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Bitcoin futures ETFs might be an costly solution to get long-term crypto publicity

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Crypto enthusiasts had reason to cheer last week when digital currencies hit another milestone: the first publicly traded US Bitcoin futures fund.

The investors rushed in. The ProShares Bitcoin Strategy ETF (BITO) made the second largest trading debut of all ETFs of all time when it was launched on October 19. Its share price rose 4%. A similar fund, the Valkyrie Bitcoin Strategy ETF (BTF), launched on Friday.

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However, according to some financial advisors, cost-conscious investors looking to use Bitcoin and other cryptocurrencies in their portfolios may be better off buying them directly than through a futures ETF.

This is especially true for buy-and-hold investors who would save money in the long term, advisors said.

"You're always better off buying bitcoins outright," said Ivory Johnson, certified financial planner and founder of Delancey Wealth Management, based in Washington, D.C.

Long term investors

For example, the ProShares and Valkyrie ETFs each have an expense ratio of 0.95%. This is the asset manager's fund fee; For every $ 10,000 someone invests, managers keep $ 95 a year.

That might not sound like a lot, but the costs can add up over decades of saving. The investor loses the fee, the income from these fees and the compound interest.

Here is an example from the Securities and Exchange Commission: An investor who saves $ 100,000, makes 4% per year, and pays an annual fee of 0.25% has $ 30,000 more than the same person who did one after two decades Fee of 1% pays (this corresponds roughly to the cost of Bitcoin futures ETFs).

"If it's been part of your portfolio for a year, five, ten years or more, 1% is a heavy fee on a mutual fund or ETF," said Charlie Fitzgerald III, CFP, principal and founding member of Moisand Fitzgerald Tamayo, based in Orlando, Florida .

Of course, buying Bitcoin or other cryptocurrencies directly (not through an ETF) is often not free. Crypto platforms and exchanges like Coinbase usually charge a one-time fee (though not always) that varies depending on the provider. But it would be much less costly for buy-and-hold investors in general when compared to the annual fund fee, Johnson said.

And fees aren't the only consideration. Investors may feel more secure with access to cryptocurrencies through a professionally managed ETF if they are concerned about hackers or the loss of passwords or private keys required to access the funds.

Short term investors could also face a 0.95% fee if they plan to sell the ETF within days or weeks. (The fee is 26 cents per day on a $ 10,000 investment.)

"The fee is insignificant if you hold it for two weeks and then sell it," said Fitzgerald.

In that case, a broker's one-time trading fee is likely more momentous, he said.

Fee trends

Overall, there is a general trend towards lower investment fees. The average expense ratio of U.S. mutual funds and ETFs was 0.41% in 2020, according to Morningstar, less than half of the 0.93% in 2000. (These costs are asset-weighted, which means they take into account the relative popularity of the fund .)

Another important difference: the Bitcoin futures ETFs do not own Bitcoin directly; they buy "futures" contracts, which are agreements to later buy or sell the asset at an agreed price. Such funds will generally track bitcoin prices, Fitzgerald said.

(It's a similar concept to oil and gold futures, for example. Such investors don't own the physical gold or the oil barrels.)

However, investors could refrain from paying a 0.95% fee for a fund that may or may not track the price of Bitcoin, Johnson said.

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