Bitcoin (BTC) has once again caught the eye of your everyday investor following the approval of 11 spot Bitcoin exchange-traded funds on January 10. This, understandably, leaves investors wondering if they should invest directly in the digital currency or gain exposure through a the newly-approved ETFs. Both options have unique pros and cons to consider.
Bear in mind, the SEC has recently approved 11 spot Bitcoin ETFs. Although, Bitcoin futures ETFs had already been given the green-light and were available on the market.
Buying Bitcoin directly allows you to own the actual cryptocurrency. This gives you full control over your investment and the potential for very high returns if you’re quick off the mark. However, investing in Bitcoin requires setting up a cryptocurrency wallet and account on an exchange, which can be complicated for beginners. Investors will also have to pick between centralized and decentralized exchanges—another decision that requires a little research.
A spot Bitcoin ETF provides much easier access to Bitcoin exposure for investors. Investing in a Bitcoin ETF is as straightforward as buying any stock or fund in your brokerage account. However, with an ETF you only own shares of a fund invested in Bitcoin rather than Bitcoin itself.
As a still emerging asset, Bitcoin carries higher volatility and security risks compared to a regulated Bitcoin ETF. But with higher risk comes the potential for higher rewards. Direct ownership means capturing all of Bitcoin’s upside compared to an ETF that charges management fees, which can reduce your total returns.
On the other hand, Bitcoin ETFs offers protections against fraud or theft that come with buying Bitcoin directly or on an exchange. However, Bitcoin ETFs have counterparty and operational risks related to the fund provider’s ability to manage the product. While these are minor risks, they simply don’t exist with Bitcoin itself.
Investing in a Bitcoin ETF over the cryptocurrency itself will be similar to holding Bitcoin itself in most large jurisdictions.
In the US, selling your Bitcoin ETF position triggers a taxable event, either as long-term or short-term capital gains, following the same tax rules as cryptocurrency trades. While buying and holding Bitcoin ETF shares incurs no taxes, selling them after holding for over 12 months subjects you to long-term capital gains tax (0% to 20%), and selling within 12 months incurs short-term capital gains tax (10% to 37%).
Please, bear in mind that your tax burden will depend on the jurisdiction in which you pay.
One major advantage Bitcoin has over a Bitcoin ETF is that as an asset traded 24/7 globally, offering constant liquidity. Meanwhile, Bitcoin ETFs can only be traded during market hours. So, if you’re looking to minimize losses from a sudden market downturn, perhaps ETFs are not the right investment option for you.
However, if you want to buy your ETF shares and forget about them until you want to cash out, an ETF might be the better choice. It will give you exposure to Bitcoin’s price movements without having to remember a complicated set of private keys (or risk losing them).
Ultimately, whether a spot Bitcoin ETF or buying Bitcoin directly makes more sense comes down to your personal risk tolerance and investment goals. For suitable investors, owning Bitcoin directly provides higher return potential despite higher risks. More conservative investors may prefer gaining exposure through a regulated Bitcoin ETF.