The Debut of Bitcoin ETFs

 
Asset Management, Companies and Industries, Education, Fixed Income, Investment Themes, The Economy June 3, 2024

The Debut of Bitcoin ETFs

Digital currencies like bitcoin have grown in popularity over the last 15 years and the recent launch of bitcoin exchange-traded funds (ETFs) have made it easier for investors to get exposure to the spot price movements. In February 2024, 11 bitcoin ETFs were given permission to begin trading. Despite substantial volatility and risk, they have generated significant interest from both retail and institutional investors. The ETFs offer a more convenient and regulated way to invest in bitcoin and eliminate the need to purchase and store coins.

How is cryptocurrency valued?

Fiat currencies like U.S. dollars and Euros are forms of money issued by governments to serve as legal tender. Cryptocurrencies like bitcoin, on the other hand, are “non-fiat” or non-governmental forms of “digital cash” to be used for electronic payments.

The idea of “digital cash” isn’t new—it started with credit cards, PayPal, Venmo, and others to satisfy the need for easy, traceable electronic payments. But those payments are tied to fiat currencies managed by central banks, whereas cryptocurrencies are managed by blockchain technology.

Proponents believe that the value of a cryptocurrency is based on the number of cryptocurrency units created and the technology that limits the creation of additional units. Like gold, the value often depends on supply and demand—the fewer units available, the higher the price potential buyers are willing to pay.

What are bitcoin ETF fees like?

The 11 bitcoin ETFs approved by the SEC are in fierce competition for investors. Many of the issuers providing the ETFs waived their fees for a certain period in order to attract more investors. The expense ratios on the ETFs range from 0.20% to 1.5%. All 11 of the ETFs function effectively in the same way using the same mechanisms to track the spot price of bitcoin.

How are bitcoin ETFs taxed?

The IRS currently treats cryptocurrencies as property, not currency. In the eyes of the IRS, cryptocurrency transactions are taxable events, which means when you sell bitcoin and turn it into U.S. dollars or trade it for another asset, a taxable event has taken place.

Because cryptocurrencies are treated as property by the IRS, they fall under the same tax rules as stocks, which means the capital gain and loss tax rules apply. If you hold a bitcoin ETF for a year or less, any realized gain will be subject to the short-term capital gains tax rates, which are the same as the ordinary income tax rates that apply to wages. Meanwhile, gains held for over a year are subject to long-term capital gains tax rates.

Conclusion

Bitcoin is a speculative investment, and we are still in the early days of understanding its utility. We need more information to understand bitcoin’s risk and return profile and whether or not it is an asset that can reliably deliver a positive expected return. There is no fundamental reason why it is priced where it is today. It is based on supply and demand, making future prices hard to predict.

 

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Capital Management, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.

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