Bitcoin ETF vs Buying BTC Directly: What’s Better?

by
George Georgiev
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A spot Bitcoin exchange-traded fund (ETF) has been one of the hottest topics over the past few years. Many investment companies, both traditional and crypto-oriented, have been filing multiple applications with the United States Securities and Exchange Commission over and over again.

On January 10th, 2024, the SEC finally gave the go-ahead and greenlighted a total of 11 Bitcoin ETF applications.

It’s been a hard-fought battle spanning many years, and if you want to check out the full timeline of the events, take a look at our detailed article on the matter:

Timeline of Events Leading to Spot Bitcoin ETF Approval in the United States

With the approval already a fact, it’s now critical to explore a very important subject – the difference between buying a spot Bitcoin ETF and buying Bitcoin directly and what might be better for you.

Here’s a quick table of comparison between both, while the following article provides a more in-depth look.

What is a Spot Bitcoin ETF?

Exchange-traded funds have been a cornerstone in the world of traditional finance for many years.

In essence, an ETF represents a basket (or individual) of assets, and it trades on an exchange just like a regular stock does. It can track the price of various types of assets, including but not limited to securities, commodities, or other assets. It can track multiple assets or just one (as is the case with the spot Bitcoin ETF).

In the case of the Bitcoin ETFs, they provide a traditional and well-regarded investment vehicle to gain exposure to the price of BTC.

There is, however, a technical difference between the ETF itself and the asset that it tracks. Since the ETF itself is a standalone product – it has a market of its own and trades independently of the asset that underpins it. This is why there might be a difference between the ETF price and the net asset value (NAV) of the underpinning product.

There are other important takeaways that characterize the Bitcoin exchange-traded funds, so let’s have a look at a comprehensive summary.

Trades on traditional exchanges like the New York Stock Exchange

Because the ETF is a traditional investment product, it trades on regulated exchanges on Wall Street, such as the New York Stock Exchange. ETFs don’t trade on cryptocurrency exchanges like Binance.

Investors don’t own the underlying BTC

Owning an ETF doesn’t grant ownership to the underlying product. Think of it as a synthetic asset that’s built on top of BTC, and it tracks its price. Investors who buy the ETF don’t have to worry about storing and safekeeping BTC.

The shares in the ETF are backed by BTC, which is owned and stored by the ETF provider.

There are acquisition fees depending on the ETF provider

There are multiple Bitcoin ETFs, and each of them comes with different fees stipulated by the provider. In the case of BlackRock’s Bitcoin ETF (IBIT), there’s a sponsor fee of 0.25% (T&C apply).

Managed by the ETF provider

ETFs are managed by the companies that launch them. They can pull support if they don’t meet certain criteria and can also change the fees at their own volition.

Trades within traditional US trading hours

Because ETFs trade on traditional and regulated US exchanges like NYSE, they can only be accessed during regular US trading hours.

There might be an ETF/NAV price difference

There might be a price difference between the Bitcoin ETF and the price of Bitcoin on the same day. This is because ETFs trade on their separate markets, which dictate their current price.

Pros and Cons of a Bitcoin ETF

The above characteristics are specific to Bitcoin ETFs, and they bring certain advantages and disadvantages.

Pros:

• Regulated financial product
• It can be included in specialized portfolios like retirement or 401(k)
• Backed by regulated and reputable providers like BlackRock

Cons:

• Investors do not own the underlying BTC
• There might be a premium on the ETF compared to the BTC NAV
• Limited trading hours and higher fees

Buying BTC Directly

As opposed to ETFs, buying Bitcoin directly provides you with ownership over the BTC, regardless of whether you buy it from an exchange or P2P.

Of course, if you do buy it through an exchange such as Binance, you should consider self-custody. This means that you should take your BTC off the exchange and transfer it into a cold wallet such as Trezor or Ledger, where you control the private keys.

In crypto, there’s a popular saying that goes like this:

“Not your keys, not your Bitcoin.”

This also comes with certain responsibilities. Keeping your crypto safe can be a challenging task, especially if you have no prior experience. Worry not, however, as we’ve prepared a detailed guide on what you can do to make sure your BTC is safe.

9 Tips for Securing Your Bitcoin and Crypto Wallets You Must Follow

Just as it is with ETFs, buying Bitcoin directly has its specifics. Here’s a quick summary.

Trades on cryptocurrency exchanges

You can’t buy Bitcoin on the New York Stock Exchange. You have to use a cryptocurrency exchange. The most popular ones are Binance (outside of the US) and Coinbase (US).

Investors get direct ownership of BTC

Once you buy spot BTC on a cryptocurrency exchange – you own it. You can transfer it out of the exchange to a cold storage, or you can use it to trade against other altcoins such as Ethereum.

Acquisition fees vary between crypto exchanges

Unlike ETFs, there’s no Sponsor fee. There are, however, trading fees associated with buying and selling BTC, and they vary based on the cryptocurrency exchange of choice.

Managed by you

Since you have complete ownership over the BTC you bought, you are also responsible for its safety. Self-custody comes with certain challenges, and it’s imperative that you learn about cold storage and how to keep your crypto safe.

Trades 24/7, irrespective of traditional working hours

Cryptocurrency exchanges work around the clock, so there are no limitations in terms of trading hours or weekends.

Direct exposure to the BTC price

You don’t have to worry about differences in the price of the ETF and the net asset’s value. You’re as exposed to the BTC price as it’s physically possible.

Pros and Cons of Buying BTC Directly

Here are the advantages and disadvantages:

Pros:

• You get direct ownership of the BTC you buy
• You can get full control through self-custody
• Unlimited trading hours and lower fees

Cons:

• Storing your BTC can be challenging and requires higher technical expertise
• Can’t include it in traditional retirement plans and 401(k)
• Not recognized as a financial instrument

Bitcoin ETF vs. Buying BTC Directly: What’s Better?

The above comprises the most essential differences between a spot Bitcoin ETF and buying BTC directly.

There’s no one answer as to which is better, and it strongly depends on the individual preferences and needs of the investor.

For instance, if you’re not tech-savvy, not interested in trading BTC against other altcoins, want long-term exposure without having to worry about safekeeping your crypto, and don’t mind the higher fees, an ETF might be the better option.

However, if you are well-versed in the crypto field and prefer direct ownership of BTC because you want to either safely store it on your cold wallet or you want to trade it actively against other altcoins, then perhaps buying BTC directly is the way to go.