Recently, spot Bitcoin exchange-traded funds (ETFs) have made headlines for obvious reasons. Around 11 Bitcoin ETF proposals were approved by the SEC on Jan. 10.
However, many people still need clarification about whether they should buy Bitcoin directly or invest in Bitcoin ETF. The post below explores these options and can help to demystify the world of cryptocurrency and Bitcoin purchases.
Define An ETF
Exchange-traded funds (ETFs) track the price of specific assets or groups of assets quickly and efficiently. The value of an ETF is closely correlated with its underlying assets. ETFs can be bought and sold on stock exchanges, making them a convenient investment choice.
Invest Directly with a Spot Bitcoin ETF
An ETF that invests in Bitcoin directly is called a spot Bitcoin ETF. Bitcoin’s current market price determines its value. Such ETFs are more exposed to changes in Bitcoin prices than other types of Bitcoin ETFs.
When investors purchase shares of a spot Bitcoin ETF, the fund manager buys an equivalent amount of Bitcoin from a third-party custodian. Conversely, when an investor sells ETF shares, the fund manager sells corresponding amounts of Bitcoin.
By buying and selling Bitcoin, the fund manager ensures that the ETF’s value always aligns with its Bitcoin holdings. As a result, the market value of Bitcoin held in the ETF is directly proportional to the value of each share.
Decide Ahead with Bitcoin Futures ETFs
Unlike a spot bitcoin ETF, a bitcoin futures ETF holds bitcoin futures contracts instead of the currency. In essence, a bitcoin futures contract is an agreement to buy or sell bitcoin at a predetermined price in the future. These contracts are traded on financial markets so investors can speculate on Bitcoin’s price. Bitcoin Strategy ETF was one of the first Bitcoin ETFs approved in the US. Introduced in 2021, this ETF is based on bitcoin futures.
The Upside of Buying Bitcoin ETF
Individuals can invest in Bitcoin by purchasing an exchange-traded fund (ETF) without owning Bitcoin. For some, this can be a simpler process. Here are some advantages of Bitcoin ETFs:
- Liquidity—Unlike direct Bitcoin investments, which are limited in liquidity, ETFs let investors buy and sell shares anytime. Liquidity allows investors to rebalance their portfolios or make other investments without worrying about price fluctuations.
- Convenience – For some buyers, Bitcoin ETFs remove some of the hassle associated with buying, storing and investing in Bitcoin. Investors may have access to additional liquidity and diversification with an ETF instead of owning Bitcoin directly. Bitcoin can be invested through existing brokerage accounts or investment platforms, so buying and selling shares is easy.
- Risk management – Investors can diversify their portfolios and reduce Bitcoin risk by investing in Bitcoin ETFs. Investing in multiple Bitcoin ETFs can mitigate Bitcoin investment risks. By diversifying, investors can protect themselves from price swings and Bitcoin risks.
The Downside of Buying Bitcoin ETF
- Lack of Direct Exposure to Bitcoin – Unlike buying Bitcoin directly, investing in an ETF does not give you physical Bitcoin ownership. Instead, the ETF tracks Bitcoin’s performance as determined by its exchange price movements.
- Potential Tracking Errors – ETFs are designed to track the underlying asset’s performance closely, but there may be instances where the ETF diverges slightly from Bitcoin’s price. This could be due to various factors such as fees, expenses and liquidity constraints.
The Upside of Spot Bitcoin ETF
The introduction of a spot Bitcoin ETF could be huge for Bitcoin. Even though Bitcoin futures ETFs have been around since 2021, spot Bitcoin ETFs are more aligned with Bitcoin’s nature. They are more direct and simpler than a futures-based Bitcoin ETF.
- Bitcoin Capital Inflows – Spot ETFs could increase liquidity because they represent direct investments in Bitcoin, so huge amounts of capital would enter the market.
- Making Bitcoin More Legitimate – An ETF can boost Bitcoin’s legitimacy among the public by providing a traditional and regulated framework.
- Promoting corporate adoption – MicroStrategy and Tesla already have Bitcoin on their balance sheets. There’s a chance a Bitcoin ETF will encourage more companies to add it to their balance sheets, increasing acceptance and investment.
The Downside of a Bitcoin Spot ETF
- The risk of centralization – Many people worry about how many bitcoins a few companies hold. This could be a problem because if these companies have a lot of power over Bitcoin, they can make decisions that affect everyone. If a few big banks controlled all the money in the world, they would have power. It is why some people are worried about Bitcoin ETFs. These ETFs could make it easier for people to invest in Bitcoin but also make it challenging for regular people to decide how it is used.
- Custody-related risk – A spot Bitcoin ETF has a custodian who holds the bitcoins securely. However, this arrangement comes with counterparty risk. Bitcoins could be at risk if a custodian fails. Bitcoin operations, including acquisition, storage and management, put the system at risk. It is critical to remember that errors or failures in these operational processes can lead to Bitcoin theft or loss. Protocols that are robust and secure will minimize these risks.
Choosing Bitcoin ETFs or Buying BTC Directly
There are some key differences between investing in Bitcoin ETFs and purchasing Bitcoin directly. Investor preferences and needs largely determine which is the better alternative.
A BTC ETF may be a more favorable option if one needs more technical expertise. This is because one wants to trade BTC with altcoins, seeks long-term exposure without cryptocurrency storage and is willing to bear higher fees.
On the other hand, if one is well-versed in the cryptocurrency industry and intends to purchase BTC directly, either to store it securely in a cold wallet or to trade it with other alternative coins, then buying BTC directly may be the most feasible choice.
Final words
Bitcoin ETFs and direct Bitcoin purchases depend on individual investor preferences. Both methods have advantages and disadvantages, and you should consider things like accessibility, cost, volatility, regulatory compliance and portfolio diversification. Ultimately, the decision should align with investors’ financial goals and risk tolerance.
The contents of this article are for information purposes only. All financial investments carry a level of risk, and it is recommended that you do extensive research and/or consult a trusted financial advisor prior to making a financial investment.
Members of the editorial and news staff of the Las Vegas Review-Journal were not involved in the creation of this content.