What’s a bitcoin exchange traded fund (ETF)?
Bitcoin ETFs are instruments which are traded publicly on a stock exchange that enable investors to gain exposure to bitcoin without actually owning the cryptocurrency. An ETF is an investment fund that tracks the performance of an underlying asset. The underlying asset could be a portfolio of stocks, or fixed income securities, or a precious metal like gold or silver or bitcoin. ETFs trade real time on traditional stock exchanges, and the price moves up or down in line with that of the underlying asset.
How do bitcoins in the ETF format help investors?
When you invest in a bitcoin ETF, you’re not directly purchasing it but instead buying units in a mutual fund that holds bitcoin. Since ETFs are regulated, it is easier for investors to gain exposure to bitcoin’s price movements without having to worry about buying and storing the digital currency and the associated risks of an unregulated product. Also, now investors can bet on crypto without opening an account with a crypto exchange or setting up a digital wallet for the storage, which is considered a complicated process.
What changes for bitcoin as an asset class?
Bitcoins will become more accessible to a wider set of investors. For instance, institutional investors, who have been hesitant to invest directly in the cryptocurrency markets for regulatory reasons, could now consider them. Industry insiders believe a wider investor participation could reduce the volatility in this new asset class. Last year, the crypto industry faced many challenges, including bankruptcies and scandals involving major players like FTX and Binance, leaving investors and financial sector regulators in the space a worried lot.
Can Indian Investors buy bitcoin ETFs that have started trading in the US?
Yes, Indians can directly purchase these ETFs through their international broking accounts in the same way that they invest in US stocks. They need to open an international broking account and once that is done, they can purchase these bitcoin ETFs under the Reserve Bank of India’s Liberalised Remittance Scheme (LRS), where they can invest up to $250,000, which includes US ETFs as well.What will be the transaction costs for these bitcoin ETFs?
BlackRock plans to charge 0.3%, as expense ratio-the cost of running the fund for its bitcoin ETF, while ARK has announced a fee of 0.25%. According to Viram Shah, CEO, Vested Finance, an online platform to invest in US stocks, the 20% TCS (tax collected at source) introduced in 2023 will be applicable on deposits above Rs 7 lakh via LRS. The 1% TDS (tax deducted at source) charged by the Indian government on transactions will not be applicable since there is no actual crypto being purchased. The other costs include forex charges, brokerage and bank fees.
How will bitcoin ETF be taxed for Indian investors?
In India, capital gains from crypto assets like bitcoin are taxed at a flat rate of 30%. Additionally, losses from one cryptocurrency cannot be offset against gains from another. There’s also no provision for carrying forward these losses to future years. However, bitcoin ETF investors will enjoy better taxation.