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Is It Better to Buy BTC or a Bitcoin ETF?
If 2022 was the year of the crypto meltdowns, then 2023 could be considered the year of the (almost) Bitcoin ETFs. With a backlog of ETF filings sitting on the SEC’s desk waiting for approval, they represent the most significant potential for liquidity yet to be deployed into the industry.
Once approved, they would unleash a tsunami of capital from legacy institutional investors, the likes of which have never been seen. Everyone from Fidelity to Blackrock, Valkyrie, and WisdomTree has filed a Bitcoin ETF with the SEC. After a defeat in court earlier this year for the SEC, their approval appears to be a matter of when, not if. Notably, Canada and Europe have already approved a Bitcoin ETF for use within their stock markets, but the real watershed moment will come with the approval of the one onto the U.S. markets.
So what exactly is a Bitcoin ETF, and do they represent a better way to get exposure to Bitcoin than buying it directly yourself? Let’s delve in.
What is a Bitcoin ETF?
Simply put, an Exchange-Traded Fund (ETF) is a security that tracks a particular index, commodity, sector, or asset. The major benefit to an ETF is that, unlike other securities like mutual funds, ETFs are able to be bought and sold on stock exchanges similar to other stocks. A Bitcoin ETF is one of these securities that tracks the price of Bitcoin and allows investors indirect exposure to its value as an investment option.
Benefits
The obvious benefit of a Bitcoin ETF is the liquidity from institutional investors that it would bring. This would almost certainly result in the price of Bitcoin exploding alongside any announcement. This is evident from the recent example when, on October 16th, 2023, Cointelegraph incorrectly reported that the SEC had approved its first Bitcoin ETF. The news alone caused the price of BTC to surge from $27,900 to over $30,000 in a matter of minutes, taking over $100 million in liquidations of long and short positions with it.
A Bitcoin ETF would allow traditional institutional investors to gain exposure to Bitcoin without needing to understand the underlying technology. An ETF would allow them to engage with it the same way they would with any other stock within their portfolio. This is a major selling point for those only interested in Bitcoin as a speculative asset.
Yet another and arguably more important benefit of a Bitcoin ETF is the legitimacy it would provide Bitcoin writ large. When the most influential institutional investors like Blackrock, with over $9.4 trillion of managed assets, talk about Bitcoin ETFs, the rest of the market takes notice.
Drawbacks
There are a few definitive drawbacks to owning a Bitcoin ETF. These become clear when you understand that an ETF operates similarly to other stocks on a stock market.
One main disadvantage to an ETF is that it operates on the same schedule as the rest of the stock market, which for the NYSE is 9.30 am – 4.00 pm ET. This can become an issue due to the volatile nature of Bitcoin’s price history.
As seen recently with the October 16th incorrect report, the price can swing violently in either direction quickly. Unlike the stock market, Bitcoin operates undeterred twenty-four hours a day, seven days a week. If one of these price corrections occurs outside stock market office hours, those holding ETFs instead of actual Bitcoin will be unable to adjust until the markets reopen.
Similarly, when you choose to gain exposure to Bitcoin via an ETF, you maintain a different degree of autonomy over that Bitcoin than you would by doing so directly. In a way, you are choosing to engage in a custodial activity with counterparty risk.
Yet, unlike utilizing other third-party custodians like centralized exchanges, you ultimately do not control the underlying asset. You cannot claim the Bitcoin in the ETF itself or utilize it as a potential means of exchange.
Which is Better?
Deciding which is a better option is entirely circumstantial. For institutional investors and those who utilize Bitcoin as purely a speculative asset for monetary gains, the ETF may be a better option. For investment firms still hesitant about the association with Bitcoin, having an SEC-approved investment option provides some reassurance and coverage from their clients.
After all, as a pure investment opportunity, Bitcoin has demonstrated itself to be the best-performing asset since its launch in 2009, outpacing traditional stocks and precious metals, including the returns of the S&P 500 over the same time frame. It is no wonder why there has been such a frenzy among institutions to try and pass a Bitcoin ETF.
A chart of Bitcoin’s incredible growth compared to other assets over the last 10 years.
However, Bitcoin does not exist in a vacuum. While it offers an excellent investment opportunity for many who can afford to do so, there are other use cases it has that are more important and significant in terms of individual liberty and freedom.
There are also many Bitcoin Maximalists who would view any form of Bitcoin ETF as a perversion of the core principles that make up Bitcoin. Bitcoin was founded to create a new, better peer-to-peer electronic cash system that eliminated the need for third-party intermediaries. A Bitcoin ETF reimposes the third-party element, along with it, a degree of trust and counterparty risk within those intermediaries.
Ironically, the two approaches might be inevitably complimentary with one another. The architecture of Bitcoin itself, its absolute scarcity, and its consensus mechanism provide the foundation for the strongest form of money we have ever seen. This makes it an exceptionally strong store of value over the long term and is why it is such an attractive investment opportunity for something like an ETF to reflect.
From a similar standpoint, having an approved Bitcoin ETF out in the world will provide further legitimacy behind Bitcoin, create more awareness about it, and lead to wider adoption of BTC as a payment rail and means of exchange as a result.
