Another bitcoin exchange traded fund (ETF) has made its market debut.
On Nov. 16, 2021, just than a month after ProShares released the first bitcoin ETF in the market, VanEck’s Bitcoin Strategy ETF (XBTF) started trading at Cboe Global Markets. The fund monitors the price of bitcoin futures contracts sold on the Chicago Mercantile Exchange (CME).It is a cash-settled fund, which means it is settled in cash rather than genuine bitcoin.
“While a ‘physically backed’ bitcoin ETF remains a crucial aim, we are extremely delighted to be providing investors with this vital tool as they construct their digital asset portfolios,” VanEck’s director of digital assets, Kyle DaCruz, said in a statement.
- Cboe has begun trading VanEck’s Bitcoin Strategy Fund, a bitcoin futures-based ETF.
- The Bitcoin ETF is the third such fund to be created in less than a month.
- In comparison to its contemporaries, it provides a reduced cost ratio and more effective tax processing for long-term bitcoin investors.
Cboe’s return to Bitcoin is marked by the XBTF listing. The exchange was first to launch bitcoin futures on its platform, ahead of CME. However, because to low trading volumes, it canceled them in 2019.
XBTF is the third Bitcoin ETF to be listed on the New York Stock Exchange in less than a month. On October 19, the ProShares Bitcoin Strategy Fund (BITO) was created, and Valkyrie Investment’s Bitcoin Strategy Fund (BTF) followed less than a week later. Both ETFs, like the VanEck fund, are cash-settled futures funds.
Futures are financial derivative contracts that bind the parties to trade an asset at a fixed future date and price. Regardless of the prevailing market price at the expiry date, the buyer or seller must acquire or sell the underlying asset at the predetermined price.
What You Should Know About VanEck’s Bitcoin ETF
VanEck’s Bitcoin ETF varies from its predecessors in two major respects.
VanEck emphasizes its lower fees and taxes in marketing and promotional materials as compared to other, comparable funds. “Cost and tax treatment are two critical factors for investors, and we have prioritized both in the design of XBTF,” DaCruz said.
The cost ratio of the fund is 0.65%, compared to 0.95% for the ProShares Bitcoin Strategy Fund and Valkyrie Bitcoin Strategy Fund.
According to some experts, the fee benefit may not be significant. Lower costs, according to Bloomberg ETF analyst Eric Balchunas, will help, but not much in the short run. “I see it succeeding, but it will take some time,” he said. According to Laurent Kssis, director of CEC Capital, the low costs of XBTF are “compressing downwards” the fees for bitcoin ETFs considerably quicker than in Europe.
By organizing itself as a C-corporation rather than a Regulated Investment Company (RIC), the fund also claims an effective tax rate of 22.15%.
The fund is liable for paying corporate taxes at the federal, state, and local levels under a C-corporation form, while RICs are established as pass-through corporations. Income and the majority of tax responsibilities are passed on to fund investors by such organizations.
Long-term investors, such as huge investment businesses, benefit from a C-corporation since it enables them to stretch their tax responsibilities over time. They may, for example, carry back their losses for three years and forward by five years, lowering their total tax burden while still offering exposure to a risky asset class.
The disadvantage of investing in a fund like VanEck’s Bitcoin Strategy Fund is that it would lag behind rivals during times of increasing bitcoin prices since it must pay taxes on its net asset value (NAV) before distributing profits to investors.
Other concerns with XBTF are the same as they are with other bitcoin futures-based ETFs that are already trading in the market. Because bitcoin futures are derivatives of the cryptocurrency’s spot price, an ETF based on them may move at a considerable premium or discount to the current price.
As monthly futures contracts expire and the fund rebalances its holdings, investors may face large rolling charges. Backwardation, the inverse of a contango, is a circumstance in which the fund sells cheap and buys high in the form of lower-priced front-month futures contracts.
“There are reasonable rolling cost (soon to expire) contracts to futures months that are passed on to the product and hence the investors,” CEC Capital’s Kssis said. “In addition to ‘roll’ difficulties, there are factors peculiar to futures known as contango and backwardation, which will cause the fund’s performance to diverge from current bitcoin prices.”
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