Investing in Bitcoin: ETFs or buying outright?

Posted: 8 April 2021 10:15 am
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Bitcoin has been around for over a decade. Is an ETF a step forward for investors — or a step back?

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With the launch of North America’s first-ever Bitcoin exchange traded fund, Canadians now have a range of options for investing in Bitcoin. At first glance, an ETF is a convenient way to invest in cryptocurrency.

But it may not be the most cost-effective. Or even the easiest: cryptocurrency exchanges have been around for close to a decade now and have streamlined the process of buying, trading and storing Bitcoin.

The ideal option – buying exposure to the price of Bitcoin through an ETF or purchasing the real coins on an exchange – will largely depend on your objectives, trading preferences and attitude to Bitcoin in general.

Goals: Investing vs trading

Do you want exposure to the price of Bitcoin, or are you more interested in buying and holding the “physical” Bitcoin asset? Are you looking for a short-term or a long-term investment?

An ETF might be an option if you already have a stock trading account and want exposure to the price of Bitcoin without the need to hold on to the actual asset itself. The downsides of an ETF are that you won’t be able to hold or trade the spot market, and you’ll pay yearly management fees, which are included in the price of the ETF.

If holding real Bitcoin is important to you, then look to a cryptocurrency exchange. Many exchanges will hold the coins on your behalf, but you can also withdraw them to your personal custody if preferred. Purchasing on an exchange may also be a better value if you plan to hold your Bitcoin over the long term, as you won’t have to pay a yearly management fee.

You can also actively trade Bitcoin with a cryptocurrency exchange. Because crypto exchanges respond to the market instantly, you’re able to take advantage of changes to the spot price of Bitcoin. On the other hand, the unit price of an ETF lags behind the spot market.

ETFs are also bound to the hours of the associated stock exchange, whereas cryptocurrency exchanges operate 24/7. And you can use an exchange to trade Bitcoin into other cryptocurrencies and such fiat currencies as the ever-popular US dollar.

ETFs

Pros

  • Accessed through a stock trading account or broker.
  • Can be included in a TFSA or RRSP.

Cons

  • Pay management fees over the lifetime of the investment.
  • Broker fees and commissions can add up quickly if you plan on trading.
  • ETF unit price typically lags behind the spot market.

Crypto exchanges

Pros

  • Purchase and own actual Bitcoin without ongoing fees.
  • Markets are open 24/7 and respond to price changes instantly.
  • Trading fees on popular exchanges are often as low as 0.1%.
  • Trade Bitcoin against other cryptocurrencies.

Cons

  • Not eligible for TFSA or RRSP.
  • May encounter slippage when placing large trades.
  • Spot market is more volatile than an ETF.

An ETF doesn’t give you ownership of the underlying asset. You purchase units of the ETF, which are indexed the price of the underlying asset.

Value for money

Bitcoin is one of the most volatile assets around. Daily price swings of 5% or higher are not uncommon. An ability to respond to market fluctuations is critical for any trader – but less important if you’re an investor planning to dollar-cost-average your way in.

ETFs typically come with additional fees compared to buying the underlying asset directly. There’s ongoing management fees (as high as 1.95%), trading fees and commissions. This also makes buying large amounts of Bitcoin a costly endeavour over time, as those management fees start to eat away at your investment. Perhaps most importantly, there may be a discrepancy between the value of the ETF and the value of the underlying asset, which means you end up paying a premium.

As for buying large amounts of Bitcoin, exchanges offer over-the-counter (OTC) desks which improve the overall value of large purchases (typically $50,000 or more). This is done by locking in the price to prevent slippage, accessing multiple liquidity pools, and catering to the needs of the individual buyer, such as purchasing with fiat currencies that may not otherwise be supported in a given marketplace.

Another advantage of exchanges is that when trading Bitcoin in the spot market you’re able to set the exact price you want to pay, plus the taker fee (on an exchange like Coinsquare, this is only 0.1%). This gives you greater control over your trades and lets you respond to changes in the price of Bitcoin instantly, instead of waiting for the conditions of the ETF to update in line with the market.

ETFs

Pros

  • Convenient way to purchase.
  • Taxed as part of your share portfolio.

Cons

  • Fees and commissions chip away at the overall value of the ETF.
  • You may pay a premium on the underlying asset.

Crypto exchanges

Pros

  • Buy at current spot prices.
  • No ongoing costs – you pay a trading fee only.
  • Purchase large amounts through an OTC desk to prevent slippage.

Cons

  • Requires a new account at a cryptocurrency exchange.
  • Not all crypto exchanges are equally safe and regulated.

Ownership and security

A major part of Bitcoin’s value is that it can be held by the individual owner, without the need for a third-party bank. This means Bitcoin is free from the restraints of cash, which can be seized or frozen by authorities and is difficult to store securely in your own possession.

Purchasing Bitcoin through an ETF eliminates this benefit, and places ownership back into the hands of a third party. An ETF also prevents access to your coins – meaning they can’t be used for payments, decentralised finance (DeFi) or to earn interest.

Cryptocurrency exchanges also custody your coins as a third party. But the key difference compared to an ETF is that you can withdraw them anytime you like. An exchange allows you to buy the coins, but it’s then up to you what you do with them.

ETF providers and most exchanges are similar when it comes to security, opting to hold the majority of coins in cold storage. Cold storage means that the cryptographic keys that control access to the coins are stored in a physical device disconnected from the Internet — except for when the coins need to be accessed and moved. For instance, Coinsquare holds over 95% of its customer funds offline in cold storage at an insured custodian, which helps mitigate the risk of a hack or theft.

ETFs

Pros

  • Custodied by a third party.

Cons

  • No ownership to the underlying asset.
  • Cannot move Bitcoin to a personal wallet.
  • Cannot spend or use Bitcoin.

Crypto exchanges

Pros

  • Custodied by a third party.
  • Can move Bitcoin to another exchange or to a personal wallet.
  • Can use Bitcoin for payments, with DeFi applications to earn interest or as collateral to take out a cash loan.

Cons

  • Custodied by a third party.
  • Not all exchanges store funds in cold-wallet, increasing exposure to a hack or theft.

Verdict

Put simply, buying Bitcoin through an ETF strips away a lot of what makes Bitcoin valuable – decentralisation, self-custody, mobility among them – and imposes restrictions like market regulation, trading hours and middlemen.

Given the current generation of Bitcoin ETFs only track the price of Bitcoin — as opposed to being a basket of Bitcoin and related assets like crypto mining stocks or exchange stocks — there is little reason to purchase a Bitcoin ETF instead of the actual asset itself.

That said, if you’re already familiar with stock exchanges and a regular trader, then keeping your exposure to Bitcoin in the same arena through an ETF may be convenient. But you will pay a high price for convenience and miss out on many of the features that have helped propel BTC to its recent all-time-high price of CAD$73,000.

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Disclosure: The author owns a range of cryptocurrencies at the time of writing

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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