To ETF or Not to ETF: Navigating the World of Bitcoin Investments

Volatility has gripped the cryptocurrency market, causing prices to swing wildly, creating a challenging environment for traders. Bitcoin has dropped roughly 18% over the past month, and has declined roughly 16% YTD. However, Bitcoin has had a historic run of gains and outperformance relative to the S&P 500.

As cryptocurrencies continue to gain traction, traditional investors are eager to participate in this burgeoning market. In the past 5 years, Bitcoin has experienced an astonishing increase of 844.94% while the S&P 500 has seen a commendable rise of 88.92%. This translates to a difference of roughly $75,000 for an initial investment of $10,000 in each asset.

The significant growth and interest in Bitcoin have led to a notable trend, as evidenced by internal usage insights, which show that the iShares Bitcoin Trust ETF was among the most viewed Exchange Traded Funds (ETFs) by Trading Central users last month. Traditional investors are keen to explore the world of crypto, particularly Bitcoin, which is often regarded as one of the more stable options in the cryptocurrency landscape. One popular method for entering this space is through Bitcoin ETFs.

While Bitcoin and the broader cryptocurrency market present significant profit potential, they also come with inherent risks and trade-offs that both newcomers and experienced stock market investors must weigh. Bitcoin ETFs, too, have their own advantages and disadvantages. In this article, we will explore both investment paths whether you prefer to own Bitcoin directly or seek exposure to its gains through ETFs. We’ll outline the merits of each option to help you determine which approach aligns best with your investment goals.

What’s Bitcoin?

In short, Bitcoin is the world’s largest cryptocurrency. Created with the intent of providing a decentralized peer-to-peer electronic cash system and launched in 2009, it is the most widely accepted and traded cryptocurrency.

What are ETFs?

Exchange Traded Funds (ETFs) are investment funds that trade on stock exchanges, like stocks, that may hold a collection of assets, including stocks, bonds, commodities, or cryptocurrencies). Through the payment of Management Expense Ratios (MERs), which are fees paid for the management of the ETF, ETFs allow investors to gain access to markets that may be tricky to get into at first, like commodities and futures. Nowadays you can buy ETFs that focus on Gold, commodity futures,  or covered call option ETFs. Bitcoin ETFs, such as the iShares Bitcoin Trust ETF (IBIT), have emerged as a way for investors to participate in the Bitcoin market without directly owning the cryptocurrency. These ETFs allow investors to potentially benefit from the significant gains seen in the Bitcoin market, while avoiding the extra steps and complexities associated with buying and storing Bitcoin directly. To achieve this, Bitcoin ETFs use investor funds to purchase and securely store Bitcoin in offline wallets, also known as cold wallets, which are designed to provide an additional layer of security.

Investing in Bitcoin ETFs versus buying Bitcoin directly: which is the better option?

There are arguments to be made for both the purchase of Bitcoin ETFs and purchasing bitcoin directly, and ultimately, the choice depends on individual preferences and priorities. For most investors, the primary concern is price appreciation, which can be achieved through either method.

Purchasing Bitcoin directly from a cryptocurrency platform offers several advantages, including:

• Access to Bitcoin and a broader range of assets not available on traditional trading platforms.
• Direct ownership and control of the cryptocurrency, which can be stored in hot or cold wallets.
• The ability to use Bitcoin for transactions.

However, buying Bitcoin directly also comes with added responsibilities and risks, such as:

• The risk of losing holdings due to security breaches or attacks on the platform, if investors choose to give custodial rights to the platform.
• The challenge of securing and managing private keys and recovery phrases.
• The need to create an account on a crypto platform, which can be time-consuming and may pose security risks due to variability in platform reputation and security.

In contrast, Bitcoin ETFs offer a more convenient and managed approach, with benefits including:

• Third-party management and security, eliminating the need for investors to handle and store Bitcoin securely, or fear a security breach or attack on a crypto platform.
• Ease of purchase, as ETFs are traded on stock exchanges and can be added to retirement accounts.
• Flexibility to trade like regular stocks on already existing accounts, without the need for a separate crypto platform account.

However, Bitcoin ETFs also have their drawbacks, including:

• Annual fees, known as the Management Expense Ratio (MER).
• Limited use, as ETFs are not suitable for transactional purposes and cannot be exchanged for actual Bitcoin.

Regardless of the investment path chosen, it's crucial to approach cryptocurrencies investments with the same level of caution and scrutiny as traditional assets. By conducting thorough research, establishing a solid trading foundation, and making informed decisions, investors can help protect their capital and increase their chances of success.