Bitcoin vs. Bitcoin futures ETFs: How futures-linked ETFs compare with buying the cryptocurrency itself

Crypto is a risky investment, which isn’t appropriate for everyone. Crypto investors may experience substantial and rapid gains or losses. For any investor, it’s important to dig into the details and make sure you understand what you’re actually buying.

The future is here — or rather, ETFs tied to Bitcoin futures are here.

While US investors have been able to buy Bitcoin itself through crypto exchanges and trading platforms for years, what they haven’t had is a product wrapped in an exchange-traded fund (ETF), a financial vehicle familiar to Wall Street. It allows investors to see their Bitcoin-related positions alongside other positions in their brokerage accounts.

But while many financial commentators and crypto investors cheered the “Bitcoin futures ETFs” that launched in October 2021, there are some crucial details to examine. Put simply, these aren’t spot Bitcoin ETFs, which would own Bitcoin directly; instead, they’re Bitcoin futures ETFs, meaning that they’re tied to a Bitcoin derivative. That makes them kind of complicated. Some financial advisers say these new products aren’t appropriate for individual investors.

Here’s what you need to know:

When you buy Bitcoin itself through a trading platform or crypto exchange, you have a direct financial stake in the cryptocurrency, and your investment represents an entry on the Bitcoin network. As crypto traders around the world buy and sell, the price of Bitcoin rises and falls, and so does the value of your investment, however big or small. Ultimately, you control a certain number of units of Bitcoin, and you can do with them as you please.

Of course, it’s important to know the risks associated with owning Bitcoin. Exchanges, trading platforms, and crypto wallets could be hacked, and Bitcoin’s network could come under attack. There’s always a chance that something could go wrong, from fraud and theft to price volatility and much more.

Nonetheless, owning Bitcoin outright is the most common approach to investing in the cryptocurrency. It’s up to you to balance the risks and rewards, and to determine whether crypto belongs in your investment portfolio.

• Direct exposure: You own actual Bitcoin.
• Lower prices: Buying Bitcoin directly is sometimes cheaper than gaining exposure through a packaged product, such as a trust or a fund. These vehicles sometimes trade at a premium relative to their holdings.
• Fewer management fees: There are usually fewer management fees involved with owning Bitcoin itself. Even if there’s a trading commission, platforms typically don’t charge you to just hold your crypto through their service.
• 24/7 Trading: The crypto market operates around the clock. When you own Bitcoin directly, you can buy or sell at any time.

• Potential hacks and theft: Exchanges, trading platforms, wallets, and crypto networks can be hacked. Plus, Bitcoin is a prime target for thieves.
• Security: Depending on how a person holds their Bitcoin, it may be difficult to ensure the security of the passwords or codes used to access their investment. For instance, if a person creates and manages their own Bitcoin wallet directly on the Bitcoin network, they’re responsible for keeping their private key safe.
• Delays and possible fees: At times, there can be delays in accessing your money because of issues with crypto-trading services or with the Bitcoin network itself. It’s also possible that these platforms and the Bitcoin network may charge higher fees than you anticipate.
• Additional risks: Crypto investing involves potential market-manipulation risks, and crypto investors may face limited regulatory certainty.

Let’s get one thing out of the way: As mentioned above, the crypto funds that began trading in October 2021 are not Bitcoin ETFs. They are exchange-traded funds tied to Bitcoin futures. These are complicated financial derivatives. (More on that in a moment.)

To be crystal clear, if a person buys shares in a Bitcoin futures ETF, they have not invested in Bitcoin itself, and they do not own any actual Bitcoin. Instead, their shares provide indirect exposure to Bitcoin’s price movements.

You might think of this like the difference between sugar and a sugar substitute. While the analogy isn’t perfect, one is the real thing and the other is a “synthetic” version. But as sweeteners, they both act in similar ways. The main takeaway here is that if you buy an ETF tied to Bitcoin futures, you’re exposed to the price movements of Bitcoin, without owning Bitcoin outright.

Now, let’s return to this “financial derivative.” Without getting into the weeds too much, a future is a contract between two parties who agree to buy (or sell) an asset at a specific price on a certain date. When they enter into this contract, it’s legally binding.

So when we talk about “Bitcoin futures,” those are contracts speculating on Bitcoin’s future price. This market has a correlation to the regular market for Bitcoin (aka the “spot market”), but sometimes the futures market behaves differently than the spot market. Fees associated with futures contracts can make this financial derivative even more convoluted. Typically, only professional traders or very advanced investors deal in the futures market. It’s complicated and risky, even when a person knows what they’re doing — and that’s without getting into other potential issues, such as market manipulation.

• Allows for speculation on Bitcoin’s price: For some advanced traders, Bitcoin futures ETFs may allow them to pursue investment strategies that aren’t available in the spot market. For instance, making a trade that hinges on a downturn in Bitcoin’s price.
• No need to hold or store Bitcoin: Typically, Bitcoin futures contracts are cash-settled, meaning that when these contracts expire, the parties involved don’t transfer actual Bitcoin. Instead, they use cash. This means that there’s comparatively less security risk related to the storage or delivery of the underlying asset, Bitcoin.
• Enter positions and view holdings in a brokerage account: While a person might consider trading Bitcoin directly on a crypto exchange or trading platform, they may prefer to access the futures market through an ETF because of its accessibility in a brokerage account. (That said, this alone probably isn’t sufficient justification for exploring Bitcoin futures ETFs.)

• Complexity: If you’ve made it this far, you can probably tell that Bitcoin futures ETFs aren’t for everyone. While price swings and volatility can entice some hungry traders, it’s possible to lose a lot of money, even for the experts.
• Fees: In addition to commissions and expenses associated with an ETF’s management, Bitcoin futures ETFs may incur additional fees as fund managers roll contracts, or sell contracts set to expire and buy new ones with a later expiration date.
• Performance differences: Since Bitcoin futures ETFs do not invest directly in Bitcoin, the performance of Bitcoin futures ETFs may differ significantly from the performance of Bitcoin.
• Geared toward the short-term trader: If there’s one thing you should know, it’s that Bitcoin futures ETFs are not designed for the buy-and-hold Bitcoin investor. They’re geared toward advanced traders pursuing short-term strategies.

Whether you’re considering Bitcoin for the very first time or you’re a seasoned crypto trader, it’s an exciting time to learn about these markets. Bitcoin is becoming more widely adopted by financial partners and market participants, and crypto is becoming more widely accepted as an asset class.

While it’s difficult to say what’s in store for crypto at large, Bitcoin futures ETFs represent a step forward in Wall Street packaging crypto-linked instruments for a wider array of investors. As always, whatever your strategy, make sure you understand what you’re investing in and the associated risks.

Disclosures

Bitcoin and Bitcoin futures are relatively new investments. They are subject to unique and substantial risks, and historically have been subject to significant price volatility. The value of these investments could decline significantly and without warning, including to zero. Investors should be prepared to lose their entire investment.

This information is educational and is not investment advice or a recommendation of any security or financial product, transaction, account type, investment strategy involving securities or financial products, or order. You should not buy or sell any security or financial product without first determining that it is appropriate for your portfolio or investment strategy.

Brokerage products and services are offered through Robinhood Financial LLC, a registered broker dealer (member SIPC). Cryptocurrency products and services are offered through Robinhood Crypto, LLC (NMLS ID 1702840). Robinhood Crypto is not a member of SIPC or FINRA. Cryptocurrencies are not stocks, and your cryptocurrency holdings at Robinhood Crypto are not FDIC insured or covered by SIPC. Robinhood Financial and Robinhood Crypto are separate but affiliated companies and wholly owned subsidiaries of Robinhood Markets, Inc.