Buying the New Bitcoin ETFs? 3 Things to Keep in Mind.

With the approval of the first spot Bitcoin (CRYPTO: BTC) ETFs, the world of crypto investing just became much more interesting. While the new Bitcoin ETFs might not send the price of Bitcoin soaring immediately, they will certainly make crypto much more accessible to the average investor.

However, buying a new Bitcoin ETF might not be the no-brainer you think it is. Here are three important points to consider.

Bitcoin ETF fees

The Securities and Exchange Commission (SEC) initially approved 11 different spot Bitcoin ETFs, and more could be on the way. To stand out in this crowded field, issuers are probably going to launch massive marketing campaigns based around low fees. The goal will be to get as big as possible as fast as possible. Thus, offering the lowest fees will be the primary way to land as much investor money as quickly as possible.

All of the major Bitcoin ETF issuers have released their initial fee structures, and it looks like expense ratios will be in line with what you’d expect from a traditional ETF. And it looks like BlackRock (NYSE: BLK), via its iShares Bitcoin Trust ETF, will have the inside track with investors due to its low 0.25% annual fees.

Gold coin with Bitcoin symbol on it.

So far, so good. It seems like a no-brainer, right? Just pick the Bitcoin ETF with the lowest fees, and you’re good to go. However, keep in mind that some ETFs are already promising fee waivers and fee discounts as a way of attracting new investors. So, if the new fees seem too good to be true, they probably are. When the fees go up after an initial promotional period, you might be regretting your choice.

Bitcoin ETF performance

Another point to consider is tracking error, which is one of the major risks of investing in ETFs. Tracking error is the difference between the performance of the underlying asset (in this case, Bitcoin) and the ETF itself. Theoretically, if the price of Bitcoin goes up by 150% in a single year (as it did last year), then the value of your ETF should go up by 150% as well. Otherwise, you’re leaving money on the table.

The problem is that the first batch of Bitcoin ETFs sometimes suffered from tracking error. That’s because they used financial derivatives (i.e., futures contracts) to track the price of Bitcoin. The new ETFs are supposed to cure this problem by holding Bitcoin directly (i.e., spot Bitcoin). Unlike traditional ETFs (which typically hold a diversified mix of stocks), these Bitcoin ETFs are going to hold only Bitcoin, so that should help to minimize tracking error as well.

Nonetheless, keep a careful eye on how these new Bitcoin ETFs perform right out of the gate. Maybe I’m overthinking things here, but it seems like getting a perfect 1:1 match in terms of performance may be a bit trickier than many people think due to the inherent volatility of Bitcoin.

Spot Bitcoin vs. spot Bitcoin ETF

It might sound crazy to suggest this, but these new spot Bitcoin ETFs may not be the right choice for all individual investors. I would characterize this as the “spot Bitcoin vs. spot Bitcoin ETF” conundrum. In short, would you rather buy Bitcoin directly (via a cryptocurrency exchange), or would you rather buy Bitcoin indirectly (via an ETF)? Theoretically, the new Bitcoin ETFs should make owning Bitcoin cheaper and more convenient than if you bought it directly from a crypto exchange, so this question should be easy to answer.

That being said, longtime crypto investors may decide to keep on using a cryptocurrency exchange like Coinbase Global (NASDAQ: COIN) to buy Bitcoin. Or they might decide to use one of the many decentralized crypto exchanges to buy Bitcoin directly for their crypto wallets. In the latter case, they won’t be relying on a financial intermediary to hold their crypto.

After all, a classic rallying cry in the crypto world has always been, “Not your (cryptographic) keys, not your crypto.” Remember: With the new Bitcoin ETFs, you will only be holding Bitcoin indirectly. The big Wall Street firms will be in charge of the cryptographic keys required to buy and sell Bitcoin. At the end of the day, they own the Bitcoin, not you.

Will Bitcoin go mainstream?

The new Bitcoin ETFs will become extremely popular with a broad cross-section of the population. Buying Bitcoin will now be so easy that anyone with a brokerage account will be able to do it. You won’t need to create crypto wallets, or memorize cryptographic keys, or jump through any of the other hoops that have sometimes been required to buy Bitcoin over the past decade.

Overall, the new Bitcoin ETFs should be good for the individual investor. But keep in mind that, just because Wall Street is telling you to run out and buy these new Bitcoin ETFs, you don’t have to. There are still plenty of other alternatives, including buying Bitcoin directly.

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Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and Coinbase Global. The Motley Fool has a disclosure policy.