Investing in Bitcoin ETFs vs. Bitcoin

With discussions of a spot Bitcoin ETF increasing in seriousness, many are wondering why the new securities are receiving so much hype. Shouldn’t the returns on Bitcoin and the spot Bitcoin ETFs be the same? However, the differences between investing in Bitcoin greatly vary depending on the investment vehicle. Let’s take a look at some of those major differences before seeing which is the better option for you. 

What Are You Buying When You Purchase a Bitcoin ETF?

An exchange-traded fund (ETF) is a pool of assets that track a specific fund, index or other security. The originator of the ETF uses investor money to purchase the underlying assets. They then package these assets into individual securities (shares) that can be bought and sold on an exchange. The originator of the ETF usually takes a small portion of the amount invested as management fees.

In November 2023, one kind of Bitcoin ETF available for purchase. This ETF involves the originator buying futures contracts on Bitcoin, which become the underlying asset in the ETF. A futures contract is a financial instrument that gives the owner the right to buy or sell the underlying security at a set price and on a set date. Since these contracts can be traded freely, they often closely match the price movements of Bitcoin.

While these futures ETFs allow equity investors to gain exposure to Bitcoin, they have some issues. The price of the futures contracts does not always directly correlate with the price of Bitcoin from illiquidity, speculation and risk premiums. Futures ETFs may not track the price of Bitcoin exactly. Additionally, they may have high management fees. They require active management, as futures contracts continually expire. 

Spot Bitcoin ETFs are meant to be a solution to these problems. Instead of buying Bitcoin futures to create an ETF, the issuers buy Bitcoin and use those as the underlying asset to reduce price discrepancies. 

Bitcoin ETFs in fall 2023 mean that you are buying shares of a fund that buys Bitcoin futures to closely track the price of Bitcoin. A spot Bitcoin ETF will enable you to buy shares of a fund that owns many Bitcoin. 

What Do You Get When You Buy Bitcoin?

When you buy actual Bitcoin (not through an ETF), you are transacting on the blockchain. 

The blockchain is a ledger that stores data across a distributed network. In layperson's terms, it is an unchangeable data storage solution. The distribution aspect is what makes the blockchain decentralized; no single person controls a majority of the data. As a peer-to-peer network, transactions take place between the two people or entities involved with no third parties. 

Bitcoin operates on its own blockchain. The Bitcoin that you purchase is stored in your wallet. A wallet is a way to store cryptocurrency by creating private keys for each user. 

Bitcoin Investing vs. Bitcoin ETF Investing

What are the pros and cons of Bitcoin and Bitcoin ETFs?

Availability

Bitcoin ETFs likely reign supreme over actual Bitcoin in availability. ETFs can be bought and sold in many places, ranging from brokerage accounts to retirement accounts. Bitcoin can only be bought and sold through crypto exchanges or on the blockchain. These platforms are much newer and may be difficult to navigate. 

Usability

While Bitcoin ETFs are more readily available, they do not offer the same level of usability. Since ETFs are a pool of assets held by the issuer, you do not have control over the Bitcoin in the pool; you control the shares of the ETF. If you own Bitcoin, you can use it for a variety of reasons, mostly involving private online payments. 

Complexity

Similar to availability, complexity is also a concern for Bitcoin investors. Since the blockchain is so new, firms are still working on the optimal way for people to directly interact with the blockchain. As such, some software can feel clunky and difficult to use. It can also be difficult to figure out exactly where to go and how to use the blockchain effectively for new users. On the other hand, Bitcoin ETFs are easy to buy and use. You can log onto existing brokerage or investment accounts and buy a Bitcoin ETF with little hassle. 

Security

While both options are relatively secure, actual Bitcoin is likely a safer investment choice than Bitcoin ETFs. They cannot be stolen from you without access to your wallet’s private keys. The blockchain is designed to reduce hacking. Bitcoin ETFs can be hacked and have their funds stolen. 

When Will Spot Bitcoin ETFs Get Approval?

In late 2023, available Bitcoin ETFs are futures-linked. However, a handful of prominent investment firms have filed applications for spot Bitcoin ETFs. These ETFs are viewed as superior options to those that are currently available. 

Several of the applicants are in serious negotiations and amending processes with the U.S. Securities and Exchange Commission (SEC). While an exact date for the applications’ approval has not yet been determined, JPMorgan is eyeing Jan. 10, 2024. 

However, January 10 is not a set date. The approval could come before or after then, or not at all. 

How to Buy Bitcoin

If you are interested in buying Bitcoin before the potential approval of the spot ETFs, you can do so through a cryptocurrency trading platform. Some of the best platforms are Kraken, Robinhood, WeBbull and eToro. These platforms are known for low fees, high security and ease of use.

What’s Better to Buy: Bitcoin or Bitcoin ETFs? 

If you’ve decided that you want to incorporate Bitcoin exposure into your portfolio, the next decision is which investment vehicle to use. Physical Bitcoin are generally considered to be safer and offer more usability, Bitcoin ETFs are often found to be less complex and more readily available. The decision on which form of investment ultimately boils down to your personal preference and knowledge.