there’s no one-size-fits-all answer when it comes to choosing the best Bitcoin ETF. Each product has its pros and cons, and the right choice depends on individual goals. If you’re bullish on Bitcoin’s long-term future but don’t want the hassle of managing it yourself, Bitcoin ETFs offer a convenient way to gain exposure without diving into the technical side of cryptocurrency.