When are Bitcoin ETFs suitable for investors? When is it inappropriate?

Author: Eric Ervin, CoinDesk; Compiled by: Deng Tong, Golden Finance

There is no doubt that the approval of the Bitcoin ETF in January was a historic moment for the United States.  Cryptocurrencies are influential from both an acceptance and access perspective. Investors interested in digital assets are breathing a sigh of relief as the SEC finally relents, while financial journalists can keep an eye on which of the "Nine New" ETFs will take the top spot in terms of assets under management and trading volume . It's a sign of progress that a handful of industry leaders have been painstakingly trying to push over the past few years through letters, repeated filings and even some lawsuits. The approval of a BTC ETF feels like a big step in the right direction.

Now the question becomes more practical: Investors can hold Bitcoin ETFs, which is great, but is it enough? While the Bitcoin ETF is a major innovation in cryptocurrency investing, it may not be suitable for everyone. I am very bullish on ETFs and their contribution to democratizing investing, one of the most important financial innovations of the 21st century. However, adding Bitcoin to an ETF is like putting training wheels on a Ferrari...and that's okay, too. I'm not saying that spot Bitcoin ETFs aren't good enough, I'm just saying that there are more possibilities without the training wheels.

When Are Bitcoin ETFs Right for Investors

Part of what makes Bitcoin ETFs so valuable is that They offer investors an opportunity to test the waters of cryptocurrencies in a familiar way (gold ETFs, for example, have been around since the early 20th century). It opens the door to a whole new generation of investors. It allows people to gain exposure to one of the most important parts of the cryptoasset ecosystem: price. By owning a fund that holds Bitcoin, you gain indirect exposure to Bitcoin’s potential price appreciation and transfer responsibility for custody, purchase, and disposal to proven institutions: such as BlackRock, Grayscale, Fidelity, and Well-known companies such as Ark Investment.

For allocators and investors who are new to the asset class or particularly interested in this particular characteristic,ETFs can easily provide exposure to a potential growth asset class , and gain additional assurance through brand trust. Fees are generally low and access is easy and convenient. Additionally, it is now possible to add Bitcoin to retirement plans such as 401Ks and IRAsan option that has been increasing in demand over the past few years.

If all goes well, we will see more cryptocurrency ETFs launched for investors this year, and the Ethereum ETF seems to have a bright future. However, currently there is only Bitcoin, which is the perfect connection point for us.

Why Direct Ownership Matters

Finance thought leader Dave Nadig really puts Bitcoin in perspective in a recent article titled “Why Bitcoin ETFs Don’t Matter” ETF, which he published before SEC approval. He highlighted all the advantages of ETF-driven BTC market growth, but ultimately called it a “one-way bridge.” This will be a question faced by many investors. Why? Because there are a lot of other great benefits to direct investing that disappear when you don't own the asset directly.

Here are three reasons why I think direct ownership is important:

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• Diversify. Think of buying a Bitcoin ETF like buying a Netflix subscription but only being able to watch one movie, or getting the final score from the Super Bowl but not being able to watch it. Just owning Bitcoin is the same as just owning a stock, which as we all know greatly limits your performance potential in the market. There are many other assets to consider as part of a balanced, comprehensive digital asset portfolio, and ETFs reduce that potential.

• Enter the ecosystem. Decentralized finance is all about building bridges by eliminating intermediaries, increasing on-demand liquidity and creating seamless global connections. It is a 24*7 marketplace with instant trading capabilities and mobile accessibility where you can access a variety of cryptocurrencies and even perform physical exchanges through fast decentralized exchanges (DEX). It is this network structure that makes cryptocurrencies so powerful and gives Bitcoin its broad appeal. In other words, it gives investors access to a broader decentralized space.

• Tax relief. Standard rules regarding wash sales of investment assets do not currently apply to the cryptocurrency market. For this reason, the market's inherent volatility can be tax-friendly, allowing you to sell assets at a loss while still being able to buy them back shortly afterwards. By investing indirectly through ETFs, you automatically lose the ability to profit from volatility.

Although Bitcoin is arguably the most recognized and established cryptocurrency, it is just the tip of the iceberg. By investing in BTC through an ETF provider, investors are crossing a one-way bridge. They don't actually own the asset directly, they have an interest in the fund that directly owns the asset.

Overall, the main thing investors suffer when investing in Bitcoin ETFs is the benefit of self-sovereignty. Part of the promise of Bitcoin is that anyone can self-custody their value, rather than relying on a fractional-reserve banking system. Bitcoin’s censorship also prevents the possibility of assets being frozen or canceled by banks (which is becoming a growing problem). The ability to self-custody Bitcoin significantly reduces counterparty risk. It's the same old story, but it still rings true: Not your keys, not your crypto.

Unlike a few years ago when cryptocurrencies were just beginning to circulate in mainstream markets and most people were unfamiliar with digital assets, you can now rely on financial professionals to help you understand emerging markets.

We are excited to see the crypto industry making such strong advances in the market, as these advancements will only increase opportunities for investors. This is just the beginning.