Bitcoin ETFs, or exchange-traded funds, provide a more traditional means of buying Bitcoin. They are investment funds that track the price of Bitcoin and are traded on stock markets, just like stocks. This offers traditional investors an opportunity to gain exposure to Bitcoin prices without the necessity of holding the cryptocurrency. There are two main kinds of Bitcoin ETFs: Bitcoin futures ETFs and spot ETFs. Think of a Bitcoin futures ETF like a bet on how the price of Bitcoin will change in the future. On the other hand, a spot ETF is like buying actual Bitcoin, but through a fund.
The price of Bitcoin may not always be accurately reflected by Bitcoin ETFs. Factors such as market liquidity and the settlement process of Bitcoin futures can influence the performance of a Bitcoin ETF, potentially leading to tracking errors. For instance, if the price of a new contract for a Bitcoin future is higher than the price of the expiring contract, this can cause a situation known as contango, which may lead the ETF to inaccurately track the price of Bitcoin. This is an important consideration for investors interested in a Bitcoin futures ETF.
Unlike Bitcoin ETFs, cryptocurrency exchanges like bitcoin.com.au provide a more direct method of investing in Bitcoin. They are platforms where investors can:
Buy and sell digital assets like Bitcoin
Have direct ownership and control over their investments
Actively manage the exchange of Bitcoin and other digital assets
However, setting up an account on a cryptocurrency exchange involves a few extra steps compared to investing in a Bitcoin ETF. Investors need to register using an email address, phone number and submit a valid government-issued ID.
Comparing Bitcoin ETFs and Exchanges
Having laid out the basics of Bitcoin ETFs and exchanges, we can now evaluate them based on:
Bitcoin ETFs offer a more accessible and regulated avenue for investors to gain exposure to the price of Bitcoin, reducing the complexities and risks associated with direct ownership of Bitcoin. On the other hand, cryptocurrency exchanges allow investors to own and control their Bitcoin investments directly.
Remember, neither option is essentially superior; it all depends on the individual investor’s circumstances and goals. Let’s delve into this comparison in more detail.
Accessibility and Convenience
For many investors, Bitcoin ETFs can be a more accessible and hassle-free option. They can be traded within traditional brokerage accounts, similar to stocks or standard ETFs, making them an easy addition to an existing investment portfolio. This means that investors can gain exposure to Bitcoin without having to create a crypto exchange account.
On the flip side, getting started with a cryptocurrency exchange involves the creation of a separate account on the platform. However, this extra effort can provide investors with increased control over their investments and increased flexibility to buy cryptocurrencies other than Bitcoin.
Fees and Expenses
When it comes to fees and expenses, both Bitcoin ETFs and exchanges have their own structures. Bitcoin ETFs typically charge a management fee, which can vary from approximately 0.10% to 0.25%. These fees are calculated and subtracted from the fund’s assets, affecting the net asset value of the ETF.
Cryptocurrency exchanges usually charge a trading fee, which can range from 0.1% to over 1% on certain platforms. They may also charge additional network fees for transactions moving crypto assets off the exchange, which can fluctuate depending on network congestion and the size of the transaction. While these fees can add up, they may be worth it for investors who value the direct control and flexibility that exchanges offer.
Security and Regulation
When it comes to security and regulation, Bitcoin ETFs and cryptocurrency exchanges operate under distinct regulatory bodies and utilise various security measures. Bitcoin ETFs are regulated by the Securities and Exchange Commission (SEC), which requires sponsors to provide comprehensive, fair, and honest disclosure about their products. They also use strong security measures to protect investors’ holdings.
On the other hand, cryptocurrency exchanges:
Cryptocurrency exchanges are currently unregulated. However, the federal government in Australia is set to introduce regulation within the next 12 months. Exchanges that hold an aggregate of more than $5m or more than $1500 for any individual will be required to obtain an Australian Financial Services Licence (AFSL) granted by the Australian Securities and Investments Commission.
Despite the lack of formal regulation, exchanges like Bitcoin.com.au have adopted a “self-regulating” approach, taking various measures to ensure user protection. We are registered as a Digital Currency Exchange with Austrac and are ISO 27001 and Blockchain Australia certified.
We maintain a full 1:1 reserve of all your fiat and crypto assets. We hold the majority of crypto assets in ultra-secure offline cold storage, protected in underground vaults with the highest security.
Our financial records are meticulously maintained, with a debt-free balance sheet. Each year, we enlist external auditors to conduct a comprehensive review of our financial statements, adhering to Australian Accounting Standards. This audit encompasses the verification of all fiat and cryptocurrency holdings held in custody on behalf of our clients.
Customer funds are never mixed. We maintain strict separation of all client assets, guaranteeing the availability of your funds when you require a withdrawal. We’re committed to ensuring the security of your assets. That’s our pledge to you.
Bitcoin.com.au is a sole custodian of all crypto assets held on our platform. Custody is managed in Australia and we do not use any third party custodians. We adhere to industry best practices and never lend, trade or reinvest your assets.
Advantages of Investing in Bitcoin via ETFs
There are several benefits of investing in Bitcoin through ETFs. For one, Bitcoin ETFs offer a more regulated and standardised way to gain exposure to the price of Bitcoin, which can be attractive to traditional investors who are unfamiliar with the crypto world or wary of its volatility. They also offer the potential for diversification and tax efficiency, which can be appealing to long-term investors.
Moreover, Bitcoin ETFs may offer lower fees compared to some exchange options. While exchanges often charge trading fees and potential network fees, some stock platforms provide zero commission trades for Bitcoin ETFs. This can make Bitcoin ETFs a more cost-effective option for investors, especially those planning to make larger or more frequent trades.
Drawbacks of Investing in Bitcoin via ETFs
Despite their advantages, Bitcoin ETFs do come with certain drawbacks. One of the main ones is that they offer indirect access to Bitcoin. This means that investors gain exposure to Bitcoin’s performance without directly owning the cryptocurrency. While this may be appealing to some, others may prefer the direct control and flexibility that owning Bitcoin directly offers.
Investing in Bitcoin ETFs can also result in potential tracking errors. Because ETFs are designed to mirror the price of Bitcoin, any differences between the ETF and the actual price of Bitcoin can impact the performance of the investment. Additionally, Bitcoin ETFs charge management fees, which can eat into the overall returns from the investment.
Advantages of Buying Bitcoin on an Exchange
There are also benefits to purchasing Bitcoin on an exchange. One of the main ones is that it allows for direct ownership of Bitcoin. This means that investors have complete control over their investment and can manage the exchange of Bitcoin for other assets.
Exchanges also offer more flexibility than Bitcoin ETFs. They allow investors to actively trade Bitcoin and other cryptocurrencies, capitalising on market volatility and short-term price fluctuations to potentially gain profit. Furthermore, buying Bitcoin on an exchange facilitates involvement in the wider cryptocurrency market, providing a platform for the acquisition and exchange of various cryptocurrencies and using them on-chain.
Drawbacks of Buying Bitcoin on an Exchange
Purchasing Bitcoin on an exchange does come with certain drawbacks. One is that it requires setting up a separate account which can be slightly more time-consuming than simply adding a Bitcoin ETF to an existing brokerage account. At Bitcoin.com.au we strive to make this as simple as possible for you.
The regulation of cryptocurrency exchanges can also vary greatly, with some regions having less rigorous oversight than others. This can expose investors to legal and financial risks, making it crucial to choose a reputable and secure exchange.
Real-Life Examples of Bitcoin ETFs and Exchanges
In order to bring these points to life and provide tangible examples, we’ll explore some notable Bitcoin ETFs and well-respected cryptocurrency exchanges. These examples aim to further clarify the concepts we’ve discussed and provide a clearer understanding of the options that are available to you.
Popular Bitcoin ETFs
At present, Bitcoin spot ETFs are primarily traded on US exchanges. However, it is anticipated that similar products will soon be available on the Australian Securities Exchange (ASX). Among the most popular Bitcoin ETFs are the Grayscale Bitcoin Trust ETF, the ProShares Bitcoin Strategy ETF, and the Valkyrie Bitcoin Fund.
The Grayscale Bitcoin Trust ETF is a publicly-traded Bitcoin fund that provides an investment avenue similar to traditional financial instruments. Meanwhile, the ProShares Bitcoin Strategy ETF is a futures ETF that tracks Bitcoin futures contracts.
Recently, 11 spot Bitcoin ETFs have been approved for trading, including funds from Bitwise, Grayscale, Hashdex, BlackRock, Valkyrie, BZX, Invesco, VanEck, WisdomTree, Fidelity, and Franklin Templeton. Each of these ETFs offers investors a unique way to gain exposure to Bitcoin, with varying characteristics and fee structures.
These ETFs have attracted significant attention from investors. For instance, BlackRock’s iShares Bitcoin Trust achieved over $1 billion in trades on its first listing day.
Reputable Cryptocurrency Exchanges
Here at Bitcoin.com.au, we pride ourselves on being a reliable and secure platform for cryptocurrency transactions. Our primary objective has always been clear: to establish the simplest and most secure avenue for Australians to buy Bitcoin and crypto. But we aim for more than just that. We are dedicated to transforming cryptocurrency technology into robust, regulated financial services while always adhering to the highest standards of integrity.
We take immense pride in serving over 300,000 Australian customers. Our core mission remains unwavering: to be the go-to platform for buying Bitcoin in Australia, uncomplicated and hassle-free. We continually strive to innovate, introducing new features and cultivating partnerships that enhance the value we provide to our customers.
Security is a cornerstone of our operations. We’ve implemented rigorous measures, including 2-factor authentication, ISO 27001 certification, and state-of-the-art underground vaults to ensure the safeguarding of your data and cryptocurrency holdings. Your peace of mind is paramount to us. Therefore, choosing a reputable exchange like ours is crucial, as it can significantly affect your trading experience and the security of your funds.
Frequently Asked Questions
What is a Bitcoin ETF?
A Bitcoin ETF is a security that tracks the price of Bitcoin and is traded on a stock market, allowing traditional investors to access Bitcoin prices without holding the cryptocurrency.
Is owning a Bitcoin ETF the same as owning Bitcoin?
Investing in a Bitcoin ETF means owning shares of a fund invested in Bitcoin, not the cryptocurrency itself or its cryptographic keys. Therefore, owning a Bitcoin ETF is not the same as owning Bitcoin directly.
What is the disadvantage of buying a Bitcoin ETF?
A Bitcoin ETF might not always match the actual price of Bitcoin because of differences in how easily it can be bought or sold and how it is settled. This means the price of the ETF could be different from the real value of Bitcoin, which can be confusing or lead to unexpected results for investors.