What to look for in a bitcoin ETF

What is a bitcoin ETF?

Exchange Traded Funds (ETFs) are an efficient and low-cost way of investing in shares or other assets and have become one of the world's most popular ways to invest.

ETFs are managed funds that trade on an exchange like the ASX. You can trade ETFs in the same way you trade shares. The difference is that an ETF represents an investment in a basket of shares or bonds while a share represents an investment in just one company. An ETF’s basket could include a handful of shares or bonds or hundreds, it could also invest in single assets like gold and other currencies.

A bitcoin ETF is a type of ETF that seeks to track the price of bitcoin. People can invest directly in bitcoin by buying an ETF instead of buying bitcoin on a crypto exchange, which can be complex for some. Bitcoin ETFs are designed for those who want to invest in bitcoin using a more simple and familiar method, like buying stocks in their brokerage accounts or stock trading apps.

Are bitcoin ETFs on overseas exchanges different to the ones here?

Bitcoin ETFs listed on overseas exchanges have similarities with the bitcoin ETFs here. There are also some differences. Many exchanges around the world approved bitcoin ETFs before the ASX, so, understandably, some Australian investors sought bitcoin ETFs offshore. 

The first bitcoin ETFs became available on the Toronto Stock Exchange in 2021. Over the past six months, more and more exchanges have started approving bitcoin ETFs. Notably, the US Securities and Exchange Commission (SEC) approval paved the way for bitcoin ETFs to be listed on exchanges in the US earlier this year. VanEck was one of a handful of investment managers that launched a bitcoin ETF in the US in January 2024.

Other jurisdictions followed. Last month bitcoin ETFs were listed in Hong Kong and now the ASX has approved its first bitcoin ETF, the VanEck Bitcoin ETF (VBTC), which started trading this week.

The investment objective of VBTC is the same as bitcoin ETFs on overseas exchanges. A bitcoin ETF will seek to track the returns of the bitcoin price. It will generally do this by buying bitcoins. This means that bitcoin ETFs will return the bitcoin price, minus fees and costs.

The big difference between VBTC and ETFs on overseas exchanges is the regulatory framework, the operation and the paperwork that may be required.

If you invest on any international exchange your investment will be governed primarily by foreign law. This means you may have to contend with legislation that doesn’t exist in Australia. For example, we have no estate taxes here. If you own US assets, there are potential US Estate Taxes for which your estate will be liable.

You could also be liable for withholding taxes in other jurisdictions.

In other jurisdictions, consumer protections or the ability for recourse, may not be available to foreign investors. This is an additional risk when investing in bitcoin ETFs on overseas exchanges.

Investors need to consider this before investing via an overseas exchange and determine if the benefits outweigh the risks.

The other problem US ETF investors encounter is the additional administration, including filling out unwieldy W8-BEN forms.

Beware too of hidden fees and price discovery investing in offshore exchanges.

Many online brokers today offer zero brokerage for trading in international shares and ETFs. However, investors will still pay a hidden commission in the form of Payment For Order Flow (PFOF). This practice routes your order to a specific counterparty, rather than having the market compete for your order at the best price possible. This means investors lose price discovery – which is a method for determining the spot price of an asset through interactions between buyers and sellers, which is what occurs throughout the trading day on ASX.

Another thing to consider is if you are buying and selling on an international exchange that operates at different hours of the day, it is more difficult to time your bitcoin ETF purchase. Often investors are restricted to buying at the open and can’t trade throughout the overseas trading day.

When you put in your trade for a bitcoin ETF listed on an overseas exchange during Australian trading hours, commonly, the overseas exchange is closed and you can’t see what the depth looks like – how many sellers there are and how many buyers. As mentioned above, you often don’t get to see the price you transact at, so between the time you place your order and the market opening, a lot could have happened in the bitcoin market and that could therefore impact the price of your investment.

This is not to mention the FX rate. Buying on foreign exchanges involves a currency transaction, on which a spread is paid. By buying on ASX in Australian dollars, there is no conversion and no currency spread.

Price transparency and ease of trading are benefits of ETFs and you are forgoing them when you buy a bitcoin ETF on an international exchange. This is another consideration investors should be aware of when investing in bitcoin ETFs on overseas exchanges.  

How do I differentiate between Australian bitcoin ETFs?

When comparing products, potential investors should be concerned with the quality, scale, and experience of the product issuer and their key service providers.

We have already seen two bitcoin ETFs close in Australia, so it is worthwhile assessing the depth and breadth of the ETF product issuer. How many other products do they offer? Have they got a strong history or global experience and backing?

An ETF issuer should be a fund manager with a track record of offering a wide range of asset classes and investment strategies.

Another important consideration we think, is whether the bitcoin ETF is listed on ASX. ASX is the main stock exchange in Australia, but it’s not the only one. Because of its size and history is regarded as having better connectivity, higher governance and standards, quality education programs, and superior service levels.

Importantly, bitcoin ETF investors should also assess costs. Fees eat into your investment return and for a single asset class ETF such as bitcoin the differences in fees can impact returns.

Key risks: An investment in the fund involves extremely high risk and the potential for loss of all capital invested. Investors should actively monitor their investment as frequently as daily to ensure it continues to meet their investment objectives. Risks associated with an invest in the fund include those associated with pricing risk, regulatory risk, custody risk, immutability risk, ASX trading time risk, concentration risk, environmental risk, currency risk, operational risk, underlying fund risk and forking risk. See the VanEck Bitcoin ETF PDS and TMD for details.