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Should You Buy Bitcoin or a Bitcoin ETF?

Motley Fool - Sun Apr 21, 10:21AM CDT

It has now been three months since the first spot Bitcoin(CRYPTO: BTC) exchange-traded funds (ETFs) launched. In that time, they have managed to accumulate more than $30 billion in assets. They have become an easy and convenient way for first-time crypto investors to get exposure to Bitcoin. Arguably, these spot Bitcoin ETFs have become the biggest, new, Wall Street product launch in 30 years.

That being said, some crypto enthusiasts still say that it's better to buy Bitcoin than a Bitcoin ETF. Are they just pining for a bygone era of crypto, or do they really have a point? Let's take a closer look.

How well are the Bitcoin ETFs tracking the price of Bitcoin?

When the spot Bitcoin ETFs started trading on Jan. 12, I thought that they would have difficulty tracking the price of Bitcoin. After all, Bitcoin trades globally on a 24/7 basis, while the new ETFs trade on centralized exchanges with limited after-hours and pre-market trading. Moreover, Bitcoin is known for its historic volatility, and that would seem to make the act of tracking its price behavior much more challenging.

Yet, when I ran the numbers in mid-April, I was positively surprised. Using Jan. 12 as a baseline, I compared the upward trajectory of Bitcoin with that of the top-two spot Bitcoin ETFs as ranked by their market cap. During that time period, Bitcoin increased in value from $46,656 to $62,206 for a gain of just over 33%. On a comparative basis, the iShares Bitcoin Trust(NASDAQ: IBIT) was up 33%, and the Fidelity Wise Origin Bitcoin Fund(NYSEMKT: FBTC) was also up 33%.

Bitcoin / U.S. dollar chart by TradingView.

As can be seen in this three-month chart from TradingView, the two largest spot Bitcoin ETFs are up almost 1:1 with the price of Bitcoin. So, if you are simply looking for exposure to Bitcoin's price movement and planning to hold for the long term, then there does not appear to be any advantage to buying Bitcoin directly. Just keep it simple and buy the ETF.

What does "buying Bitcoin" really mean?

However, just keep in mind that you are not actually "buying Bitcoin" when you buy a Bitcoin ETF. Instead, you are buying exposure to the price of Bitcoin. In much the same way, when you buy an ETF tracking the S&P 500, you are not actually buying shares of every company in the S&P 500. You are buying exposure to the price of the S&P 500 via a benchmark asset that holds shares of those companies.

This might sound like semantics, but it has huge implications when it comes to crypto. That's because Bitcoin is both a currency and a commodity. There are times you might need access to Bitcoin as a currency. Say, for example, you wanted to use Bitcoin to pay for an airline ticket for an upcoming summer vacation. If you held Bitcoin via an ETF, you wouldn't be able to do that. You'd have to sell your ETF and ask to pay in dollars instead. So did you really buy Bitcoin or just exposure to the price movement of Bitcoin?

Gold coin with Bitcoin symbol on it.

Image source: Getty Images.

There is a well-known aphorism within the crypto world: "Not your keys, not your crypto." The keys referenced here are cryptographic keys, and possession of them is the only way that you truly own Bitcoin (or any other cryptocurrency). In the case of the Bitcoin ETFs, the cryptographic keys belong to the ETF issuers and not to you.

Thus, if anything happens to Bitcoin -- such as the government deciding to change its legal or regulatory approach to crypto -- your options are very limited. The ETF issuers, not you, will decide what to do with your Bitcoin. Given that governments around the world routinely change their minds about Bitcoin, this is something that is top-of-mind for many crypto investors with a sizable position in Bitcoin.

Do rich dads buy Bitcoin ETFs?

That's why, whenever someone says how "easy" and "convenient" the new spot Bitcoin ETFs are to own, I'm always a bit skeptical. Yes, they are easy. Yes, they are convenient. Yes, they do a very good job of tracking the price of Bitcoin. But at the end of the day, you do not own Bitcoin; Wall Street does.

A number of influential investors are starting to recognize this fact as well. For example, best-selling Rich Dad Poor Dad author Robert Kiyosaki recently endorsed buying Bitcoin instead of the new Bitcoin ETFs. From his perspective, "rich dads" buy Bitcoin, while "poor dads" buy the Bitcoin ETFs. As Kiyosaki points out, direct-asset ownership is the key to wealth. Kiyosaki says he buys gold, not gold ETFs, and real estate, not real estate ETFs.

This is not to say that you shouldn't buy the new Bitcoin ETFs. If you are new to crypto, then they are potentially fantastic investments, right after the fourth Bitcoin halving event. They abstract away all the complexities of crypto and make Bitcoin easy to buy. You never have to worry about cryptographic keys or what Bitcoin miners actually do all day.

But just keep in mind: Buying a Bitcoin ETF is not the same as buying Bitcoin. Someday, this could be a game-changing difference.

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Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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