The new iShares Bitcoin Trust(NASDAQ: IBIT) is one of a dozen spot Bitcoin(CRYPTO: BTC) ETFs that were approved by the SEC in January. All of these spot Bitcoin ETFs are supposed to do one thing, and one thing only: hold Bitcoin.
Sounds simple enough, right? But, as with all things crypto, there are a few hidden wrinkles that may not be obvious to the average investor. Let's take a closer look.
The most efficient way to track the price performance of Bitcoin
First and foremost, the iShares Bitcoin Trust is a spot Bitcoin ETF. In other words, it buys Bitcoin in the spot market. This is an important distinction, because previous Bitcoin ETFs used a mix of different financial derivatives, such as futures contracts, to track the daily price of Bitcoin. This made them inherently unreliable for investors who wanted direct exposure to the current price of Bitcoin.
Bitcoin / U.S. dollar chart by TradingView
The iShares Bitcoin Trust changes all of that, because it buys Bitcoin in the spot crypto market. Theoretically, then, it should be able to track the price of Bitcoin on a nearly 1:1 basis. And, indeed, that has largely been the case for all of 2024. Since Jan. 12, when this ETF launched, Bitcoin is up 77%, while the iShares Bitcoin Trust is up 75%. That's about as close as you'll get without buying Bitcoin itself.
A new market benchmark for crypto
While all of the new spot Bitcoin ETFs do the same thing, the iShares Bitcoin Trust stands out from the pack because it has become the largest and most popular of the new spot Bitcoin ETFs. In less than 12 months, the iShares Bitcoin Trust has attracted over $17 billion in assets under management. To put that into perspective, that's approximately 1% of all Bitcoin currently in circulation.
And, in the process, the iShares Bitcoin Trust has become the single-best benchmark to gauge overall sentiment in the crypto market. Significant inflows into the ETF are a sign of positive sentiment, while significant outflows are a sign of negative sentiment.
Image source: Getty Images.
For example, ahead of the 2024 presidential election, market participants were closely watching how much money was flowing into and out of the different Bitcoin ETFs. On the day before the election, over $541 million flowed out, and that was viewed as a sign of market skittishness. Notably, the iShares Bitcoin Trust was the only spot Bitcoin ETF that saw a modest inflow.
On Election Day, the iShares Bitcoin Trust set a single-day trading volume record, with more than $4 billion changing hands. On the day after the election, with Donald Trump having been declared the winner, the iShares Bitcoin Trust saw an incredible $1 billion in volume in just the first 20 minutes of trading. Keep your eye on these inflows and outflows going forward: They could give advance notice of how the market is feeling about Bitcoin at any given moment.
You're not holding Bitcoin directly
By their very nature, exchange-traded funds are indirect investments. For example, if you're buying an ETF tracking the S&P 500, you're not actually buying and holding all 500 stocks in the index. Instead, you're buying a share of an investment product that has already done that for you.
In the same way, if you're buying the iShares Bitcoin Trust, you're not actually buying and holding Bitcoin. Instead, you're buying a share of an investment product that has already done that for you. In this specific case, the company that actually owns the Bitcoin is BlackRock(NYSE: BLK), which is the asset management company behind the iShares Bitcoin Trust.
For most investors, this might sound like a technical issue, and one that really doesn't matter. But here's the thing: Bitcoin is both a digital currency and a digital asset. And there are many uses you might have for Bitcoin as a digital currency. For example, you might want to buy a very expensive item with your Bitcoin. If you're holding the Bitcoin indirectly, you can't do that. You'd have to sell shares in your ETF, collect the cash, and then buy the item.
Buy Bitcoin or the iShares Bitcoin Trust?
The obvious question becomes: Should you buy the iShares Bitcoin Trust, or should you just buy Bitcoin directly? Long-time crypto investors will usually opt to buy Bitcoin directly. But investors new to crypto will typically opt to buy the ETF. After all, they're getting nearly 1:1 exposure to the daily price performance of Bitcoin, at almost no additional cost. The expense ratio of BlackRock's Bitcoin ETF is just 0.25%.
And that's why the launch of the iShares Bitcoin Trust in January was such a watershed event for potential Bitcoin investors: It completely abstracted away all the technical issues of buying and selling crypto, and made it possible for anyone to get exposure to Bitcoin at a very low cost with just a single click.
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Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
