Bitcoin vs. ETFs: Which Is Better?

Ten years after the first spot Bitcoin exchange-traded fund (ETF) application was filed in the U.S., the Securities and Exchange Commission (SEC) approved spot Bitcoin ETFs on January 10, 2024. In that time, they have managed to accumulate more than $30 billion in assets, becoming an easy and convenient way for first-time crypto investors to get exposure to Bitcoin. Arguably, these spot Bitcoin ETFs have become the biggest new Wall Street product launch in 30 years.

However, some crypto enthusiasts still argue that it's better to buy Bitcoin directly rather than through a Bitcoin ETF. Are they just nostalgic for the early days of crypto, or do they have a valid point? Let's take a closer look.

What Does "Buying Bitcoin" Really Mean?

When you buy a Bitcoin ETF, you're not actually purchasing Bitcoin. Instead, you're buying exposure to Bitcoin's price. This is similar to buying an ETF that tracks the S&P 500—you’re not buying shares of every company in the S&P 500, but rather gaining exposure to the index's performance through a benchmark asset.

This distinction is crucial because Bitcoin serves as both a currency and a commodity. For instance, if you want to use Bitcoin to pay for something, like an airline ticket for an upcoming vacation, owning a Bitcoin ETF won't help—you'd have to sell the ETF and convert to dollars. In essence, you're not buying Bitcoin itself, just its price movements.

The Implications of ETF Ownership

There’s a well-known saying in the crypto world: "Not your keys, not your coins." This refers to the cryptographic keys that are necessary to truly own Bitcoin. When you buy a Bitcoin ETF, the ETF issuer holds these keys, not you. This means you don't have direct ownership of the Bitcoin, limiting your control over the asset.

This issue becomes particularly relevant if there are changes in government regulations regarding Bitcoin. The ETF issuer, not you, will decide how to handle these changes. Given the fluctuating regulatory landscape for Bitcoin globally, this is a significant consideration for investors with large Bitcoin holdings.

Are Bitcoin ETFs Right for You?

While Bitcoin ETFs are undoubtedly easy and convenient to own, they do not equate to owning Bitcoin. Prominent investors, such as Robert Kiyosaki, author of "Rich Dad Poor Dad," advocate for direct ownership of assets. Kiyosaki suggests that "rich dads" buy Bitcoin directly, while "poor dads" opt for Bitcoin ETFs. He emphasizes that owning the asset itself—whether it’s gold, real estate, or Bitcoin—is key to building wealth.

That said, Bitcoin ETFs can still be a great investment for newcomers to the asset class. They simplify the process, eliminating the need to manage cryptographic keys or understand the complexities of Bitcoin mining. They offer a way to participate in Bitcoin’s price movements without diving into the intricacies.

Conclusion

The choice between buying Bitcoin directly and buying a Bitcoin ETF ultimately depends on your investment goals and comfort with managing digital assets. While Bitcoin ETFs offer simplicity and convenience, they don’t provide direct ownership of Bitcoin, which can be a crucial distinction.

If you’re new, Bitcoin ETFs can be an excellent starting point, providing exposure to Bitcoin's price movements without the need to manage the underlying asset. However, for those seeking true ownership and control over their Bitcoin, buying it directly remains the preferable option. This decision is more complex than it might initially appear, and it's important to consider your long-term investment strategy and the potential implications of each choice.