Bitcoin vs Bitcoin ETF: What’s The Difference?

The introduction of the first spot Bitcoin ETFs has been largely celebrated by the cryptocurrency community as a major milestone for Bitcoin. Bitcoin ETFs allow a broader pool of investors to easily invest into BTC, which could result in new capital flowing into the Bitcoin market. 

With all the hype surrounding Bitcoin ETFs, many investors who are interested in Bitcoin are wondering whether it’s better to buy Bitcoin directly or invest in a Bitcoin ETF instead. In this article, we’ll compare buying Bitcoin vs. a Bitcoin ETF and explain the pros and cons of each approach.

First, let’s learn a little more about what Bitcoin ETFs actually are.

What is a (spot) Bitcoin ETF?

A spot Bitcoin ETF is an investment product that is designed to provide exposure to the price movements of Bitcoin. In contrast to previous Bitcoin ETFs, which invested in futures contracts, spot Bitcoin ETFs are backed with actual BTC. 

As far as the investing process is concerned, investors can access a Bitcoin ETF in the same way as they would purchase a stock or shares in any other ETF. 

Here are a few of the biggest spot Bitcoin ETFs available on the market today:

*Data as of February 2, 2024.

Compared to directly buying Bitcoin, purchasing shares in a Bitcoin ETF eliminates the need for the investor to manage their cryptocurrency wallet and ensure that their BTC coins stay safe. Therefore, it can be a more convenient way of investing in Bitcoin, especially for people who aren’t very tech-savvy.

Compared to keeping Bitcoin on an unregulated exchange which might not even have official headquarters, you can be quite sure that your investment in a spot Bitcoin ETF won’t suddenly vanish overnight because of incompetent or corrupt management. 

Of course, this doesn’t mean that Bitcoin ETFs are low-risk investment products – they are designed to track the performance of BTC, which is notoriously volatile. 

Spot Bitcoin ETFs in the United States currently have to use a cash-only redemption model, and not the in-kind redemption model that’s more common among ETFs. This requirement was made by the Securities and Exchange Commission (SEC) during the approval process for these investment products. 

In the cash-only redemption model, when the issuer needs to create new shares of a Bitcoin ETF, they need to use cash to purchase BTC. Conversely, when shares need to be redeemed, the Bitcoin ETF issuer has to sell Bitcoin for cash. 

The cash-only redemption model could result in certain inefficiencies that could impact in the ability of spot Bitcoin ETFs to accurately track the price movements of Bitcoin. Whether this will be a significant problem or not will only become apparent after these investment products are on the market for an extended period of time.

Bitcoin vs. Bitcoin ETF

You should buy Bitcoin directly if any of the following is important to you:

• You value the fact that Bitcoin is decentralized and censorship resistant.
• You are comfortable with taking responsibility for the safety of your private keys and want to have full control over your BTC.
• You want to use Bitcoin to purchase goods and services.
• You want to benefit from potential hard forks and airdrops from Bitcoin holdings. 
• You want to use BTC as capital to trade other cryptocurrencies.

Meanwhile, if any of the following describes you, you’re better off purchasing shares in a Bitcoin ETF.

• You value the convenience of making all of your investments through your brokerage account.
• You aren’t comfortable with managing a Bitcoin wallet and ensuring your private keys remain secure.
• You don’t care about the ability to pay for goods and services with Bitcoin.
• You’re not looking to invest in any other cryptocurrency. 

Should I buy Bitcoin or invest in a Bitcoin ETF?

For people who have high conviction in Bitcoin as a technology and think its censorship-resistance and decentralized design are important, investing in a Bitcoin ETF doesn’t make much sense. 

Bitcoin proponents put a lot of emphasis on self-custody, which is when you hold Bitcoin in a wallet that you have the private keys to. If you use a hardware wallet to secure your private keys, you can achieve a very high degree of security.

When you buy a Bitcoin ETF, on the other hand, you don’t have any control over the underlying BTC coins and have to trust the issuer that the funds will remain safe.

If you want to actually use Bitcoin and not just speculate on its price movements, you should invest directly in BTC and not into a Bitcoin ETF. 

However, if you simply think that Bitcoin is likely to perform well as an investment in the future, a Bitcoin ETF is a convenient way to get exposure to the price movements of BTC. This is especially true if you are already accustomed to investing in traditional markets and already have a brokerage account set up. 

Which method of investing in Bitcoin is more efficient?

In terms of fees, there is no clear winner. If you’re buying BTC directly, the costs you’ll incur will depend on the cryptocurrency exchange you’re using to make the purchase, as well as the conditions on the Bitcoin network if you want to withdraw the coins to your own wallet.

If you’re buying a Bitcoin ETF, you might be charged a fee on the transaction by your broker. In addition, Bitcoin ETFs themselves also charge fees, which are usually expressed as an annual rate known as the expense ratio. The expense ratio of Bitcoin ETFs varies from product to product. 

Due to the stiff competition between issuers, the fees charged by Bitcoin ETFs are relatively low – the top contenders have expense ratios between 0.20% and 0.40%. 

A key difference between holding Bitcoin and investing in a Bitcoin ETF is that simply holding BTC coins in your wallet is completely free. Meanwhile, the longer you hold your position in a Bitcoin ETF, the more you’ll pay in total fees. 

Still, depending on the exchange you use to buy Bitcoin and the transaction fee you have to pay to withdraw the coins to your own wallet, investing in a Bitcoin ETF could still incur lower costs in some scenarios compared to purchasing Bitcoin directly. 

The bottom line

Overall, Bitcoin ETFs are a safe way of getting exposure to Bitcoin, as they have regulatory requirements to ensure that they hold the required amount of BTC and that it’s securely stored by professional custody firms.

However, it can also be argued that Bitcoin ETFs defeat the purpose of Bitcoin, which is to serve as a peer-to-peer digital currency that users have full control over. By holding Bitcoin in your own wallet, you can use it to make transactions and don’t have to trust anyone but yourself to keep your coins safe.

If you want to learn more about the ins and outs of buying Bitcoin, make sure to check out our ultimate guide to investing in Bitcoin.