The Securities and Exchange Commission (SEC) approved 11 new spot Bitcoin (BTC -2.14%) ETFs earlier this month; two stand out as clear winners among the group.
The iShares Bitcoin Trust (IBIT -1.47%) from Blackrock (BLK 0.69%) was the first to reach $1 billion in assets under management less than one week after its launch. The Fidelity Wise Origin Bitcoin Fund (FBTC -1.52%) followed close behind, reaching the milestone the next day. Two weeks into the start of trading of this new breed of Bitcoin ETFs, the two leaders account for about 70% of all inflows.
In other words, the market is showing a clear preference for the Bitcoin ETFs from Blackrock and Fidelity over the competition. Should you follow the wisdom of the crowd, or are there better options?
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Why size matters in Bitcoin ETFs
Neither Blackrock nor Fidelity offer the lowest fees among the new Bitcoin ETFs. That title belongs to the Bitwise Bitcoin ETF (NYSEMKT: BITB), which charges just 0.20% of assets under management. It's also waiving the fee for the first six months up to $1 billion in assets. But Blackrock and Fidelity are not too far behind, with expense ratios of 0.25% each. Both issuers are also offering generous fee waivers.
Importantly, scale can play an important role in driving down costs for shareholders. Issuers can leverage certain operational expenses for an ETF, such as marketing spend. Additionally, bigger funds may be able to negotiate lower custodial fees for their Bitcoin holdings. (In the case of Fidelity, its crypto arm is handling the custody of the trust's holdings, so it has a lot of room to lower fees.) As a result, the biggest ETF issuers are often very competitive on price. Over time, both Blackrock and Fidelity may offer lower fees than the competition for their respective Bitcoin ETFs.
But size matters for another reason as well. More funds flowing into (and out of) an ETF means the shares are more liquid. That provides investors with tighter bid-ask spreads and helps the ETF price track the net asset value of the fund's holdings. Even if you're not an active trader, the ability to buy an ETF that tracks the actual underlying assets very closely can ensure you're not paying an unnecessary premium to invest in Bitcoin.
Should you follow the crowd?
If I were to invest in a Bitcoin ETF, it would either be the Fidelity Wise Origin Bitcoin Fund or the iShares Bitcoin Trust. Not only do the two issuers have the factors of scale working in their favor, but they also have long track records of providing low-cost ETFs and mutual funds for traditional asset classes, like stocks, bonds, and real estate investment trusts.
The ETFs are particularly interesting for anyone looking to add Bitcoin exposure to a retirement account, such as an IRA. While it's possible to invest directly in cryptocurrency with a self-directed IRA, those plans are expensive and the process of opening an account can be cumbersome. The simplicity of an ETF that tracks Bitcoin is a great option for those investors, and I wouldn't hesitate to buy either the Blackrock or Fidelity fund in that situation.
But for those investing in a regular brokerage account, they might consider a direct investment in Bitcoin itself. Holding Bitcoin instead of an ETF has several advantages. For one, you can transfer it to a wallet you control and use it for purchases. Second, you won't pay any fees just for holding Bitcoin.
That said, there are costs to purchase and sell Bitcoin. And those costs can be substantial on certain cryptocurrency exchanges. If you want a small amount of Bitcoin or will be buying a small amount at a time, you may end up paying less in fees with an ETF, despite the expense ratio.
Buying the actual cryptocurrency itself will be a great option for some, but many will be better off with an ETF. And if you're going to buy a Bitcoin ETF, the iShares Bitcoin Trust or Fidelity Wise Origin Bitcoin Fund are the most appealing options.
