Buying Bitcoin: directly or through an ETF?

January 29, 2024
6 min read

With massive media coverage worldwide, virtually every investor has heard of a Bitcoin spot ETF. And many will ask: what is best for my portfolio? Bitcoin, or buying a Bitcoin spot ETF? In this article, we will discuss the differences, advantages, and disadvantages of both options.

What is a Bitcoin spot ETF?

An Exchange-Traded Fund (ETF) is a fund traded on the stock markets. It can contain one or more assets. Think stocks, bonds, commodities, or nowadays: crypto. For example, some ETFs capitalize on food production, and have a basket of various stocks of companies in the food industry. Or ETFs that capitalize on companies that historically pay the most dividends. The convenience of trading an ETF is that an investor does not have to take all these different positions themselves and still have market exposure.

A Bitcoin ETF does not have a basket of different assets, but tries to track the price of just one digital asset as accurately as possible: that of Bitcoin.

An important note: Several Bitcoin futures ETFs were already available. These trade futures contracts are not backed by BTC. The advantage of Bitcoin spot ETFs is that their issuers actually hold BTC. Thanks in part to this advantage of BTC coverage, the recently approved U.S. Bitcoin spot ETFs enjoy the most popularity. The best-known Bitcoin spot ETFs are:

  1. Blackrock’s iShares Bitcoin Trust (NASDAQ:IBIT)
  2. ARK 21Shares Bitcoin ETF (NYSE:ARKB)
  3. VanEck Bitcoin Trust (NYSE:HODL)
  4. Bitwise Bitcoin ETF (NYSE:BITB)
  5. Valkyrie Bitcoin Fund (NASDAQ:BRRR)
  6. Franklin Bitcoin ETF (NYSE:EZBC)
  7. Fidelity Wise Origin Bitcoin Trust (NYSE:FBTC)
  8. Grayscale Bitcoin Trust ETF (NYSE:GBTC)
  9. Hashdex Bitcoin ETF (NYSEARCA:DEFI)
  10. Invesco Galaxy Bitcoin ETF (NYSE:BTCO)
  11. WisdomTree Bitcoin Fund (NYSE:BTCW)

How accurately does a Bitcoin spot ETF track the market?

The purpose of the spot ETF is to track the Bitcoin price. If Bitcoin rises three hundred percent in a year, the idea is that the ETF will also rise three hundred percent. With Bitcoin spot ETFs that have been available for some time in other countries, tracking the price has been very accurate.

At the time of writing, it is too short a time to say, based on data, that U.S. ETFs are doing as well. The costs of buying and holding the position in an ETF can cause a small difference between the returns of Bitcoin itself and the Bitcoin ETF.

Advantages of a Bitcoin spot ETF

When investors have no previous experience with crypto, the advantage is that they can gain exposure to Bitcoin without having to create an account with a crypto exchange. Investors can, in some cases (more on that later), purchase the Bitcoin ETF from the broker where they may have purchased other assets, which significantly lowers the barrier.

A common argument used by investors not to invest in cryptocurrency is volatility. Index funds and ETFs are often cited as "safer" investments. However, because a Bitcoin spot ETF tracks the price of Bitcoin, it has the same volatility.

A final advantage is that investors in a Bitcoin ETF do not have to worry about the safe storage of their BTC.

Disadvantages of a Bitcoin spot ETF

Bitcoin originated from the belief that no one entity controls the blockchain. There is no government or corporation behind it. With that, everything is hyper-transparent and decentralized.

However, a Bitcoin spot ETF is issued by a company and listed on a central exchange. That is not in line with Bitcoin's original philosophy. That centralized nature also creates counterparty risk: ETFs are dependent on financial institutions that could theoretically go bankrupt.

In addition, an investor in a Bitcoin ETF does not own BTC himself. Being in control and owning BTC yourself offers both security and flexibility.

Where to buy Bitcoin or a Bitcoin spot ETF?

Given that the latest U.S. Bitcoin spot ETFs do not comply with UCITS regulations, they are not available for sale to individuals in Europe. Therefore, a retail investor will not find the Bitcoin spot ETF at Dutch major banks or European brokers such as DeGiro. Professional investors may in some cases have access to these instruments at parties such as Saxo.

There are alternatives available on the European market such as ETNs (Exchange-Traded Notes), but these funds are on a much smaller scale and not all of them are spot ETFs (but rather futures).

Buying Bitcoin, on the other hand, is a lot easier. Virtually every crypto exchange offers Bitcoin. With that said, it is advisable to choose a secure platform with an official registration with local legislators such as De Nederlandsche Bank (DNB) in the Netherlands.

The cost of buying ETFs and buying crypto yourself depends largely on the platform used, the spread, and how you store Bitcoin. As a result, a comparison is not so straightforward. GBTC from Grayscale is comparatively quite expensive to buy.

How does the Bitcoin spot ETF add value to investors?

For someone who would like exposure to Bitcoin as part of their investment portfolio, both a spot ETF and buying BTC themselves are good options. Both have pros and cons, and investors would do well to make their own informed choices.

What the approval of the latest Bitcoin spot ETFs in the United States especially adds for investors is a potential catalyst for Bitcoin price growth. In the first seven days after the launch of these ETFs, the funds collectively bought more than 100,000 BTC. The expectation among investors and analysts is that these ETFs will increase capital inflows, from both retail and institutional investors. As explained in economics at high school, more demand usually results in higher prices.

How to store your Bitcoin

To buy Bitcoin, it is necessary to have a wallet. This can be a hosted wallet at a crypto exchange such as Bitvavo, but there are also numerous options for external wallets, such as a hardware wallet or software wallet. Each type of wallet has advantages and disadvantages, but the most important thing is that the BTC is stored with a trusted party.

At Blockrise, we have built a unique, technically advanced solution from the ground up: each client receives their own wallet which they fully own. So clients don't have to deal with technical solutions themselves or risk losing a physical wallet, but they keep all the control. Something unprecedented in the European crypto market.

With this added convenience, there are few advantages to a Bitcoin spot ETF over purchasing Bitcoin yourself from a DNB-registered party such as Blockrise.

The information provided in our articles is intended solely for general informational purposes and does not constitute (financial) advice.

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