All of a sudden, investors have access to exchange-traded funds (ETFs) tracking the real-time value of Bitcoin (BTC -1.10%). American regulators finally approved 11 applications for Bitcoin-tracking ETFs, opening a whole new type of digital asset investments.
Maybe you haven't dipped your toes in the unpredictable cryptocurrency waters yet, but you're thinking about your first Bitcoin investment. Should you dive into the deep end with a direct buy of Bitcoin tokens, or is a robust ETF like the iShares Bitcoin Trust (IBIT -1.47%) a better choice?
The answer, of course, is that it depends on your needs and preferences. Let me walk you through the pros and cons of these two options for Bitcoin exposure.
Why iShares Bitcoin Trust ETF may be for you
This is not the only Bitcoin ETF on the market today, but it's an early leader for several solid reasons.
The largest and most popular Bitcoin ETF in the early days has already built a $1.2 billion portfolio of Bitcoin holdings. The Fidelity Wise Origin Bitcoin Trust runs a close second with a net asset value (NAV) just north of $1 billion as of Friday, Jan. 19. Beyond Fidelity, it's not a close race. Each of the other nine Bitcoin ETFs is worth less than half of the iShares fund so far.
The fund trades at a 0.3% discount to its underlying NAV, reflecting the live Bitcoin price of an index called the CME CF Bitcoin Reference Rate-New York Variant (BRR). In turn, the BRR index tracks the average Bitcoin price in U.S. dollars across six leading crypto exchanges. This methodology ensures a stable Bitcoin price, shielded from the sudden price swings you sometimes see in a cryptocurrency (or stock) on a single trading platform.
The iShares fund is managed by BlackRock, one of the world's largest and most respectable financial asset managers. Investors have relied on the iShares brand of index-trading funds for decades, with 29 ETFs holding at least $20 billion in NAVs.
Suppose you want ultimate stability in a strictly regulated investment vehicle, with the backing of a true financial services giant under a household name brand of ETFs. In that case, the iShares Bitcoin Trust should be right up your alley. And if you're planning to add Bitcoin exposure in an account that doesn't offer direct Bitcoin trading, an ETF may be your only choice. For example, many IRA retirement accounts provide access to stocks, mutual funds, and ETFs, but not to cryptocurrency tokens.
Why you might prefer buying Bitcoin directly
Here's why making the effort to open an account on an exchange with cryptocurrency trading such as Coinbase Global or Robinhood Markets may be worth it for some people.
All ETFs charge an annual fee. Most of the new Bitcoin ETFs carry very low fees of 0.3% or less, and most of them are pausing their fee collections for a few months in order to earn more investor attention. The iShares Bitcoin Trust's sponsor fee stands at 0.25%, cut in half for the first year or until the fund's asset value exceeds $5 billion.
That's not a deal-breaker for most investors. Still, a low fee is more expensive than no fee, and nobody will charge you an annual fee for holding Bitcoin tokens in a digital wallet.
That digital wallet is another popular selling point. Direct ownership gives you full control over your cryptocurrency assets, much like carrying dollar bills in a leather wallet instead of a bank account.
The iShares fund comes with a significant market footprint, managing one of the largest Bitcoin portfolios in the world, but it's just 0.16% of the entire Bitcoin asset. The leading cryptocurrency's total market value stands at $804 billion today, with a daily trading volume of $11.7 billion. I wouldn't be surprised to see a Bitcoin logo when I look up "liquidity" in a dictionary.
Some investors prefer to keep their holdings as pure and simple as possible. For some, that quest for simplicity will point to the stock-like trading process of an ETF. For others, it means going straight to the source and buying the real thing. True purists like MicroStrategy chairman Michael Saylor will never buy Bitcoin ETFs as long as the digital tokens are readily available.
Brief summary: Which Bitcoin bet is better for you?
In the dynamic world of cryptocurrency investments, choosing the right path can feel like navigating a labyrinth. Today I explored two distinct paths: the iShares Bitcoin Trust ETF and buying Bitcoin directly. Each alternative offers unique advantages tailored to different investor profiles.
The iShares Bitcoin Trust ETF might be your beacon if you seek a regulated, stock market-traded avenue into Bitcoin with a diversified risk profile. In some cases, an ETF may be the only available option.
On the other hand, purchasing Bitcoin directly could be your next step forward if you aim for a more hands-on approach with potentially higher rewards (and risks).
So, which path should you take? The answer isn't set in stone; it depends on your investment style, risk tolerance, available brokerage account types, and goals. I hope this overview helps you make the best choice for your particular situation. Mind you, this is far from a complete analysis, and you could spend hours getting deeper into the details.
Whatever you do, your favorite Bitcoin investment should be a small part of a diversified investment portfolio. "Backing up the truck" to a single investment is never a good idea -- unless that all-in investment involves an inherently diverse instrument such as an index fund.
