Comparison of Direct Ownership of Bitcoin With Bitcoin ETF

The cryptocurrency sector is constantly evolving. As a result, investors now can invest in a spot Bitcoin ETF or buy Bitcoin directly. The two methods have vital differences that many investors are unaware of. Many are also unaware of the fact that investment vehicles, custody, trading, tax implications, and the basic concepts vastly differ. 

Liquidity and Trading

The direct ownership of Bitcoin and Bitcoin ETF differ on the points of liquidity and trading. On the point of liquidity, Bitcoin is purchased and sold on various crypto exchanges, during direct ownership.  Undoubtedly, direct ownership is more liquid. Usually, investors purchase and sell cryptocurrencies without discounts and premiums. Trading experience and liquidity vary across different exchanges. Sometimes, both withdrawals and transactions may charge higher fees.

Bitcoin ETFs provide higher liquidity and ease of trading during regular market hours. From the perspective of investors, liquidity is higher but there are more investor protections. Stock exchanges limit the trading time, not 24/7. ETF therefore provides limited time outside trading hours. It is also true that these shares may trade at a premium or discount of the underlying Bitcoin.

Security and Custody

In direct Bitcoin ownership, investors manage custody solutions that range from storing private keys and using digital wallets. It is worth noting that the private keys are of paramount importance in Bitcoin ownership. Any user losing it can suffer from loss of funds. Therefore, it is always recommended that clients use hardware wallets and have the best practices for protecting Bitcoin. Two-factor authentication is the most common security system of crypto exchange platforms.

ETFs usually need institutional-grade custody solutions from third-party custodians. It also has provisions for security systems such as multi-signature wallets and cold storage. It significantly reduces the risk of theft and loss. In the case of ETFs, investors depend on third-party custodians and use counterparty risks. However, ETFs are marginally less secure because clients and advisors cannot have direct control over their security.

Tax Implications

The tax implications of direct ownership of Bitcoin are different depending upon the jurisdictions in some countries. For example, the taxation laws vary from one state to another. The tax treatment may include calculation and reporting. The notable advantage of direct ownership includes optimizing tax strategies. Sometimes, in some countries, taxation laws may require careful compliance. This is why people consult tax professionals or use software to track transactions. 

The tax implications are usually simpler in the case of investing in a Bitcoin ETF. In many countries, ETFs, including Bitcoin ETFs, are treated as securities. The ETFs offer more taxation advantages. It can defer capital taxes. In many countries, however, the sales of ETF shares can incur capital gains taxes in the long run. Therefore, it can have an impact on returns on investment. 

Also Read- The Role of Ethereum ETF in Crypto Trading Adoption

Bottom Line

The needs of crypto investors are diverse. Investors who want less risk can choose an ETF because it is better at reducing the risk quotient. One should consider consulting a financial advisor before choosing Bitcoin or Bitcoin ETF. If adequate exposure is the yardstick, then ETF Bitcoin is a better option. On the count of portability and 24/7 liquidity, direct ownership is a better option. Therefore, every major factor should be considered before choosing the method of investment.