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ETFs vs Direct Holding at Banks

ETFs vs Direct Holding at Banks

25 Jan, 2024

The most notable ETF at the moment is the bitcoin ETF. Recently approved by the SEC, the market expects to see spot bitcoin ETFs securing approximately 1% of the $7.2 trillion of the US ETF market (equivalent to $72 billion) within the next five years, based on Bitwise’s predictions. Further emphasising ETFs as an attractive option for investors who only seek the opportunity to invest in stocks.   

Financial institutions in Switzerland, such as Vontobel Bank or 21 Shares, have been offering similar financial products since 2016.

Owning an ETF differs from the direct holding of crypto at banks. This text will elaborate on bitcoin ETFs, specifically, their advantages and the differences between ETFs and direct holding at banks.  

What Do Bitcoin ETFs Offer?

If only interested in investing in bitcoin (BTC), BTC ETFs are a convenient solution. With a BTC ETF, investors can buy the financial product without having to set up a wallet or an account at an exchange.  Assuming the investor has an existing account, they can merely go to their bank and request to buy the ETF. All the paperwork, tax-related issues and so forth are handled by the bank, which they inherently trust. 

For conservative investors, this is a solid choice: their invested funds are held at their bank, which cannot reinvest the funds elsewhere, unless in other ETFs, and there is a very slim chance of the funds disappearing or becoming inaccessible like on a crypto exchange.  

The Downsides of ETFs 

It is important to note that investors do not own bitcoin after buying a BTC ETF; they possess a certificate. In fact, the bank they bought the ETF from probably does not own it either. Oftentimes, it is most likely owned by larger asset managers. 

For example, an investor could buy a BTC ETF from their bank; however, Blackrock (the issuer) would be the owner of the bitcoin to which it is pegged, and Coinbase would be the custodian of the bitcoin. This increases counterparty risks. 

How Do ETFs Differ From Direct Holding at Banks? 

With ETFs, the investor can buy, store and sell their ETFs. With direct holding at a bank, the investor can also easily transfer them to their self-hosted wallet (if the bank allows this feature). 

However, regarding costs, ETFs shine and often offer more bang per buck than buying crypto at a bank. While the issuers of the ETFs do charge a yearly fee, usually in the range of 0.25 - 1.50%, it hardly compares to what is being forked out when using a bank.  Brokerage and custody can charge a custody fee (up to 0.6%) and a trading fee (usually around 1%). The main upside is if the brokerage and custody provider offers transaction services.

Exchange-traded Funds (ETFs) Explained 

What Is an ETF? 

An Exchange-Traded Fund (ETF) is an investment fund and exchange-traded product with tradeable shares on a stock exchange. ETFs are designed to track the performance of a specific index, commodities - like bitcoin -,  bonds, or a basket of assets like stocks. 

What Can You Do with an ETF?

ETFs offer investors a way to buy and sell a diversified portfolio of assets, similar to mutual funds, but with some distinct differences, such as the ability to trade them intraday and their tax efficiency.

Is an ETF a Stablecoin? 

Stablecoins are designed to maintain a stable value, while ETFs represent a range of underlying assets and are actively traded on stock exchanges.

Is an ETF a Cryptocurrency? 

ETFs should not be confused with cryptocurrencies; they are financial products securely held within a bank or deposit. These instruments can represent a multitude of assets, including bitcoin. However, the holder of the ETF will not physically hold the cryptocurrency it is pegged to merely the certificate.

Overall, Are Bitcoin ETFs a Good Investment? 

As explained above, BTC ETFs may be the better option when the investor is offered limited functionality due to the costs involved. It is worth noting that no investor should invest more than they are prepared to lose. 

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