As the long-awaited spot Bitcoin ETF finally emerges after years of speculation, it is accompanied by its 10 fraternal twins, marking one of the most pivotal developments on the storied streets of Wall in recent years.
Whether you find yourself bewildered by the fantastic news or you are well-versed and looking to delve deeper into this groundbreaking occurrence, allow us to guide you through this monumental moment in finance.
The Big Reveal
The U.S. Securities and Exchange Commission made an epochal announcement on Wednesday, greenlighting 11 exchange-traded funds, aptly named “spot Bitcoin ETFs”. These funds are meticulously designed to align with the “spot” price of the Bitcoin cryptocurrency—it endeavors to mirror the actual trading price of Bitcoin.
Amongst other implications, this approval dramatically simplifies access for individuals to own at least one digital coin, representing a significant stride towards integrating cryptocurrency into the mainstream financial ecosystem.
Prior to this milestone, Bitcoin and other cryptocurrencies could only be stored in a limited number of places: specialized accounts (or digital wallets), popular money apps such as PayPal and Venmo, or a select few brokerage accounts, including Robinhood, TradeStation, and Webull.
The vast majority of investors with a standard brokerage account or individual retirement account (IRA) had scarce options at their disposal. There existed an “over-the-counter” fund that struggled to accurately reflect the price of Bitcoin, alongside Bitcoin futures ETFs—which do not trade on the spot price of Bitcoin, but instead on futures contracts tethered to Bitcoin.
However, after nearly a decade-long battle for a fund that tracks spot prices—the nearest equivalent to direct exposure to the underlying asset—the wait is now over.
On Wednesday, the SEC greenlit not just one or two, but an impressive “banker’s dozen” of 11 spot Bitcoin ETFs¹. I’ll outline them based on cost, though it’s worth noting that several funds are currently waiving a substantial portion, if not all, of their fees for a limited period:
The Analysis
With the unveiling of these innovative products, a plethora of questions naturally emerge. Today, we aim to use this space to address some of the most poignant queries surrounding the newly minted funds.
Who’s Investing in These ETFs?
These groundbreaking funds are poised to attract both Wall Street institutions and everyday investors.
“It’s targeted at the institutional allocators who seek the reassurance of an ETF,” states Leah Wald, CEO and Co-Founder of Valkyrie, a firm that boasts one of the newly established spot Bitcoin ETFs. “However, the significance of the retail market cannot be overlooked, even for those who currently possess Bitcoin in a digital wallet. The ETF is undeniably a favorite among IRAs and other retirement accounts, particularly for those who prefer to self-direct their investments.”
The Battle of the Bitcoin ETFs Heats Up: Investors Delve Into the World of Cryptocurrency Funds
What to Consider When Evaluating Spot Bitcoin ETFs
As the world of cryptocurrency funds expands, investors are flocking to spot Bitcoin ETFs. However, with 11 issuers launching ETFs simultaneously, a “fierce fee war” has erupted. With fees being a critical factor, Bitwise’s BITB is leading the pack with a mere 0.20% in expenses. Furthermore, the backing of trusted institutional names like BlackRock and Fidelity, versus newer entrants with crypto-native expertise like Valkyrie, adds an interesting twist to the evaluation process.
The Rise of Older Bitcoin ETFs
Despite the surge in popularity of spot Bitcoin ETFs, their older counterparts, the Bitcoin futures ETFs, still hold their ground. Decentralized and lacking a centralized pricing mechanism, Bitcoin poses unique challenges. Additionally, futures ETFs have shown better assimilation of information and continue to garner significant trading volumes, making them a force to be reckoned with in the cryptocurrency funds arena.
The Tax Implications of Spot Bitcoin ETFs
While the taxation of spot Bitcoin ETFs is not entirely clear, there are some indications. Just like gold ETFs are taxed based on owning gold, it is likely that these Bitcoin ETFs will be taxed similarly. Investors will need to familiarize themselves with capital gains tax rates. Selling a Bitcoin ETF after less than a year attracts short-term capital gains rates, while selling after a year or longer incurs long-term capital gains rates, based on the investor’s taxable income.
Investor Alert: Navigating the Potential Wash-Sale Rule When Trading Spot Bitcoin ETFs
Amid the increasing interest in spot Bitcoin ETFs, investors are drawn to the potential tax advantages of these investment vehicles. As the allure of trading spot Bitcoin ETFs intensifies, investors are faced with a critical question: will these ETFs be subject to the famous wash-sale rule?
Understanding the Wash-Sale Rule
The wash-sale rule is a tax regulation designed to prevent investors from generating artificial losses for tax benefits. This rule prohibits investors from deducting capital losses if they repurchase the same or substantially identical asset within 30 days before or after the sale. While traditional securities are subject to this rule, Bitcoin, with its unique classification, has been exempt. This exclusivity has presented investors with a significant tax advantage when trading Bitcoin.
Risks When Trading Spot Bitcoin ETFs
As the popularity of spot Bitcoin ETFs continues to grow, investors must proceed with caution due to the uncertainty surrounding the application of the wash-sale rule to these instruments. Investors are left in a state of limbo, eagerly awaiting clarification on whether these ETFs will fall under the wash-sale rule.
Unanswered Questions and Cautionary Advice
The elephant in the room remains: Will spot Bitcoin ETFs steer clear of the wash-sale rule, or will investors be treading in risky tax territory? The lack of a definitive answer poses a dilemma for investors. Consequently, until regulatory clarity emerges, a prudent approach may involve refraining from engaging in trading activities that could trigger the wash-sale rule within the realm of spot Bitcoin ETFs.
WealthUp Tip: If you don’t know about the capital gains tax, here’s what you need to know.
Riley & Kyle
The Regulatory Ambiguity of the Hashdex Bitcoin Futures ETF
Complicating matters further, the Hashdex Bitcoin Futures ETF (DEFI) presents an interesting case. While it has secured listing approval from the SEC, it is poised to transition from tracking Bitcoin futures to a spot product once its registration statement receives SEC approval, adding another layer of complexity for investors to navigate.
WealthUp (Young and the Invested is now WealthUp)
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
