ETF stands for exchange-traded fund which is a type of investment vehicle that contains various investment products of an underlying asset class. Bitcoin ETF is a product that allows investors to seek exposure to the value of Bitcoin without directly investing in it.
Top digital assets such as Bitcoin and Ethereum have amassed attention from investors on account of their position as an effective hedge against inflation.
On this account, financial firms introduced various types of investment options that consisted of Bitcoin such as mutual funds and ETFs. These investment vehicles allowed traditional investors to seek exposure in Bitcoin without purchasing it directly from the spot market.
At the same time, it granted protection against price volatility and regulatory reservations of cryptocurrencies. There are two main types of Bitcoin ETFs namely futures and spot. Bitcoin futures ETFs track the performance of Bitcoin-backed futures while Bitcoin spot ETFs track the performance of the spot prices of BTC.
Direct Bitcoin Investment Vs ETF Investment Vehicle
Direct Bitcoin investment requires directly purchasing and holding Bitcoin. For this purpose, investors have to create an account at a cryptocurrency exchange or use a custodial wallet. However, by holding the Bitcoin directly investors have to account for price changes taking place in Bitcoin in real time.
Additionally, investors have to account for other issues such as securing privacy keys, accounting for transaction costs, calculating bid-ask spread, and keeping an eye on technical vulnerabilities.
However, investors who do not wish to have direct exposure to Bitcoin can opt for investment vehicles such as mutual funds, futures, and exchange traded funds (ETFs). The indirect investment option allows investors to gain advantages such as adding derivatives to their cryptocurrency portfolios and adding Bitcoin to regulated investments.
Here are some important factors that explain the difference between direct and indirect Bitcoin investments:
Asset Exposure
Investors have direct access to Bitcoin reserves with direct investment option while they do not store or manage Bitcoin funds in an indirect investment vehicle such as mutual funds and ETFs.
Management
Direct investors have to self-manage their Bitcoin reserves. In contrast, the Bitcoin-based investment vehicles are managed by appointed fund managers.
Accessibility
The accessibility of direct Bitcoin purchases is based on exchange-specific requirements and indirect investment is associated with professionally managed BTC reserves.
Regulatory Implications
Regulatory oversight is limited for direct Bitcoin investors. However, Bitcoin investment vehicles such as ETFs and mutual funds are issued as regulated products.
Investment Diversification
Direct investment of Bitcoin grants exposure to a single asset but BTC investment vehicle allow investors to seek exposure in multiple asset classes that are inclusive of Bitcoin-backed derivatives.
Advantages of Bitcoin ETF Investing
Ease of Access
Bitcoin ETFs increase accessibility for investors by allowing them to purchase ETF shares via brokerage accounts. At the same time, the investors do not have to account for private keys or custodial wallet accounts when using a brokerage account.
Regulatory Oversight
Bitcoin ETFs are fully regulated therefore they create a secure investment environment. At the same time, investors have more transparency and proceed in accordance with the regulatory requirements. At the same time, Bitcoin ETFs bridge the gap between traditional and digital investment options for digital asset sector.
Diversification
Bitcoin ETFs introduce more diversification for investors. In this manner, investors can mitigate risk on account of the conservative correlation of Bitcoin with stocks and bonds. Furthermore, indirect investment vehicles act as a hedge against inflation when Bitcoin prices are subjected to volatility while traditional investment products are declining.
Tax Deduction
Bitcoin ETFs are more tax-efficient in comparison to direct investing. This is because ETFs have a special tax exemption by way of regulatory policies in specified jurisdictions such as capital gains or sales of the reserves. On the other hand, direct Bitcoin investing is subjected to taxation for every transaction when Bitcoin is sold or exchanged.
Liquidity
Indirect investment vehicles such as ETFs have more liquidity in comparison to direct investments.
Therefore, investors may easily sell or purchase ETF shares during market hours and able to manage the investment vehicle in an effective manner during periods of volatility.
Conclusion
Bitcoin adds a lot of value to the cryptocurrency trading portfolio in both direct and indirect forms. However, Bitcoin ETFs also harbor various risks such as high price volatility, regulatory uncertainty, high fees, indirect propriety, and BTC price tracking discrepancies.
