Major Differences Between Closed-End and Open-End Bitcoin Funds

Bitcoin ETFs are a type of exchange-traded product that holds assets. It also provides securities as shares of the fund which trade on an exchange. These ETFs are usually traded on stock exchanges such that investors get exposure to various classes. Compared to direct ownership of Bitcoin through exchange platforms, Bitcoin ETFs are safer and have some notable advantages. However, most investors currently are not aware that even Bitcoin ETFs are of two types. The purpose of this article is to explain the important differences between closed-end and open-ended funds.

Open-End Bitcoin ETF

These Bitcoin ETFs do not offer any fixed amount of shares for buying. Open-end Bitcoin ETF creates new shares to adjust to more investor demand. It then uses the money to add more to the underlying asset of the fund’s holdings. This is why when investors sell their shares, these shares are excluded from circulation. The fund assets are then sold to pay the investor from ETF share redemption. Bitcoin open-ended ETFs charge management fees although they will be lower owing to factors affecting the share price. 

Closed-End Bitcoin ETF

The fixed supply of closed-end Bitcoin ETF leads to more volatility in terms of share prices. This is because the reliance on the laws of supply and demand is greater than open-end ETF. 

Major Differences Between Open and Closed-End Bitcoin ETFs

These are some of the important differences between open and closed-end Bitcoin funds based on crucial parameters. 

Price volatility

In an open-ended fund, supply and demand play a lesser important role. Based on the fund’s current net asset value, shares are bought and sold. In the case of a close-ended fund, the supply and demand factors determine trade outcomes. Therefore, investors can trade at discounts or premiums to the fund’s NAV.

Share features 

In an open-ended fund, the fund operator regularly bases the demand of investors and then issues shares. In close-ended funds, shares are created at fund launch and investors can buy shares only from existing investors.

Role of Net Asset Value (NAV)

There are structural differences between closed and open-ended funds. NAV is the total of fund assets subtracted from total liabilities. For example, if a fund has $100 in Bitcoin and $10 as liabilities, then the NAV will be $90. ETFs create and redeem shares continuously. This is why in open-ended Bitcoin funds, the performance of the assets largely depends on the value of the shares. 

Closed-end funds also use NAV to find out its share price. However, closed-end funds have only a predetermined amount of shares in circulation. The supply and demand factors therefore play an overarching role in the valuation of a fund’s assets.

Also Read- When To Choose ETPs vs ETFs?

Final Thoughts

The differences between the two types of Bitcoin ETFs are important for investors. It is also vital to understand that these differences will have a profound effect on the returns of investment too. Different external factors have distinct levels of influence on investments. For instance, close-end ETFs are more influenced by external factors. Therefore, it is advisable for crypto enthusiasts to first analyze relevant factors such as volatility, profitability, and external factors and then choose the type of investment.