Is Buying a Bitcoin ETF the Same as Buying Bitcoin?

Bitcoin bull on Wall Street AI art
Bitcoin vs Bitcoin ETFs

The decision between purchasing Bitcoin directly or opting for a Bitcoin ETF depends on your knowledge and expertise of Bitcoin, the tradeoffs of each option, and your investment objectives. If you’re new to Bitcoin, unsure how to properly self-custody, and are mostly interested in Bitcoin as an investment, the Bitcoin ETF may be for you. However, if you have studied Bitcoin more thoroughly, want to access the full potential of Bitcoin as money, and understand proper self-custody practices, buying and holding Bitcoin directly is the way to go.

🔒 Enhance your self-custody with Theya, a collaborative multisig vault.

What is a Bitcoin ETF?

A Bitcoin Exchange Traded Fund (ETF) is a financial product that offers investors exposure to the price movements of Bitcoin while transferring custody and security responsibilities over your Bitcoin to a trusted third party.

Bitcoin ETF Tickers

In the United States, there are currently nine Bitcoin ETFs investors can choose from, including from financial giants such as BlackRock and Fidelity. Your choice of ETF will come down to considerations such as their fees, reputability, and choice of custodian.

Top Bitcoin ETF graphic
Source: Visual Capitalist — The Largest Bitcoin ETFs in the U.S.

Is it better to buy a Bitcoin ETF or Bitcoin?

While it is objectively always better to buy and hold Bitcoin directly, Bitcoin ETFs have some key advantages while also introducing some drawbacks. Let’s explore the main advantages and disadvantages of a Bitcoin ETF.

Advantages of Bitcoin ETF

  1. Accessibility 

Bitcoin ETFs simplify the process of buying and selling Bitcoin, making it accessible to a wider audience. The ETFs can be easily bought in investment accounts, making them an easy addition to any well-diversified portfolio.

  1. Tax Efficiency

Bitcoin ETFs can be held in tax-free investment accounts, offering investors the opportunity to gain exposure to Bitcoin’s price action without significant tax implications when selling.

  1. Simplified Custody and Security 

With Bitcoin ETFs, there is no need to worry about self-custody or proper seed phrase management. The ETF provider handles all aspects of Bitcoin custody, providing peace of mind, particularly for newcomers.

  1. Increased Liquidity

ETFs often offer greater liquidity compared to direct asset investments, enabling ease of buying and selling at the prevailing market rates and faster reactions to market fluctuations.

Disadvantages of Bitcoin ETF

  1. Counterparty Risk and Indirect Ownership

Buying Bitcoin ETFs involves relying on a trusted third party to hold your Bitcoin, similar to leaving your Bitcoin on centralized exchanges. If the custodian encounters issues, whether accidental or regulatory, your Bitcoin could be jeopardized. Owning a Bitcoin ETF essentially means owning a claim to Bitcoin, instead of the asset itself.

  1. Fee Structure 

Bitcoin ETFs are subject to management fees, reducing a portion of your investment return over time since a portion of your investment is allocated to paying the fees to the custodian for holding your Bitcoin in the fund.

  1. Lack of Utility

Holding a Bitcoin ETF offers exposure solely to Bitcoin as an investment, and retains none of the powerful capabilities of the underlying asset. Direct ownership over your Bitcoin through self-custody enables full utilization of its technological features. 

Bitcoin is a digital bearer asset that you can hold and transact with without the need for intermediaries. It offers global, uncensorable monetary transactions, and functions as a store of value that is resistant to seizure and debasement. In sum, Bitcoin ETFs transform Bitcoin into an investment, instead of the powerful form of money that it is.

  1. Tracking Errors 

Bitcoin ETFs may not track the price of Bitcoin with perfect accuracy, leading to potential discrepancies in returns due to various factors pertaining to how the individual ETF operates.

Not Your Keys, Not Your Coins (NYKNYC)

“Not your keys, not your coins” (NYKNYC) represents a fundamental distinction between Bitcoin and Bitcoin ETFs, emphasizing the critical aspect of self-custody and control over private keys. When investing in Bitcoin ETFs, you rely on a custodian to manage your Bitcoin, and consequently your private keys. In contrast, purchasing Bitcoin directly and holding it in self-custody enables you to manage your private keys independently. 

In sum, the essence of Bitcoin ownership lies in the possession of the private keys, hence the phrase NYKNYC, underscoring the importance of self-custody and private key ownership. Opting for a Bitcoin ETF means relinquishing direct ownership over your Bitcoin, whereas self-custody ensures exclusive access to your funds. 

Ultimately, the right Bitcoin solution will depend on a variety of factors including your level of Bitcoin expertise and investment objectives. While we have highlighted the key factors to consider when buying Bitcoin ETFs, there are a variety of other ways you can buy and hold Bitcoin as well. If you want to learn what the best self-custody solution is for you, check out our article here.

Theya's Bitcoin Multisig Vault

Another option for those unsure how best to hold their Bitcoin, and are uncertain regarding the risks of self custody and private keys are multisignature vaults. 

As the name suggests, multisignature (multisig) wallets have a signing process that requires signatures from multiple private keys to access, transact, and move the Bitcoin held in self-custody. At any point in time, a subset of the total private keys associated with the wallet (typically 2 out of 3) will be needed to sign a transaction and spend the Bitcoin.

The structure of multisig wallets is most often described using the m-of-n scheme, where 'm' is the required number of private keys needed to sign a transaction and 'n' is the total number of private keys in the multisig setup.

At Theya, we offer a 2-of-3 multi-signature wallet through our streamlined app. This means your Bitcoin wallet would have a total of 3 private keys, and at any point, 2 of these private keys are needed to transact or move the Bitcoin.

Theya holds 1 of these keys, and the other 2 keys would be assigned to two other separate devices. These other devices could be a smartphone or a hardware wallet of your choice.

To make the setup even more secure, a trusted family member or friend can hold one of the three keys. Additionally, you can geographically separate your private keys, adding further security to your multisig setup.

If you lose the private key you have in your possession, whether by theft, loss, or damage, Theya has your back.

Because you separated ownership of the private keys associated with your wallet, you will still be able to recover your funds thanks to the private key Theya holds and the other key you or a friend still possesses. To learn more about our multisig offerings check out our website and blog.