Letter #18: Bitcoin and the ETF Waiting Game

Dear Readers,

No matter where you go these days, you’ll find a lot of people interested in purchasing Bitcoin, even in the midst of its current downturn. And Bitcoin can be acquired in a variety of ways. There are dozens of exchanges that facilitate Bitcoin trading, Bitcoin ATMs are popping up on street corners around the world, and more and more companies are willing to pay you all or part of your salary in Bitcoin. However, for retail investors within the United States, the vast majority of avenues with which to purchase Bitcoin require hodlers either to self-custody their Bitcoin or entrust it to a third party provider. While there are plenty of Bitcoin proponents (myself included) who will tell you that owning actual Bitcoin rather than a derivative or pegged substitute is the only way to go, there are a lot of individuals and companies in the world who would like to get involved in Bitcoin ownership without buying the “physical” cryptocurrency itself.

Enter Stage Right: The Bitcoin ETF

An ETF or Exchange Traded Fund is a type of security that attempts to maintain a price peg to a specific index, commodity, or asset and that can be traded on a stock exchange. ETFs are attractive to investors because they oftentimes allow the investors to more easily exit and enter trading positions than if they were directly holding the asset. For example, if you wanted to diversify your portfolio across the entire S&P 500, it would be quite burdensome to actively buy and sell stocks for five hundred different companies to get that level of exposure. Or if you wanted to invest in gold, it would be much simpler to purchase shares of a gold ETF rather than to install a vault in your home to keep your treasure trove safe from thieves.

A Bitcoin ETF operates in the same way. The ETF operator accepts investments from retail and institutional users in the local currency and uses that money to purchase a specified amount of Bitcoin. The investor then receives shares in the ETF, which are pegged to the value of the underlying Bitcoin, without ever having to convert Bitcoin into another currency or maintain access to a digital wallet or private keys. Bitcoin self-custody is rather nuanced and Bitcoin ETFs are opening up Bitcoin investing to a host of investors globally who have remained on the fence up to this point.