Why Is Investing In Bitcoin ETFs Better Than Buying BTC?

Investing in spot Bitcoin ETFs offers regulated, convenient, and portfolio-integrated exposure to Bitcoin but sacrifices direct ownership, 24/7 market access, and lower costs compared to holding Bitcoin directly.

US spot Bitcoin ETFs have seen remarkable growth in 2024, becoming major players in the institutional crypto market. Here’s a breakdown of their latest statistics:

As of December 2024, US spot Bitcoin ETFs collectively hold approximately 1,104,000 BTC. This surpasses the estimated 1.1 million BTC owned by Bitcoin’s creator, Satoshi Nakamoto. Notably, BlackRock’s iShares Bitcoin Trust (IBIT) leads with around 521,375 BTC under management.

Most importantly, the combined net assets of these funds exceeded those of gold ETFs. This shift highlights a growing investor preference for digital assets over traditional ones like gold. In fact, the US Bitcoin ETF market is worth more than the entire European ETF market combined, which has been operational for decades.

These developments underscore the rapid adoption and integration of Bitcoin ETFs into mainstream financial markets, reflecting a significant shift in investment trends toward digital assets.

So, what are Bitcoin ETFs? And is it better to invest in ETFs rather than directly buying Bitcoin itself?

What is a Bitcoin ETF?

A Bitcoin ETF (exchange-traded fund) is a financial product that allows investors to gain exposure to Bitcoin without directly owning or managing the cryptocurrency. It operates much like a traditional ETF, tracking the value of an asset or group of assets, but it focuses specifically on Bitcoin.

A Bitcoin ETF is traded on traditional stock exchanges, like the NYSE or Nasdaq, making it accessible through brokerage accounts. This setup simplifies the process of investing in Bitcoin for those who might find the technical aspects of buying and storing cryptocurrency daunting. It also brings Bitcoin into the fold of regulated financial markets, offering a layer of legitimacy and security.

Types of Bitcoin ETFs

1. Spot Bitcoin ETF: Tracks the actual price of Bitcoin by holding Bitcoin as its underlying asset. When the price of Bitcoin changes, the value of the ETF adjusts accordingly. However, regulatory approval for spot Bitcoin ETFs has been slow in many regions.
2. Bitcoin Futures ETF: Tracks Bitcoin futures contracts rather than directly holding Bitcoin. Futures are agreements to buy or sell Bitcoin at a predetermined price on a specific date. These ETFs provide exposure to Bitcoin price movements without owning the cryptocurrency itself.

How are these funds managed?

1. Management: The ETF is managed by a financial institution or fund manager. In the case of a spot ETF, the fund buys and holds Bitcoin. For a futures ETF, the fund invests in Bitcoin futures contracts.
2. Pricing: The ETF’s value mirrors Bitcoin’s price (or futures prices), which means its performance closely follows the cryptocurrency market.
3. Trading: Investors buy and sell shares of the ETF on stock exchanges during normal trading hours, just like stocks. This ease of trading is a significant advantage over the more complex and sometimes slow process of directly buying or selling Bitcoin.

Advantages

• Simplicity: Investors don’t need to manage private keys, wallets, or exchanges.
• Regulation: Bitcoin ETFs are traded on regulated exchanges, reducing risks associated with unregulated crypto markets.
• Diversification: ETFs can be included in broader investment portfolios without the need for direct cryptocurrency expertise.

Risks

• Volatility: Bitcoin’s price is highly volatile, which directly impacts the ETF’s value.
• Fees: Bitcoin ETFs may have management fees, which can eat into returns.
• Tracking errors: Futures-based ETFs might not perfectly mirror Bitcoin’s price movements due to differences between futures prices and spot prices.

Bitcoin ETFs provide a bridge for traditional investors to enter the cryptocurrency market with fewer hurdles. They also signal growing mainstream acceptance of Bitcoin as a legitimate asset class. However, potential investors should still weigh the benefits against the risks and volatility associated with Bitcoin itself.

Investing in Bitcoin ETFs vs buying BTC

Investing in Bitcoin through US Spot Bitcoin ETFs can be more advantageous for certain investors compared to directly purchasing and holding the cryptocurrency. While both options provide exposure to Bitcoin’s price movements, the mechanisms, accessibility, risk profiles, and practical considerations differ significantly.

Key differences

1. Access and convenience: Spot Bitcoin ETFs are traded on regulated exchanges like stocks, making them easy to buy, sell, and hold using traditional brokerage accounts. Direct Bitcoin ownership requires setting up a crypto wallet, choosing an exchange, and managing private keys, which can be cumbersome for beginners.
2. Regulation and security: ETFs operate under strict regulatory oversight by the SEC. This ensures transparency, investor protections, and reduced counterparty risk. Direct Bitcoin investments are tied to unregulated crypto exchanges, which have faced issues like hacks and bankruptcies.
3. Storage and custody: Spot Bitcoin ETFs eliminate the need for self-custody, a process that requires technical knowledge and carries risks like losing private keys or falling victim to phishing attacks. ETF investors benefit from institutional-grade custody solutions managed by fund operators.
4. Tax efficiency: ETFs may offer better tax efficiency depending on jurisdiction, especially in taxable accounts. Direct Bitcoin transactions, such as selling or exchanging, are taxable events and may lead to complex capital gains calculations.

Advantages of spot Bitcoin ETFs

1. Accessibility for traditional investors: Spot Bitcoin ETFs bridge the gap between traditional finance and cryptocurrency. They allow investors unfamiliar with crypto platforms to gain exposure through well-known brokerage accounts.
2. Liquidity and trading flexibility: ETFs can be traded throughout market hours, offering flexibility similar to stocks. Direct Bitcoin trades often depend on crypto exchange availability, which operates 24/7 but can suffer from liquidity issues during extreme market conditions.
3. Diversification options: ETFs can be included in broader portfolios alongside equities, bonds, and other asset classes. They integrate seamlessly into retirement accounts and tax-advantaged portfolios, which is challenging with direct Bitcoin holdings.
4. Regulatory oversight: Spot Bitcoin ETFs are subject to SEC guidelines, reducing risks related to unregulated exchanges or custodial services. This regulatory backing adds credibility to Bitcoin as an investment.
5. Simplified ownership and reporting: ETFs consolidate all ownership, reporting, and tax forms within a brokerage statement. Direct Bitcoin ownership requires careful tracking of transactions for tax purposes.

Disadvantages of spot Bitcoin ETFs

ETFs come with management fees, often ranging between 0.5% and 1% annually, which eat into returns. Direct Bitcoin ownership avoids such costs, as there are no recurring fees beyond initial exchange fees or custody solutions.

Also, ETFs may not perfectly track Bitcoin’s spot price due to expenses and operational inefficiencies. Direct Bitcoin ownership guarantees alignment with the actual asset value.

With an ETF, you don’t own Bitcoin directly; you own shares in a fund that holds Bitcoin. This limits your ability to use Bitcoin for payments, staking, or other decentralized finance (DeFi) activities.

ETFs trade during regular stock market hours, meaning you miss price movements outside of these periods. Bitcoin, on the other hand, trades 24/7 on global exchanges.

Owning Bitcoin directly gives full control over the asset, allowing participation in the decentralized economy. Beyond initial purchase fees, holding Bitcoin incurs no recurring costs unless you use custodial services. Most importantly, BTC can be traded or transferred globally without relying on intermediaries, providing unmatched flexibility.

Final thoughts

Investing in US Spot Bitcoin ETFs simplifies the process of gaining Bitcoin exposure for traditional investors. ETFs offer regulatory security, ease of access, and integration into traditional portfolios, making them ideal for risk-averse individuals or those unfamiliar with cryptocurrency technology. However, they come with additional costs, lack direct ownership benefits, and restrict participation in the decentralized financial ecosystem.

For long-term investors seeking exposure without technical complexity, Bitcoin ETFs provide a straightforward path. For those who value control, utility, and lower costs, direct Bitcoin ownership remains a strong alternative. The choice ultimately depends on individual goals, risk tolerance, and investment strategy.

1. 01.

   How do you buy Bitcoin ETFs in the US?

   

   To purchase Bitcoin ETFs in the US, open an account with a brokerage that offers access to these ETFs. Once your account is set up, you can search for the specific Bitcoin ETF by its ticker symbol and place an order, similar to buying shares of any stock or traditional ETF. This process allows you to invest in Bitcoin through a regulated financial product without managing digital wallets or dealing with cryptocurrency exchanges.

2. 02.

   Which Bitcoin ETF is the best?

   

   The ‘best’ Bitcoin ETF depends on individual investment goals, risk tolerance, and considerations such as expense ratios, liquidity, and fund performance. As of December 2024, BlackRock’s iShares Bitcoin Trust ETF has emerged as a dominant player, amassing over $50 billion in assets within 11 months of its launch. Its popularity is attributed to low investor fees and small bid-and-ask spreads. However, it’s essential to conduct thorough research and consider factors like management fees and investment strategy before choosing an ETF that aligns with your investment objectives.

3. 03.

   Which countries have Bitcoin ETFs?

   

   Several countries have approved Bitcoin ETFs, providing investors with regulated avenues to gain exposure to Bitcoin. Notably, the United States, Canada, Germany, Brazil, and Australia have operational Bitcoin ETFs. Additionally, regions such as Bermuda, Jersey, Switzerland, Liechtenstein, and Guernsey have incorporated spot Bitcoin ETFs. These developments reflect a growing acceptance of cryptocurrency investments within traditional financial markets across various jurisdictions.