The arrival of Bitcoin (BTC +1.28%) exchange-traded funds (ETFs) is a complete game changer. Not only do they legitimize Bitcoin, but they also provide a new means for investors seeking exposure to the cryptocurrency.
Previously, buying Bitcoin meant going through a cryptocurrency exchange, which could be a challenging task for those not proficient with technology. However, with the introduction of ETFs, investing in Bitcoin is as simple as buying stocks of your favorite company, effectively democratizing access to the cryptocurrency.
While the Bitcoin ETFs have already proven to be one of the most successful launches in ETF history, you won't see me buying them. Here's why.
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Why it's better to own the asset
You could think of Bitcoin ETFs as very similar to gold ETFs. When you buy a gold ETF, you don't get gold bullion. You essentially get a receipt saying you own a certain amount of shares within the ETF. The fund sponsors are the ones buying and selling physical gold.
In the same way, when you buy a Bitcoin ETF, you are not provided with actual Bitcoins. While you can't hold a Bitcoin like you can a gold coin or bullion, there are still implications to be aware of.
When you own actual Bitcoin and not an ETF equivalent, you benefit in three significant ways. First, you are eliminating any counterparty risk and preserving autonomy. The firms offering these ETFs are the ones that hold the Bitcoins. What if there is a security breach? What if the government orders the seizure of all Bitcoin? This may sound hysterical, but it happened with gold in the 1940s. If a similar situation unfolded, those companies holding your Bitcoin would likely comply, and you would be left with nothing.
When you own actual Bitcoin, you have complete control over your private keys and can store your assets in a secure hardware or software wallet of your choice. This eliminates the need to trust a third-party custodian or intermediary to hold your Bitcoin on your behalf, reducing the risk of hacking, fraud, or other security breaches associated with ETF providers.
Second, you are in direct control of your Bitcoin. In contrast to stock exchanges with fixed trading hours, Bitcoin trades 24 hours a day, seven days a week. If you need to sell some of your holdings late on a Saturday night, you can do just that. The same goes for buying. With the ETFs, you are limited to the set trading hours of the exchange, Monday through Friday, from 9:30 a.m. to 4 p.m. East Coast time.
Third, by owning Bitcoin you can use your holdings in ways that are unique to cryptocurrencies. For example, you can send Bitcoin to other individuals anywhere in the world as payment. You can't send your ETF holdings. In addition, there are new and innovative applications being developed to leverage Bitcoin. Although the process is relatively nascent, Bitcoin owners can lend their holdings to other investors and earn a yield or even swap their Bitcoin for other cryptocurrencies through a decentralized exchange.
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A necessary disclaimer
Now, I will be the first to acknowledge that these reasons might not resonate with everyone. Or maybe you have no idea how to use a cryptocurrency exchange. In this case, Bitcoin ETFs can be a useful means of gaining exposure.
Perhaps you have a 401(k) retirement savings plan where your employer matches contributions. As long as your provider offers one of the Bitcoin ETFs, you could gain exposure with your money and your employer's. Who doesn't love the idea of some free Bitcoin?
Whatever your preference, Bitcoin is proving to be a necessary component of any portfolio. Whether you own Bitcoin or choose ETFs, rest assured that you are setting yourself up for long-term success and will benefit from Bitcoin's historic journey of price appreciation.
