Bitcoin ETFs Approved, Offering New Investment Options

Bitcoin investors now have a variety of options for gaining exposure to the asset, following years of regulatory resistance. The approval of spot BTC ETFs to trade on January 11, 2024, marked a significant milestone, allowing various legal wrappers for BTC exposure to emerge. Recently, public companies have started adding BTC to their balance sheets, presenting investors with a complex set of options and trade-offs.

Owning actual Bitcoin, held in a personally controlled wallet, offers complete control over the asset. This form of ownership aligns with the original intent of Bitcoin as an asset independent of government control or centralized authority. Properly custodied Bitcoin can be secure from seizure, hacking, or even detection. However, self-custody comes with risks, such as the loss of private keys, which can result in a complete loss of investment. The process of accessing, transferring, or selling Bitcoin can also be slow, posing challenges for some investors. Alternatives to self-custody, such as keeping Bitcoin on an exchange or using a private key device, reduce the risk of loss but also remove the self-sovereign properties that make owning Bitcoin attractive.

Bitcoin ETFs provide a legal wrapper that allows people to gain exposure to the price of Bitcoin. These ETFs are regulated by the SEC and must abide by strict compliance, reporting, and security standards. They simplify ownership by allowing regular investors to make an investment in Bitcoin without dealing with the technological peculiarities of the asset. However, ETFs also neuter much of the unique protections Bitcoin can provide, as investors depend on a large set of human beings to protect them. This includes the ETF creator, custodian, regulators, and market-making firms, whose incentives may not be aligned with every individual who wants to own Bitcoin. Changes to policy, technical errors, hacks, and fraud can all arise when so many counterparties get involved.

The latest wave of BTC exposure has come in the form of so-called Bitcoin Treasury Companies. These are public companies that hold Bitcoin rather than only USD, offering regulated protections and mainstream accessibility similar to ETFs. They can be traded on exchanges and add a variety of strategies and financial engineering approaches to aim to generate greater returns. These approaches can vary widely depending on the company and can include selling more shares of stock, selling convertible debt, offering exposure across different jurisdictions, trading the Bitcoin using derivatives, taking out loans with the Bitcoin to buy more Bitcoin, and much more. For some jurisdictions, no ETF exists, and so a simple company that just buys and holds Bitcoin for shareholders may be the best option available. However, these companies also add another layer of human involvement to the risk of the investment, which can mean much greater upside if chosen properly. Some of these companies trade at 10 times the value of the actual Bitcoin they hold.

Investors may be able to make more upside with BTC Treasury Companies, gaining exposure to intelligent strategies and retail buying momentum. However, they also have more risk. The same factors that can create outsized gains can create outsized losses. These are very sophisticated financial products that leverage aspects of retail speculation, debt instruments, marketing, and legal and jurisdictional arbitrage to, hopefully, outperform Bitcoin. Some of these strategies suffer from black swan-type risk, in which they will look to be doing very well until they suddenly fail. Others will be successful far out into the future. One important aspect to consider with BTC Treasury Companies is whether they are pure-play Bitcoin holding companies or does the Bitcoin complement other business activity and income. Companies that have real income may be better positioned in the long run for stability and risk management during times when the price of BTC falters, since they have other ways to pay bills and stay in business. Companies that are pure-play vehicles may have greater upside and volatility.

In conclusion, all of these vehicles can make sense for different types of investors, from long-term individual holders to pension funds to day traders. It’s important to truly understand what the company does to generate a return for you so that you can evaluate risk with a clear perspective.