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More than 10 years have passed since the first application to open a Bitcoin ETF (Winklevoss Bitcoin Trust) was filed. All this time, battles have been raging over the intricacies of regulating assets related to the unstable cryptocurrency market. And even after the launch of spot Bitcoin ETFs, analysts still have doubts about the safety of this solution for investors.
Bitcoin ETFs To Avoid: Grayscale Bitcoin Trust (GBTC)
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Access to digital assets is now available through the Grayscale Bitcoin Trust (NYSE:GBTC). It is not necessary to study blockchain technology. However, this tool for simplifying investment activities has not escaped criticism.
Using this opportunity, investors are not immune to fluctuations in GBTC shares at different points. Premiums or discounts to its net asset value (NAV) mean the user will pay a different price for 1 bitcoin than the current one. The actual profit may differ from the expected one, which makes GBTC a less profitable option compared to other ways of gaining access to bitcoins.
The annual management fee is 2%, which is several times higher than other Bitcoin ETFs. In a bear market, investors’ profits depend heavily on the amount of fees.
The flexibility of this asset is also questionable. GBTC operates like a closed-end fund and cannot create or redeem shares based on market demand. For investors, this means a departure from the usual ways of doing business.
In 2021, GBTC applied to the SEC for full approval of the ETF. The Federal Court of Appeals ruled in favor of the former only in 2023. As a result, the SEC was forced to review the application to convert the Bitcoin trust into an ETF.
The regulator has consistently emphasized the need for adequate supervisory sharing agreements. This was to prevent market manipulation. Therefore, the approval of the Securities and Exchange Commission was received only on January 10. The event was unexpected for many analysts and may emphasize the fragile situation. If the SEC continues its efforts to prevent this ETF from operating, the sustainability of this instrument will be in question.
Franklin Bitcoin ETF (EZBC)
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The Franklin Bitcoin ETF’s (NYSE:EZBC) potential Achilles’ heel is the lack of diversification. EZBC positions itself as an optimized investment vehicle consisting of Bitcoin and cash. However, this approach ignores the standard ETF approach of reducing risks by including a large number of stocks in its portfolio.
A non-diversified portfolio of crypto assets is more susceptible to roller coasters due to their high volatility. Such changes are difficult for inexperienced investors, who usually choose ETFs to simplify decision-making and get more predictable results.
An ETF that fully bets on Bitcoin leaves investors vulnerable to concentration risk. Any black swan, regulatory change, or temporary market disruption could have a severe impact on the fund. This heightened sensitivity limits EZBC’s ability to utilize a risk mitigation strategy. Specifically, it can mitigate the impact of individual asset performance on the overall portfolio.
The EZBC Bitcoin ETF stands as a newcomer, a youngster among the giants of the exchange-traded fund industry. Given its recent debut on the market, the fund does not have a large data set to backtest. Without verification, it is difficult for investors to make an informed decision, as they are traditionally driven by an understanding of the facts at hand. The lack of historical background makes understanding a fund’s reaction to different market cycles or events difficult, requiring alternative metrics and indicators to gauge its potential trajectory.
BlackRock’s iShares Bitcoin Trust (IBIT)
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Investors’ risks can be their own responsibility with the BlackRock’s iShares Bitcoin Trust (NASDAQ:IBIT), judging by a recent SEC memorandum. The proposed plan implies a new method for ETF share redemption, which can allow fund investors access Bitcoin without directly buying or holding the asset. Despite the SEC’s traditional concerns about Bitcoin market manipulation, the ETF has received the approval.
During the meeting held to address SEC’s concerns, BlackRock proposed a T+1 settlement regulation, improving the redemption process. The revised model allows investors to send funds to the broker prior to authorized participants — Wall Street banks. Such a proposal is expected to increase resilience to market manipulation. However, the risks still remain above average and investors should be cautious when choosing the first ETF to enter the Bitcoin market.
On the date of publication, Julia Magas did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Julia Magas is a writer who covers the latest trends in finance and technology. Her work is published in a number of financial media outlets such as Nasdaq, Cointelegraph, Investing, SeekingAlpha, FXEmpire, and Beincrypto. She primarily covers cryptocurrency and blockchain technology with a focus on market performance, innovations and trends.
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