Best Bitcoin Exchange-Traded Funds (ETFs)

Over the last five years, cryptocurrencies have evolved from financial rogues to high profile financial assets within the wealth management space. Some advisers and portfolio managers are reluctantly embracing cryptocurrencies as a high-risk asset class in their own right. More and more retail investors are considering allocating a modest amount of their investment portfolio to cryptocurrencies, despite the risks. In response to this demand, asset managers have recently launched some of the best Bitcoin ETFs.

These collective investment vehicles allow retail investors to invest in Bitcoin through their UK stockbroker accounts, rather than through a cryptocurrency exchange.

What is an Exchange-Traded Fund

Exchange-Traded Funds, also known as ETFs, are listed investment funds that retail investors can invest in just like company stocks & shares. The fund is open-ended, which means that the size of assets under management can expand or contract in accordance with investor demand. This effective mechanism helps to ensure that the price of the shares in an ETF closely correspond with the value of its underlying holdings.

The same cannot be said for investment trusts and other closed-ended investment funds which can be bought or sold at a discount or premium to underlying assets depending on whether demand for the finite number of shares is higher or lower than the supply of shares for sale at any given moment.

Why are Bitcoin ETFs being launched?

Bitcoin has the status of being the most mature and dominant cryptocurrency. At the time of writing, its market cap exceeds $1 trillion, (which is double the market cap of closest rival crypto Ethereum).

It is logical that investors see the frontrunner as the most ‘investment grade’ opportunity, as its perceived obsolescence risk is lower, unlike the smaller cryptocurrencies known as ‘alt-coins’ which don’t have the same brand-name recognition and could more easily disappear into obscurity.

In this guide, we’ll highlight the best Bitcoin ETFs available across the world and provide facts about each to enable you to continue your research.

Is Bitcoin a good investment?

This is a massive subject for debate and it deserves its own article. Read it here: ‘Is Bitcoin a good investment?’

Bitcoin is objectively a very high-risk investment on the basis of price volatility. Bitcoin has followed an astonishing upward trajectory over the last few years, but these climbs have been frequently punctuated by short term falls exceeding 20% in a month.

Bitcoin investors need a stomach for this level of risk. Assess your appetite for risk in our risk tolerance quiz.

To learn more about Bitcoin and the blockchain technology that underpins the currency, browse some of the best cryptocurrency books in our book ranking. It’s not possible to be sure that you’ve found the best cryptocurrency to invest in, therefore abandon this notion of certainty in such a volatile market.

The best Bitcoin ETFs: ranking methodology

There are many ways to rank exchange-traded funds to crown one Bitcoin ETF as the champion. We prefer to rank by assets under management because smart investors vote with their capital. The size of a fund typically provides useful insights as to the merits of a fund relative to its peers. We’ll also draw out key statistics about each Bitcoin ETF so that you can understand why each fund is so highly ranked.

The best Bitcoin ETFs is a dynamic ranking because new Bitcoin ETFs are launched every month. As previously stated, many asset management groups have sensed the pent-up demand for an accessible investment product that can be accessed within a Stocks & Shares ISA, pension account or another traditional brokerage account.

Investors are still wary about registering directly with a cryptocurrency exchange and are wary about owning cryptocurrencies directly, having been put off by news items about exchange failure and hostility from regulators. They would rather pay a knowledgeable steward to own and manage the Bitcoin holding on their behalf.

Disclaimer: This article is not financial advice. Financial Expert does not recommend cryptocurrency investment and supports the guidance of the UK financial regulator that investors should only spend money on cryptocurrencies that they could afford to lose completely. If you’re unsure about making investment decisions, consider finding a financial adviser.

The distinction between real and synthetic Bitcoin ETFs

Investors should understand the difference between a real or synthetic Bitcoin ETF before they invest. The best funds to invest in is subjective and will depend on investor preference.

A real Bitcoin ETF will invest its cash in a portfolio of Bitcoins in a straightforward manner. Therefore, ETF shareholders will indirectly hold a Bitcoin asset and can expect that the performance of the fund will more-or-less mirror the performance of the Bitcoin price.

A synthetic ETF uses derivatives to replicate the performance of an asset. In the case of the best Bitcoin ETFs, a synthetic variant would use derivatives such as swaps to achieve this. A derivative is a contract with another financial institution that will aim to provide the ETF with a return similar to a Bitcoin.

However, the financial performance of a contract may not mirror the real return of a Bitcoin precisely. This could be due to an inherent mismatch between how the contract functions and the underlying asset, human error, or the impact of having to renew the contracts periodically at different prices. Investors often find that the tracking error of synthetic ETFs is much greater than their real counterparts, particularly over long periods of time.

It is important to note that the only Bitcoin ETFs currently in issue are synthetic ETFs. At the request of the US Securities & Exchange Commission, they use Bitcoin futures derivatives to provide their return rather than real Bitcoin holdings.

Are Bitcoin ETFs legal?

Please be aware that laws and regulations are subject to change therefore this content be out of date. Please perform your own research to determine the legality of an investment.

The legal status of Bitcoin ETFs in the UK and abroad is not straightforward and will continue to evolve.

At the time of writing (6 November 2021), UK retail investors are not permitted access to the only Bitcoin ETFs on the market.

This is because the only active Bitcoin ETFs admitted to regulated exchanges are synthetic ETFs that use Bitcoin derivatives to produce their return.

This puts the products in breach of pre-existing UK rules which prevent UK retail investors from accessing cryptocurrency derivatives. This included a ban on trading cryptocurrency Contracts for Difference (CFDs).

Therefore UK investors will need to sit on their hands and wait for one of two developments: