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Why The 3rd Bitcoin ETF Is Better Than The First Two

Between three bitcoin ETFs where composition is essentially identical, costs become a deciding factor.

The ProShares Bitcoin Strategy ETF (BITO) got all of market's (and media's) attention when it launched back in October. It's hard to call it anything but an immediate success as it now manages more than $1.4 billion, most of which came in the first several trading days.

There are actually three bitcoin ETFs trading today - BITO along with the Valkyrie Bitcoin Strategy ETF (BTF) and the newly launched VanEck Bitcoin Strategy ETF (XBTF). BTF debuted just 3 days after BITO, while XBTF launched on Monday. BITO clearly benefited from the first move advantage and controls 95% of the total combined assets of these three ETFs.

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All three of these ETFs are substantially the same by investing in near-term expiration bitcoin futures contracts. A physical bitcoin ETF has yet to be approved and the SEC has shown no inclination to do so at any point in the near future, so this is the best the ETF marketplace can offer for crypto exposure at the moment.

The only real hiccup in the recent bitcoin ETF launches was that BITO needed to move away from its goal of investing only in current-month expiration contracts and add next-month contracts as well due to contract position limits and the overwhelming demand for its shares. It could mean that BITO trades slightly differently than either BTF and XBTF, but the differences will probably be minor at most.

Comparing Bitcoin ETFs

This is the one-day chart of all three bitcoin ETFs to give you an idea of how they trade.


XBTF's trading pattern is choppier since it was so thinly traded in the early going, but you can still tell that it's essentially tracking the performance of the other two. It's a very short-term chart in order to include XBTF, but I can add that BITO and BTF have traded in virtual lock-step since their common inception date.

The point in saying all of this is that all three bitcoin ETFs own the (almost) same bitcoin futures contracts positions and have the same objective. From a performance standpoint, they're virtually interchangeable.


The obvious next question is there an advantage to holding one bitcoin ETF over another at this point? There is one noticeable difference and it's one that gives the brand new XBTF an advantage.

source: ETF Action

source: ETF Action

XBTF comes cheaper with an expense ratio that's a full 30 basis points lower than BITO and BTF. Ordinarily, I'd say that a difference of a few basis points when comparing two funds is kind of like splitting hairs, but 30 basis points is a gap that could swing the pendulum one way or the other.

This difference in expense ratios would likely be more important when comparing a bond or stock ETF, but it could be less so when it comes to crypto. The price of bitcoin, obviously, is very volatile and an annual cost savings of 0.3% might be immaterial for an asset class that can swing 10% in a single day. Still, if you can get the advantage, why not grab it?

There is one other caveat to consider. Expense ratios don't consider trading costs and investors need to consider both when choosing between two products. Larger and more heavily traded vehicles tend to have much narrower spreads, while thinly-traded securities often cost more to trade.

We can see this pretty clearly when looking at the average spread of these three funds.

source: ETF Action

source: ETF Action

A typical BITO trade is costing traders about 4 basis points to execute right now. XBTF is much higher at 32 basis points. That makes the decision of whether to go with BITO, BTF or XBTF really dependent on if you're going to be a trader or an investor.

Let's consider just BITO vs. XBTF at the moment.

If you want to bitcoin for the longer-term and plan on making just a single trade to establish a position, XBTF is probably the better bet. You'll incur a larger trading cost up front, but the cost savings on the expense ratio over time will more than make up for it.

If you're more of a trader and expect to be getting in and out of positions regularly, BITO is the better option. You might pay a larger annual expense ratio, but you're saving significantly on every trade you make. Taken together, BITO becomes the overall cheaper option.


XBTF has a clear advantage over BITO and BTF when it comes to the expense ratio. The total cost of ownership, however, will be the deciding factor in determining which is better in any individual situation.

The trading spread will be the key factor to watch. As XBTF grows over time, I'd expect the trading spread to come down swinging the advantage over to XBTF even more. The question is when or even if it can get there. For better or worse, the markets probably now consider BITO as THE bitcoin ETF. XBTF (or even BTF for that matter) might not even get a passing thought if investors are aware they exist at all. XBTF's current $10 million asset base might not end up growing much larger than it is, in which case the spread may not come down that much at all.

Still, the idea behind using expense ratios and trading costs as the deciding factor between funds that are substantially the same in composition is still relevant. As it stands today, XBTF is a better option for bitcoin investors than either BITO or BTF. BITO is the better option for bitcoin traders. Over time, I expect the trading spread on XBTF to narrow, at which time XBTF will continue to become more advantageous than its two peers.

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