As of 2024, there is a new way to invest in Bitcoin. On January 10th, the SEC gave the green light for Bitcoin ETFs (exchange-traded funds). But what exactly is a Bitcoin ETF, and why would anybody choose one over a standard BTC investment?

What are Bitcoin ETFs?

A Bitcoin ETF is a type of investment fund where the price of Bitcoin is tracked and then placed on a stock exchange, allowing people to invest in it in a similar way to other traditional assets. People buy and sell shares of the ETF itself, rather than of Bitcoin. There is no direct purchase of BTC, but rather investment activity that relates to the price of it.

How Do Bitcoin ETFs Work?

Bitcoin ETFs work by mirroring the real-time price of Bitcoin, and displaying it on a stock exchange, essentially making it no different from buying stocks or gold. Or at least, no difference is felt by the investor themselves. Under the hood, Bitcoin ETFs work quite uniquely from stocks.

While there are a range of Bitcoin ETFs on the market who all have their own separate setups and quirks, generally speaking, the company behind an ETF will own a sizeable portion of Bitcoin that will be tied to the investment. When people buy shares of the ETF, they are actually buying a stake in the ownership of that Bitcoin, albeit indirectly.

Bitcoin ETFs vs Bitcoin: Key Differences

Let’s take a look at some major differences between Bitcoin ETFs vs Bitcoin investments themselves.

Ownership and Control

A Bitcoin ETF is an indirect investment, making it very different from when you actively purchase BTC and store it in a wallet of your choosing. When you use an ETF, the underlying Bitcoin does not exactly change hands.

Convenience

The average crypto investor is probably very comfortable with buying Bitcoin, but for traditional traders who deal more with stocks and forex, it can be daunting. Bitcoin ETFs lower this technical barrier and make it more accessible for individuals who are more comfortable with old-school assets.

Centralization

When you invest in Bitcoin, you are usually engaging in a relatively decentralized activity. While most BTC exchanges are centralized (as Bitcoin is not compatible with a lot of larger blockchain ecosystems), you are still buying or selling a digital asset that operates on a decentralized platform. However, when you buy shares of a Bitcoin ETF, you are adding an additional centralized component to the equation. Not only are you using a centralized exchange, but you are working with a centralized company who is providing you indirect access where they fully maintain the underlying asset. It is a far cry from Bitcoin's original goal of decentralization.

The Advantages and Disadvantages of Bitcoin ETFs

To fully grasp the differences between Bitcoin ETFs vs Bitcoin itself, it helps to see what ETFs excel at, and what their shortcomings are. 

Advantages of Bitcoin ETFs

Let’s kick things off with their advantages.

Easy for Traditional Traders to Use

For people who typically work with stocks, forex, commodities, and gold, Bitcoin ETFs are tremendously easy to get a grasp of. This reduces the barrier of entry for a select, yet highly significant, demographic. As a result, it adds more money to the overall Bitcoin sector and crypto industry, which is good for future growth.

Regulatory Oversight

US based Bitcoin ETFs are heavily monitored by the SEC, ensuring there is minimal manipulation or unsavory practices. The SEC also engages with this when it comes to regular Bitcoin investments, although it is a little tougher to manage as the Bitcoin sector is global and decentralized, whereas US ETFs are governed by the nation's legal bodies.

Risk Management 

Closely related to the previous point about regulations, buying Bitcoin ETF shares means you do not need to worry as much about the risks involved when it comes to looking after your assets. For example, when you normally buy Bitcoin, you need to think about whether it will be held in a custodial wallet (and whether you trust the custodian), or whether it will be held in a non-custodial wallet (and whether you know the right safety protocols to look after it on your own). This is not exactly relevant with Bitcoin ETFs, as they are managed by an external company with no actual BTC changing hands or ownership. You should still be mindful of who you buy your ETFs from and what platforms you use, but the stringent regulatory oversight and lack of assets being sent elsewhere reduces risk.

Disadvantages of Bitcoin ETFs

Let’s see what the drawbacks of Bitcoin ETFs are, to help frame this discussion fairly.

No Direct BTC

When you invest in a Bitcoin ETF, you never actually get hold of any BTC. Rather, you get shares of the investment fund. This is an indirect way of dealing with the market, which can be limiting. For instance, you cannot place your ETF shares in a savings account, such as Ledn’s Growth Accounts, which is something that is definitely possible when you own the actual digital currency.

Primarily Available on Traditional Exchanges

Bitcoin ETFs are made specifically for traditional investors, and so it makes sense that they will be found almost exclusively on stock exchanges and other established services. If you are not registered to an exchange like this, then you may not find them easy to access. While they reduce the barrier of entry for certain people, they have a higher barrier for others.

Regulations Can Be Restrictive

Regulations are a double-edged sword. On one hand, the Bitcoin ETF regulatory activity helps keep investors better protected. But on the other hand, it can be stifling, especially if you are used to the sheer level of autonomy and freedom that Bitcoin offers when investing via normal methods. This is made more complicated if you consider the possibility that the SEC could at some point retract its positive position on ETFs, which is not an outlandish scenario if you think about how they have only existed since early 2024, and how uncomfortable the SEC has been about them over the years.

Advantages and Disadvantages of Bitcoin

Bitcoin comes with its own positives and drawbacks, too. Let’s see what they are, so we can understand the landscape better.

Related Content: Is it too late to invest in Bitcoin? Ledn Experts review

Advantages of Bitcoin

The following are three major advantages of Bitcoin vs Bitcoin ETFs

Complete Autonomy

When you buy Bitcoin directly, you often have complete control to send or withdraw the asset to your own fully non-custodial wallet. This is a fantastic element that has attracted people to this industry since its very birth. The sheer level of financial freedom offered by Bitcoin and crypto is unmatched by any other economic sector.

Globally Accessible

Unlike Bitcoin ETFs, BTC itself is globally available, with many exchanges and tools on the market for people to buy, sell, and hold. ETFs, on the other hand, are typically region-restricted, as they are overseen by the specific regulatory bodies of their origin countries.

Earn Passive Income

If you own actual Bitcoins, rather than ETF shares, then you can place them in a crypto savings account and earn interest on them. This becomes especially lucrative if you are looking to hold your assets for a sizeable period of time. One fantastic option for this is Ledn’s Growth Accounts, which currently let you earn up to 3% APY.

Disadvantages of Bitcoin

Of course, Bitcoin comes with its own pitfalls and downsides, which lead many people to turn to ETFs and other investment options as alternatives.

Less Regulated Than ETFs

Bitcoin is harder to regulate due to its global existence and decentralized architecture. This means that some exchanges have fewer rules imposed on them, as opposed to traditional stock exchanges. This was especially the case several years ago, although in the current day, the differences in safety between the two is smaller than ever (however it still exists to some degree).

You May Need to Manage Your Own Wallet

Depending on how you choose to engage with the Bitcoin sector, you may have to manage your own BTC by looking after it in a non-custodial wallet. These are great for people who want full control, but can be daunting for those who have never handled their own crypto assets entirely by themselves.

Hard to Access for Traditional Investors

Some traditional investors who have only dealt with stocks, gold, and other arcane asset classes may find Bitcoin slightly confusing to wrap their heads around. Bitcoin ETFs rectify this problem with a very elegant solution of functioning identically to other instruments that these types of investors will already be accustomed to. For them, it is the perfect way of getting involved.

Can You Get a Loan Against a Bitcoin ETF?

It is possible to get a loan against a traditional ETF, although this is not currently the case with Bitcoin ETFs. While that may change in the future, there is no saying when it will occur, as many companies are being cautious about how they treat BTC ETFs.

Of course, this is not the case with actually holding Bitcoin, as you have the freedom to use it in a myriad of ways. For instance, with Ledn, you can get a Bitcoin-backed loan within 24 hours, with a 50% loan-to-value ratio. Naturally, this gives you more autonomy than holding a Bitcoin ETF (at least for the time being). 

Is A Bitcoin ETF Safer Than Buying Bitcoin Directly?

There is no direct answer to this. Both ETFs and direct Bitcoins experience the same price fluctuations, so if your idea of safety is related to stability then there is zero difference. If, however, you consider the safest method of trading to be the one where you stay mostly in control, then buying directly might suit your needs. This is because, once you have your Bitcoins off an exchange and in your own wallet, you never need to worry about what any other organizations are doing. 

Whereas, with an ETF, you are bound to not only the exchange you used, but the organization that manages the fund. Of course, the flipside is that the stringent regulations imposed on Bitcoin ETFs means that you could consider this to be relatively safer from a legal standpoint.

Is Buying Bitcoin Directly Better Than Buying A Bitcoin ETF?

This all comes down to what exactly you are looking for as a buyer. If you want direct exposure to Bitcoin, and enjoy having complete autonomy to move your assets wherever you wish, then nothing beats buying directly. If, however, you are comfortable with holding shares, and you are more accustomed to the traditional investment landscape, then the ETF route may be ideal. It mostly comes down to preference.

Make The Most Of Your Bitcoin Investment With Ledn

One of the best perks of investing in Bitcoin directly is that you can earn passive income on your holdings by placing them in a savings account. Ledn’s Growth Accounts are a fantastic option for this, as you can currently earn 3% APY in the form of compound interest. It essentially lets you diversify your assets by offering a new revenue stream. Plus, you can take them out of your Growth Account whenever you wish.

Conclusion

Bitcoin ETFs are an exciting time for the crypto sector. Of course, despite people wanting them for a very long time, there are still tons of individuals who do not know what exactly they are, or how they differ from buying Bitcoin via regular channels. Now that you know the main factors that separate them, you should be able to make a more informed decision when it comes to investing. And if you decide that buying directly makes the most sense to you, then be sure to see what Ledn’s Growth Accounts can do for you, and whether it is smart to earn passive income on your BTC holdings. 

This article is sponsored by 21 Technologies Inc. and/or its subsidiaries (“Ledn”) and is for general information, discussion, or educational purposes only and is not to be construed or relied upon as constituting legal, financial, investment, accounting, tax, estate-planning, or other professional advice or recommendation. Past performance is not a guarantee of future results. Please read Ledn’s full Risk Disclosure Statement and Disclaimers.