Critical Information Essential for Crypto Enthusiasts Regarding the iShares Bitcoin Trust Exchange-Traded Fund
The recent approval of the iShares Bitcoin Trust (IBIT 0.16%) by the SEC makes it one of numerous spot Bitcoin (BTC 4.20%) ETFs on the market. These ETFs are designed to accomplish a single task: store Bitcoin.
At first glance, this task appears straightforward. However, as with all cryptocurrencies, there are hidden complexities that may not be evident to the typical investor.
The most accurate method to monitor Bitcoin's price performance
The primary function of the iShares Bitcoin Trust is to serve as a spot Bitcoin ETF. This means it purchases Bitcoin directly from the spot market. Contrast this with previous Bitcoin ETFs, which relied on a mix of financial derivatives such as futures contracts to track Bitcoin's daily price. This method was often unreliable for investors seeking direct exposure to Bitcoin's current price.
By purchasing Bitcoin directly from the spot market, the iShares Bitcoin Trust should theoretically have a nearly 1:1 correlation with Bitcoin's price. In fact, this holds true for the majority of 2024; since its launch on Jan. 12, Bitcoin has risen 77% while the iShares Bitcoin Trust has climbed 75%. This is about as close as you can get without actually acquiring Bitcoin itself.
A benchmark for the crypto sector
Although all spot Bitcoin ETFs share the same objective, the iShares Bitcoin Trust distinguishes itself as the largest and most popular of the new ETFs. It has amassed over $17 billion in assets under management in less than a year, which equates to approximately 1% of all circulating Bitcoin.
In this capacity, the iShares Bitcoin Trust has become the primary marker for gauging overall market sentiment for cryptocurrencies. Massive inflows into the ETF reflect positive sentiment, while significant outflows signify negative sentiment.
For instance, prior to the 2024 presidential election, observers scrutinized the inflow and outflow of funds among the various Bitcoin ETFs. The day before the election, $541 million exited all ETFs, indicating market unease. Remarkably, the iShares Bitcoin Trust was the only ETF to see modest inflows.
On Election Day, the iShares Bitcoin Trust set a single-day trading volume record, with over $4 billion exchanged. The following day, with Donald Trump declared the victor, the iShares Bitcoin Trust recorded an astonishing $1 billion in volume within just the first 20 minutes of trading. Take note of these inflows and outflows moving forward; they may offer advance warning of how the market feels about Bitcoin at any given moment.
Indirect ownership of Bitcoin
By definition, exchange-traded funds (ETFs) involve indirect investment. Purchasing an ETF that mirrors the *S&P 500* index, for example, doesn't mean you own each of the 500 stocks in the index. Instead, you buy a share in an investment vehicle that already holds these stocks for you.
In a similar vein, purchasing the iShares Bitcoin Trust doesn't mean you directly own Bitcoin. Instead, you acquire a share in an investment product that already holds Bitcoin for you. In this specific case, BlackRock (BLK 1.22%), the asset management firm running the iShares Bitcoin Trust, owns the Bitcoin.
While this may appear like a minor technicality, it's crucial to understand that Bitcoin functions as both a digital currency and a digital asset. There may be situations where you want to use Bitcoin as a currency to purchase expensive items, but if you hold it indirectly, this becomes impossible. You'd need to sell your ETF shares, convert the cash, and then make the purchase.
Bitcoin or iShares Bitcoin Trust: Which is better?
The question ultimately becomes: should you invest in the iShares Bitcoin Trust, or should you simply buy Bitcoin directly? Seasoned cryptocurrency investors typically opt for purchasing Bitcoin directly. However, newcomers to the crypto market are more likely to invest in the ETF, which provides nearly 1:1 exposure to Bitcoin's daily price movement at a minimal additional cost (the expense ratio of BlackRock's Bitcoin ETF is just 0.25%).
This is why the launch of the iShares Bitcoin Trust in January was a groundbreaking moment for potential Bitcoin investors; it virtually eliminated the technical hurdles involved in purchasing and selling cryptocurrencies, making it easier than ever for anyone to gain exposure to Bitcoin at a low cost with a single click.
In the world of finance, investing in the iShares Bitcoin Trust offers a less complex approach for individuals looking to gain indirect exposure to Bitcoin's daily price movements. Unlike directly purchasing Bitcoin, investing in this ETF is associated with lower technical hurdles, making it more accessible for potential Bitcoin investors.
Moreover, the iShares Bitcoin Trust serves as a significant barometer for the broader crypto sector. Its massive inflows and outflows can provide insights into market sentiment towards cryptocurrencies, offering valuable investment cues for both short-term and long-term strategies.
