Have you decided to finally bite the bullet and invest in Bitcoin?
If so, you're likely confused about whether you should invest in Bitcoin ETFs or buy Bitcoin tokens (BTC) themselves. Both have their advantages and disadvantages and many newcomers are confused on what to do.
This detailed guide will help you understand how both Bitcoin and Bitcoin ETFs work so you can determine which is the ideal route for your needs. The first step is to understand why you want to invest in Bitcoin at all:
Why Bother With Bitcoin?
Your first step should be to determine your why when it comes to buying Bitcoin. For many beginner investors, Bitcoin is a digital asset that appreciates in value which they can sell for a fortune in fiat currency.
For others, however, Bitcoin isn't an asset to trade for fiat currencies. For this group of investors, Bitcoin is the superior alternative to fiat currencies. They don't wish to sell their Bitcoin. They only want to hold their Bitcoin or spend it as they would with fiat currency.
You want to determine what your main priority is with investing in Bitcoin. While you can use Bitcoin as an investment asset and as a form of currency, you should prioritize one viewpoint over another.
Only once you've decided on your main reason for owning Bitcoin can you determine whether you should hold BTC or invest in a Bitcoin exchange-traded fund.
Let's now look at the arguments in favor of both scenarios.
Bitcoin As an Asset For Investment
It's been a long time since the first few Bitcoins had little value and would get you little more than a pizza!
10,000 Bitcoins were valued at around $41 in May 2010 and this was the very amount used to buy the pizza. Fast forward 12 years and each Bitcoin was worth close to $35K each after the first week of May!
This means that those 10,000 Bitcoins, which were worth $41 are now worth $350,000,000! This almost absurd rise in Bitcoin's value is what has caused the average person to buy Bitcoin.
While Bitcoin's price has been volatile, it still remains a valuable asset that can make you a fortune within a few years. If you're looking for a great investment that can bring you such an enormous return, Bitcoin might be the best asset.
The disadvantage is that the current price range of Bitcoin has been very high for the average investor. If you can't own at least 0.5 BTC you might not make a high return on your investment.
However, if you have lots of cash at your disposal you might find that it's better to buy 1 or 2 whole Bitcoins than it is to buy a whole stock or index fund.
Bitcoin As Money
At this moment, only a small niche of people see Bitcoin as a form of money to use along with or instead of fiat currency. This philosophy tends to attract liberty-minded individuals who have spent years researching the monetary system of the world.
As one can expect, it's likely to be a while until this perspective reaches mass adoption. However, since 2020 with the global economic crisis, we've seen a greater understanding of how Bitcoin can be used as money.
Both El Salvador and the Central African Republic have adopted Bitcoin as legal tender. It's likely that other countries are set to follow this example.
But what are the advantages of Bitcoin over traditional fiat currencies? Why do some people see Bitcoin as a threat to the U.S. Dollar — which is the world's reserve currency.
All countries depend on buying the U.S. Dollar for their own country's central bank reserves. As the U.S. Dollar continues to be printed at a rapid rate its value is destroyed.
This is called inflation and in its worst case can be considered hyperinflation. The more a fiat currency, such as the U.S. Dollar, inflates the more it loses its purchasing power.
This means that you'll need even more of a particular currency to buy the same product or service. For example, you might have been able to buy a gallon of milk for a mere $0.25 in the 1950s. Today, you can expect to pay a minimum of $5 for the same gallon of milk!
Bitcoin is able to dodge the havoc of inflation because there's a limited supply of tokens. Via its programming, Bitcoin can only have a maximum of 21 million tokens. This helps Bitcoin retain its purchasing power.
Taxes and Legality
The next factors to consider are the taxes and legal obligations surrounding Bitcoin. As Bitcoin becomes more popular, more jurisdictions will create taxes and other laws related to the cryptocurrency.
As a result, you have to take these factors into consideration when deciding how you'll own Bitcoin and how much you'll own. Make sure you consult a lawyer and accountant on how to best structure your affairs when buying Bitcoin.
Let's start by understanding taxation and Bitcoin:
Taxation On Bitcoin
Since many average citizens have become rich by selling their Bitcoin, their country's tax authority's have decided to take their cut of the pie!
In some parts of the world, these taxes are low and reasonable. While in others, your profit margin ends up being low after you make your tax payment.
This is something you'll have to consider when buying Bitcoin as an investment asset. You'll also have to consider which option works best to save on taxes.
For example, in some jurisdictions you might not have to pay tax on Bitcoin ETFs until you sell a substantial amount.
However, you might have to report every transaction including actual Bitcoin. In such a scenario, you might even get taxed on smaller trades or sales. You might even have to pay a small fee when you receive actual Bitcoin.
On the opposite end, you might pay unrealized capital gains taxes if you invest in a Bitcoin ETF.
You might also have to look at the different tax rates when dealing with Bitcoin ETFs compared to actual Bitcoins (BTC).
For example, you might have to pay a 20% capital gains tax when you sell shares of a Bitcoin ETF. Or, you might pay a 10% capital gains tax if you sell actual Bitcoin tokens. In this scenario, owning actual Bitcoin is clearly the preferable scenario.
Laws Regarding Bitcoin
Many governments and central banks alike see Bitcoin as a threat to their hegemony and control. As a result, some countries have banned Bitcoin while others want more control over it.
In such a situation, you have to think about the best route to protect your investment. Here are some scenarios that you have to consider:
Let's assume you have invested your money in a Bitcoin ETF. Like the stock market, this is beholden to the laws of a particular nation.
If a government decides to ban or confiscate Bitcoin you might lose most or all your shares in an ETF. In many cases, you might not receive any compensation for this confiscation.
So what if you hold actual Bitcoin tokens? It's possible that governments can confiscate your tokens or freeze access to a web exchange. However, the advantage with this situation is that you can use a hardware or paper wallet to keep your Bitcoin safe.
But this also means that you might not be able to use your Bitcoin as transactions will become illegal. You likely won't receive any compensation even if you surrender your Bitcoins.
Make sure you always follow the laws of your jurisdiction. Your lawyer and accountant can help you invest in Bitcoin while remaining compliant.
Bitcoin ETFs vs BTC: How They Work
Now let's look at how Bitcoin ETFs versus buying Bitcoin (BTC) work and how you can accumulate either asset. Make sure you research the laws in your jurisdiction as these vary drastically. The following are general rules on how to acquire Bitcoin ETFs and BTC.
When you buy a Bitcoin ETF, you should know that you won't hold actual Bitcoin tokens. You'll simply own shares in a fund that owns large quantities of Bitcoin.
This doesn't require any technical expertise and works well for investors who want to accumulate fiat currency from Bitcoin. If you believe the price of Bitcoin will continue to rise but can't afford to buy whole Bitcoins, then Bitcoin ETFs are the perfect choice.
You can find a trading platform that allows you to invest in Bitcoin ETFs. Many popular trading apps that allow you to invest in the stock market are now opening up to offering Bitcoin ETFs.
So what happens if you want to buy whole Bitcoins? Whether you want to use them as an investment asset or as a form of currency, this requires the most technical expertise.
You can choose to buy Bitcoin in three ways. The first method is with an online web exchange.
Buying Bitcoin With a Web Exchange
This allows you to buy Bitcoin using bank transfer or via a credit card or debit card. This is the simplest method for buying Bitcoin and is currently the most popular.
However, you should know that with this option you don't hold your Bitcoin or other cryptocurrencies. Web exchanges work in the same manner as a bank.
The web exchange holds your Bitcoin and is beholden to the laws of a particular jurisdiction. This means that you can lose your access to your Bitcoin and/or it can get confiscated by your government.
Buying Bitcoin With a Hardware Wallet
Another method is using a hardware wallet. This requires you to own a physical device, called a hardware wallet, where you store your Bitcoin.
This requires technical expertise as you'll need to set a password, pin code, and recovery phrase to access your Bitcoin. You'll have to know how to share your public key to send and receive Bitcoin.
If you lose this pertinent information then you'll lose access to your Bitcoin forever. You won't have any method of recovering your Bitcoin once you've lost this information.
But perhaps the best way to buy, sell, trade, and hold your Bitcoin is through a paper wallet. This is dispensed through a Bitcoin ATM. With a Bitcoin ATM, you'll buy Bitcoin using cash. The Bitcoin ATM prints out a receipt that has the information about your crypto wallet and how much Bitcoin you hold.
As long as you keep this paper safe with you, then you'll always have access to your Bitcoin. This is one of the easiest ways to buy Bitcoin and one that is the least susceptible to hacking.
You can use this website to see if there's a nearby Bitcoin ATM in your city: https://www.bytefederal.com/bitcoin-atm-near-me/
The Future of Bitcoin
As you start investing in Bitcoin, you have to always keep an eye on what might happen in the future. This will also help you determine whether you should stick with Bitcoin ETFs or buying Bitcoin tokens.
As of now, few jurisdictions have created options to invest in Bitcoin ETFs. Owning actual Bitcoin tokens is a lot easier as it doesn't require approval from a country.
However, this might bring an opportunity to invest in a Bitcoin ETF. At the same time, there might be limits to how much you can earn with ETFs.
Owning Bitcoin tokens is the ideal solution for most investors at present. Nevertheless, with government control increasing one has to prepare for the possibility of confiscation. There might come a day when you'll have to leave your jurisdiction in order to protect your Bitcoin holdings.
Whichever option you choose, make sure you study the future of Bitcoin so you can make wise investment decisions.
Get Into Bitcoin
Now that you know the advantages of Bitcoin ETFs and owning Bitcoin directly, you can determine which is the best solution for your needs.
You have to first determine what's your goal with Bitcoin. If your main goal is to grow your fiat wealth then you should consider Bitcoin ETFs. Owning Bitcoin tokens is a better option if you've lost faith in the fiat system altogether.
Make sure you always do your research on the tax rules and laws surrounding Bitcoin. You want to follow the future of Bitcoin so you can make the right investment decisions.
You can read even more great content about Bitcoin on our blog!