Investing in Bitcoin ETFs vs. buying real Bitcoin - which is better?

Cryptocurrency investors are closely watching the development of a new product on the market: the Bitcoin ETF.

Once available, this new investment vehicle has the potential to open crypto investing to a broad swath of people, legitimize the currency among the uninitiated, and stabilize the value of a famously volatile asset.

But Bitcoin exchanges already exist to let investors buy, sell, and trade the asset directly. Why not just buy Bitcoin that way?

There’s a big difference between buying Bitcoin and investing in a Bitcoin ETF. Which option makes sense for you depends on your financial goals and priorities.

Here’s everything you need to know about Bitcoin vs. Bitcoin ETFs and how to decide which investment option would be right for your money.

What is Bitcoin?

Bitcoin is a digital currency that, unlike so-called fiat currencies such as U.S Dollars and Euros, is not controlled by any government or central bank. Instead of regulation by a central entity, the currency lives on a database called a blockchain, which is a continuously growing record of the history of a coin’s use.

A blockchain database collects information about a coin’s history in groups called “blocks” and “chains” them together to form a permanent history of the coin. All users collectively control the Bitcoin blockchain, and anyone can view the records through a blockchain explorer like blockchain.com — though, most users won’t have a need to or probably understand what they’re looking at.

The Bitcoin blockchain is also immutable, which means you can’t reverse transactions (like you can with, say, your credit card).

No physical asset backs up Bitcoin; it’s 100% digital, and only 21 million can ever exist. That means once 21 million bitcoins have been “mined” — a process that basically involves using a computer to solve complex math problems and add a block to the Bitcoin blockchain — no more can be created.

Cryptocurrency is built with this limitation to protect its value, even though there’s no physical limitation on its existence the way there is with valuable commodities like gold, where there’s literally only so much in the world to dig up.

Anyone can technically mine for Bitcoin online, but the process takes a ton of processing power and requires expensive hardware called a mining rig. Most people get into the Bitcoin market simply by buying existing coins with cash or alternative digital currencies.

How to buy Bitcoin

You’ll need three things to buy bitcoins:

A Bitcoin/cryptocurrency wallet

That’s the software that holds information about your store of Bitcoin, sort of like a bank account. You can download a wallet as desktop software or as a mobile app, use a web wallet that’s built into a cryptocurrency exchange platform, or purchase a hardware wallet you can connect to your computer via USB. 

Desktop, web, and mobile wallets are “hot” wallets because they’re connected directly to the internet and at risk of contracting malware. Hardware wallets are “cold” wallets and mostly immune to attacks or theft.

A crypto exchange

This is the platform where Bitcoin is available to purchase, sell, or trade, similar to a stock exchange. Different exchanges give you access to different cryptocurrencies, so you have to make sure Bitcoin is available on your platform of choice. As the most popular coin, it’s available on most of them. 

Depending on your location — because regulations vary by country — you can find hundreds of crypto exchanges. Kraken, Binance, Gemini, and Coinbase are some of the largest and most popular exchanges around the world. For new buyers, user-friendly platforms with bank-account-esque features, like Coinmama and BlockFi, might be more attractive.

You can also buy Bitcoin through regular investing apps, like Cash and Robinhood.

Bank account, credit, or debit card

Most exchanges only let you buy crypto with a bank transfer or wire transfer, but they’re increasingly letting you make purchases with credit and debit cards (often with higher fees). If you already own other cryptocurrencies, you can use that to purchase Bitcoin, too, depending on the platform.

Anyone can buy Bitcoin either as an investment or as an alternative currency. The difference is in what you do with it once you own it.

If you buy bitcoins to spend, you’ll shop markets and sellers that accept the currency. To make a purchase with a bitcoin, you typically have to send money from your wallet to the seller’s, using their wallet address, which is a unique identifying number similar to a bank account number. This process is similar to any peer-to-peer digital payments you make with regular money.

Additional avenues for shopping with Bitcoin and other digital currencies are opening up as crypto becomes more widespread. A few platforms offer debit cards that let you spend from your crypto balance directly to vendors and retailers in fiat currencies.

If you buy Bitcoin as an investment, you expect to hold onto it and sell it when the value goes up. The price of the coin fluctuates frequently, so the value of your Bitcoin holdings could change significantly day to day or week to week. Active traders, like in the traditional stock market, keep a close eye on hour-to-hour fluctuations and play the buy-low/sell-high game multiple times per day to maximize their earnings.

Bitcoin pros and cons

Pros:

• Currently available to purchase or mine.
• Available to buy, sell, and trade 24/7, so you can react instantly to price changes.
• Not subject to inflation or fluctuation due to actions by the Federal Reserve.
• Significant growth in value since its inception (though gains aren’t guaranteed).
• Ability to use as currency to make direct purchases.
• Ability to trade for other cryptocurrencies or use to purchase other currencies.

Cons:

• Platforms are typically complex with a steep learning curve.
• Volatile asset (though a nod from the SEC could reduce volatility).
• Unregulated by any authority, so no protection against loss or theft.
• Significant energy consumption to provide computing power for mining.

What is a Bitcoin ETF?

In case you’re unfamiliar, an exchange-traded fund (ETF) exists in the traditional investment world and is under development as well as in crypto. An ETF lets you purchase a large number and variety of securities at once. 

They usually track the performance of a certain business sector or stock index (like S&P 500, Dow Jones, or NASDAQ), and they’re cheaper to invest in than other types of funds because of low management fees.

Similarly, a Bitcoin ETF would be one that tracks the value of Bitcoin. Just like with other securities and commodities, the fund owns the assets, and you would invest for a piece of the value. So investing in a Bitcoin ETF would give you exposure to the value of Bitcoin, but not ownership of any actual Bitcoin.

This is getting seriously abstract, so here’s a more solid analogy: imagine someone owns a bunch of gold bars. They keep that gold in their storage shed, along with a little frankincense and myrrh. 

You want a piece of the treasure, but don’t want to go to the trouble of building and maintaining your own shed. You give them money to own a piece of their stash, plus some fees in exchange for them handling the shed headaches (shedaches). When they sell some of their collection, you get a piece of the earnings. But you never get your hands on a gold bar.

A traditional ETF is like that, but instead of biblical treasures, the fund (shed) holds commodities like gold, art, or real estate; or securities like stocks and bonds that provide ownership in companies.

A Bitcoin ETF, then, would be a fund full of digital currency data instead of tangible assets.  growth potential right now.

How to buy Bitcoin ETFs

Here’s the thing…Bitcoin ETFs don’t exist yet (speaking of abstractions…)

More accurately, none have been approved for actual trading by the U.S. Securities and Exchange Commission. Applications regularly come before the SEC, but so far the commission has rejected them, mainly because of the volatility and lack of regulation in cryptocurrencies.

However, crypto enthusiasts are optimistic.

Once a Bitcoin ETF is approved, you’ll be able to invest in it the same way you invest in any ETF. You wouldn’t need to find a crypto exchange or wallet. You’d be able to purchase it anywhere you can invest in stocks. The ETF would let investors get access to the potential gains (along with exposure to the potential losses) in the Bitcoin market without learning how to use complex tools and navigating new exchanges.

Another option: buying blockchain ETFs

Because a Bitcoin ETF hasn’t become available in the stock market yet, many investors are focusing on blockchain ETFs – funds whose underlying securities are invested in companies that operate in blockchain technology.

Blockchain has broader applications beyond cryptocurrency, like sharing medical data, tracking music royalties, ID theft protection, and more. As these uses grow in popularity, along with the boom in crypto, the companies behind the tech are growing, too, so blockchain ETFs have great

Until then, eager investors can put money into blockchain ETFs, which work just like any other ETF, tracking the value of a particular business sector. These aren’t affected directly by the fluctuating value of Bitcoin or other cryptocurrencies, because they don’t hold those currencies the way a potential Bitcoin ETF would, so they’re much more palatable for the SEC.

You can invest in blockchain ETFs through investing apps like Robinhood.

Bitcoin ETF pros and cons

Pros:

• Accessible through traditional investing platforms.
• Regulated by the U.S. government and SPIC-insured.

Cons:

• Not yet available to purchase — subject to SEC approval.
• Only available to buy and sell during market hours.
• May have a mix of assets, so it does not track the price of Bitcoin precisely.
• No ability to trade for other cryptocurrencies or make purchases using Bitcoin.

Bitcoin vs. Bitcoin ETFs: which is the better investment?

Once Bitcoin ETFs become available to trade on the stock market, you’ll have to make a choice: do you want to buy Bitcoin directly or invest in an ETF that tracks its price?

Buying Bitcoin is right for you if…

You’re a savvy investor

Directly buying Bitcoin is better for savvy investors who buy and sell frequently according to price changes. The 24/7 access to cryptocurrency trading lets you stay on top of Bitcoin price changes and react immediately to hedge losses or take advantage of gains.

You want to spend with Bitcoin

Buyers who want to use Bitcoin as currency to make purchases will need to buy the cryptocurrency directly. Investing in an ETF doesn’t give you access to its underlying assets, so you can’t use the value you own in a Bitcoin ETF to make crypto-based purchases.

You want to transfer funds internationally

In some cases, Bitcoin exchange rates might be favorable compared with exchange rates for local currencies, or the crypto coin might be more stable. If you use Bitcoin to transfer funds to contacts in other countries, you’ll need to purchase it directly. You can’t transfer currency from an ETF for someone else to spend. 

Consider investing in a Bitcoin ETF if…

You’re a hands-off investor

If you don’t want to actively manage your crypto investment, but you want a way to diversify your portfolio with a high-risk, high-reward asset, a Bitcoin ETF is a better option than directly buying Bitcoin.

You’ve been wary of Bitcoin

An ETF could bridge the gap between traditional investing and crypto investing for anyone who’s stayed away from the crypto world because of the lack of government oversight. SEC regulation could stabilize the currently volatile price of Bitcoin as well as add a much-needed layer of protection against fraud.

You’re in the market for a new kind of investment

Any risk-tolerant investors using money they can afford to lose could benefit from investing either in Bitcoin directly or a Bitcoin ETF. Both vehicles offer the potential for high gains in a largely untapped market and make a good fit for experimental investors.

Summary

The SEC has yet to approve a Bitcoin ETF for the U.S. market, but optimistic investors believe this option is just around the corner.

Whether investors take advantage of the opportunity or stick with owning the decentralized currency directly will depend on their financial goals and priorities. 

Read more:

• Investing In Bitcoin: Everything You Need To Know Before You Buy
• The Top 10 Things You Need To Know About Bitcoin