Bitcoin ETFs: Why buying "paper" Bitcoin is different from buying real Bitcoin.

Bitcoin ETFs: Why buying "paper" Bitcoin is different from buying real Bitcoin.

Valentin Hautefeuille
January 12, 2024

The wait is finally over. On January 10th 2024, the U.S. Securities and Exchange Commission (SEC) approved Bitcoin spot ETFs.

This is a significant development for crypto going mainstream, allowing ETF providers such as BlackRock and Fidelity to hold Bitcoins and enable both institutional and retail investors to buy and sell shares through traditional brokerage accounts. But how is buying Bitcoin using a traditional ETF different from buying real bitcoin on the crypto market? What does it imply?

Here's a comparison table between a Bitcoin ETF and real Bitcoin:

A few years ago, companies and funds did not have a straightforward way to buy cryptocurrencies. Exposure through ETFs, ETNs, or ETPs compatible with standard financial tools like  ISIN codes makes crypto accessible while avoiding change. After all, repurposing the old is always more reassuring than creating new things when it comes to finance.

A few years back, when you bought a stock, it was under the form of a bearer share because it was not registered to any authority, and transferring the ownership of the stock involved only delivering the physical document. Today, although the terminology remains the same, it no longer implies that you physically own the stock. Instead the bank either holds it for you or even owns the stock. Holding Euros represents a line of credit, which serves as a debt acknowledgement from your bank to you. To exercise your voting right at a general meeting, you must request a holding certificate from the bank to prove you were a creditor of a stock on a specific date. It's your custodian, and they, in turn, have their own custodian overseeing the stocks you've entrusted to them.

Asset ownership in today's finance

While finance has digitised, the old world of owning your asset still exists through blockchain and cryptocurrencies. Bitcoin is an asset that both institutional and retail investors demand. Whether it is for pure speculation or trust in the transformative power of blockchain, big banks did not take long to understand that traditional investment products like ETFs, ETNs and ETPs should be used to answer this demand for this new asset class, following TradFi codes (ISINs…). Starting today, ETF providers such as BlackRock and Fidelity can hold Bitcoins and enable investors to buy and sell shares through traditional brokerage accounts. 

While this is positive for those interested in seeing the cryptocurrency's value rise, it presents a mixed perspective for those viewing crypto as the future financial system. The prospect of everyone owning Bitcoin through mainstream ETFs challenges the original vision of decentralized, trustless finance.

When you place an order, you are not utilizing the underlying technology, blockchain. Positively, in the case of a physical ETF, it is the product issuer who rebalances your accounts. Do you benefit from Bitcoin's performance? Only if your bank agrees. Your risk relies on at least two intermediaries; The product issuer must not fail, and neither should your custodian bank.

Planning your exit strategy? Be cautious, the market operates exclusively on weekdays, a bit inconvenient when dealing with an underlying asset that trades, 24/7.

So what now?

It is definitely good news to see the US regulator finally acknowledging crypto, we have come a long way, from institutions mocking crypto to them all wanting their part of the cake. The takeaway here is that everyone sees the value of owning Bitcoin, but only one type of investment directly supports blockchain and finance 2.0, and that is owning real bitcoin.

Businesses seeking exposure to Bitcoin without navigating the complexities of blockchain and private keys can still own real Bitcoin through their Fipto account. It is the opportunity for businesses to create, invest, pay and interact with Web3 while enjoying the security and compliance of traditional finance.

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January 12, 2024

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