Where Will iShares Bitcoin Trust ETF Be in 5 Years?

Key Points

• The iShares Bitcoin Trust ETF generally tracks Bitcoin’s price, so investor returns should be similar to holding the coin after fees.

• The ETF introduces extra risks because third parties such as Coinbase and BlackRock hold and manage the coins.

• At the same time, the ETF structure adds regulatory safety and other benefits.

• 10 stocks we like better than iShares Bitcoin Trust ›

Whatever Bitcoin (CRYPTO: BTC) does over the next five years, iShares Bitcoin Trust ETF (NASDAQ: IBIT) will follow almost exactly the same pattern.

2030 is basically an eternity away when you're dealing with the volatile cryptocurrency market. Nobody knows exactly what's coming up, and there will almost certainly be both bullish and bearish surprises along the way. That being said, let me sketch up the most likely scenario for the iShares Bitcoin ETF over this period.

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Why I expect Bitcoin to rise

First and foremost, I do expect Bitcoin prices to rise in the long run.

The original cryptocurrency has proved its worth as a reliable tool for long-term wealth storage. The strictly limited supply should boost Bitcoin prices over time, assuming that demand for this digital coin increases. That's almost a foregone conclusion at this point, given the U.S. government's embrace of Bitcoin ownership and the emergence of Bitcoin-based exchange-traded funds (ETFs).

The Bitcoin community must stave off challenges from newer cryptocurrencies, including hard forks such as Bitcoin Cash (CRYPTO: BCH) and Bitcoin SV (CRYPTO: BSV). It should also trade in its encryption algorithm for a solution that's resistant against quantum computer decryption attacks, perhaps not right away but certainly in the next decade.

As long as Bitcoin can dodge these risks, it has a strong first-mover advantage as people, governments, and companies continue to embrace cryptocurrencies. Rising interest in Web3 solutions and decentralized finance apps will accelerate that trend. Again, there are real risks on the table but I strongly expect Bitcoin to gain value over time.

Image source: Getty Images.

How closely does the iShares ETF follow Bitcoin?

ETFs are incredibly good at reflecting the returns of their underlying holdings. In this case, you can bet that the iShares Bitcoin ETF will follow Bitcoin's every move.

There is a modest sponsor fee of 0.25% per year, allowing iShares owner Blackrock (NYSE: BLK) to make some money from running this popular ETF. Even so, it's hard to tell the cryptocurrency apart from the ETF in long-term price charts. As of August 19, both have gained roughly 141% since the ETF was launched:

IBIT data by YCharts

The perks and catches of owning a Bitcoin ETF

So why bother buying spot-priced Bitcoin ETF shares instead of actual Bitcoins? Well, the ETF structure comes with a few benefits:

• ETFs add a layer of shareholder protection due to financial filing requirements and regulatory oversight.
• You can buy and sell them just like stocks, using an ordinary stock brokerage account.
• You can leave technical issues of Bitcoin ownership such as encryption key management and data security to the ETF manager.
• It's much easier to report ETF ownership when tax season rolls in.
• Priced at $113,600 per coin right now, most people don't buy entire Bitcoins. But if you insist on nice, round units of ownership, the iShares ETF's costs just $64.19 per share.

The iShares ETF isn't a free ride, of course. The benefits listed above should be considered alongside the risks and downsides involved in ETF ownership:

• The management fee may be small. Nevertheless, it's an extra cost that reduces your returns over time. These tiny nibbles can make a difference if you're holding the ETF for many years.
• There are several parts to the ETF structure such as the fund's management team and a Coinbase Global (NASDAQ: COIN) custodian account that holds the actual coins. Blackrock and Coinbase probably aren't going out of business any time soon, but investors felt the same way about Enron in 2001 and Lehman Brothers in 2008. The additional risk of multiple asset management teams is never quite zero.
• Owning actual Bitcoins lets you use them as a currency, participate in on-chain events like hard forks. The ETF doesn't confer these options and benefits to the shareholder.

The ETF should track Bitcoin, but mind the risks

This is a simplified overview, in the interest of not writing a literal book. There are many more wrinkles and quirks to consider. However, for most intents and purposes, owning the iShares Bitcoin ETF over the next five years should be just as good (or, less likely, just as bad) as holding actual Bitcoins. I highlighted earlier why I think that's a winning idea with a couple of serious risks and plenty of volatility expected ahead.

So the iShares Bitcoin Trust ETF should post shareholder-friendly gains in the next five years, just like Bitcoin itself. The amount of upside remains to be seen, and opinions of Bitcoin's true value vary from nothing (Warren Buffett) to millions of dollars per coin (Michael Saylor, Cathie Wood). Most long-term investors should include a little bit of Bitcoin exposure in their portfolios, either directly or via ETFs.

Blackrock itself recommends limiting that exposure to 2% or less of the total portfolio value, and that advice comes from the largest Bitcoin ETF's sponsor firm. In other words, Bitcoin (and its ETFs) looks enticing in the long term but it's still a high-risk investment.

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Anders Bylund has positions in Bitcoin and iShares Bitcoin Trust. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool recommends Coinbase Global. The Motley Fool has a disclosure policy.