A New, Cheaper Way to Buy Bitcoin Is Coming…But You Shouldn’t Use It

Right now, there are basically two ways to invest in bitcoin. 

You can buy it through a brokerage or payments firm such as Fidelity, Robinhood, or PayPal. Or you can buy it through a specialized cryptocurrency exchange like Coinbase or Binance.US. 

Soon, however, there is likely to be a third way…through a bitcoin exchange-traded fund. 

Currently, there is no U.S. bitcoin ETF. But I expect to see one very soon, certainly this year, and the demand will be enormous.  

Consider the popularity of Toronto-listed Purpose Bitcoin ETF, the first bitcoin ETF in North America. That has amassed about $1 billion in assets since launching in just February this year. A U.S.-based ETF would see far higher interest. 

But here’s the thing: When a bitcoin ETF arrives, I would still strongly advise you to buy bitcoin through a crypto exchange.  

To understand why, you need to understand how a bitcoin ETF would work, and how buying bitcoin through such a fund would differ from owning it through a crypto exchange. 

It used to be, if you wanted to invest in the stock market, you had to hire a broker to actively manage your portfolio (an expensive proposition) or manage your investments yourself. Then index funds, the precursor to ETFs, came along and changed everything. 

First appearing in the 1970s, index funds are a basket of securities—stocks, bonds, or commodities—designed to track an entire index, like the S&P 500. So, if you buy an S&P 500 index fund, and the S&P 500 rises, your index fund should rise, too.  

ETFs came later, though work in a very similar fashion. First released in 1993, these are designed to track something specific, say the healthcare industry or gold, rather than an entire index.  

Industry-targeted ETFs contain a broad list of securities that attempt to capture the sector as a whole. For commodities or currencies, like say gold or the Swiss franc, ETFs are often structured as trusts. This means the funds hold a certain amount of gold or the currency in question for each share issued. 

The innovative aspect of index funds and ETFs is that they allowed investors to easily diversify their portfolios, without having to pay for active management or individually invest in numerous stocks. Say, for instance, you believed the aerospace industry was going to do well in the years ahead, you could simply buy some shares of an aerospace ETF, which would give you exposure to a broad list of related securities like Boeing, Lockheed Martin, United Technologies, etc.  

The popularity of these kinds of funds has exploded since the global financial crisis, when ordinary investors understandably lost faith in big investment banks. In 2008, U.S. investors had around $530 billion in ETFs. Today, that number is more than $4 trillion. 

Given the popularity of ETFs, the fact that the U.S. does not already have a bitcoin fund shows just how far behind the American financial ecosphere is with crypto.  

In fact, to me it’s a symptom of a much larger problem—the U.S. is so paternalistic, so controlling about what Americans can invest in that it is stifling innovation. America’s strict, outdated investment rules mean many innovative new cryptocurrency projects are unavailable to U.S. residents, and mean many of the top crypto exchanges are located overseas.  

You can see how far behind the U.S. is in this space by looking at the amount of money already invested in Grayscale Bitcoin Trust.  

Grayscale is, for all intents and purposes, a bitcoin ETF. But it is not yet allowed to trade as an ETF on a major exchange, so instead it trades as a trust on the more lightly regulated over-the-counter market, or OTC. This has real consequences for investors, including making Grayscale more volatile and more expensive to buy in terms of fees.  

Recently, Grayscale reiterated its desire to convert its publicly traded bitcoin fund to an ETF, which would make it cheaper for investors. And if—or rather when—it is finally allowed to do so, it would be America’s second-largest commodity ETF, since it already has some $34 billion in assets under management.  

My position on this is clear: It is frankly ludicrous that the U.S. doesn’t have a bitcoin ETF and when one launches, it will be hugely popular, but…there are better ways to invest in bitcoin.  

You should avoid bitcoin ETFs for the same reason you should avoid buying bitcoin and other cryptos through PayPal and brokerage firms like Fidelity: You don’t own your crypto.  

By which I mean, if you buy bitcoin through PayPal or the brokerages, your bitcoin is part of a massive, collective pool. Sure, you can buy and sell it as you wish, but you can’t remove it from your account. It would be similar with a bitcoin ETF.  

ETFs make sense for a commodity like gold. If you want to own physical gold, you need to think about where you’ll store it and how you’ll keep it secure. This can be costly. Owning an ETF is a simple way of getting around these issues. 

But bitcoin is a digital asset. It’s computer code. The storage and security costs are tiny. Plus, here’s the real kicker: Bitcoin is a currency, so you can earn interest on it. 

If you buy your bitcoin through a cryptocurrency exchange, you own it. It’s solely yours, so you can withdraw it and store it offline. Or you can put it to work in the rapidly developing decentralized finance sector. 

At New York-based BlockFi, you can get 6% annual interest when you deposit your bitcoin. At Nexo, you can earn up to 8%. These are gains you are giving up when you choose to own bitcoin through a brokerage, PayPal, or potentially an ETF. 

Despite the popularity of bitcoin, only a small percentage of bitcoin owners are securing these gains. Many bitcoin investors either don’t know about this option or they presume that the process of earning interest is complex or unsafe.  

However, buying bitcoin through an exchange and depositing it with a company like BlockFi is no more difficult than opening an online bank account.  

Decentralized finance projects like this are the future. I want us all to start earning this way. So, in May, I’m rolling out a big project to show you how—in really simple, step-by-step terms—you can tap into this opportunity. Stay tuned for that… 

In the meantime, if news breaks of a bitcoin ETF, stick with the savvy approach and own your crypto through an exchange instead.