Bitcoin vs. Bitcoin ETFs: How They Differ and What Exchanges Need To Know

As banks and financial institutions navigate the rapidly evolving world of cryptocurrency, digital assets continue to attract significant investment. At the forefront of this trend is Bitcoin (BTC), a foundational option that has reshaped the financial landscape and influenced both traditional banks and cryptocurrency markets. 

The emergence of Bitcoin ETFs has marked a significant development, introducing a new asset class that bridges the gap between these worlds by making Bitcoin more accessible to conventional investors. For exchanges and investors, understanding the differences between Bitcoin and Bitcoin ETFs is crucial. While both provide exposure to Bitcoin’s market value, they come with distinct structures, trading mechanisms, and regulatory requirements.

Recognizing these differences not only enables more informed listing decisions but also helps navigate the complexities of trading and compliance within the dynamic crypto market.

Understanding Bitcoin

Bitcoin is often referred to as “the mother of all cryptocurrencies,” and for good reason. Launched in 2009 by pseudonymous creator Satoshi Nakamoto, it was the world’s first mineable cryptocurrency, introducing a new form of digital asset that could be earned through a process called mining. This process involves solving complex mathematical problems to validate transactions on the blockchain, rewarding participants with newly minted Bitcoin.

Since its inception, Bitcoin’s popularity has soared, with its value surging from a fraction of a cent in its early days to over $73,000 in March 2024. As a decentralized asset, Bitcoin offers an alternative to traditional currencies, free from the control of central banks and governments. 

Unlike fiat money, which can be printed in unlimited quantities, Bitcoin’s supply is capped at 21 million coins, creating scarcity that many view as a hedge against inflation. Although the last coins are not expected to be mined until 2140, the fixed supply helps limit inflationary risks compared to traditional currencies, making BTC appealing as a store of value. However, its higher volatility relative to fiat currencies and gold means investors should carefully consider the risks before investing. 

What Are Bitcoin ETFs?

To understand Bitcoin ETF, it helps to start with what an ETF (exchange-traded fund) is. An ETF is a basket of securities that tracks the performance of an asset class, such as currencies and commodities. A Bitcoin ETF tracks Bitcoin’s value but trades on a stock exchange instead of a crypto exchange. 

Although Bitcoin ETFs are relatively new — the U.S. Securities and Exchange Commission (SEC) approved the first spot Bitcoin ETFs in January 2024 — they have quickly gained popularity, especially among traditional investors. They offer exposure to BTC without the complexities of trading, managing, or storing the actual digital asset. 

Types of Bitcoin ETFs

There are two types of Bitcoin ETFs:

1. Spot Bitcoin ETFs: These funds track Bitcoin’s current market price in real time, holding actual BTC in custodial wallets. Investors can buy shares on the stock exchange, providing direct exposure to the digital asset’s market movements. 
2. Bitcoin Futures ETFs: These funds are based on Bitcoin futures contracts — agreements to buy and sell BTC at a future date for a specified price. Instead of holding actual BTC, they derive their value from anticipated future prices, which can lead to differences in performance compared to spot-based ETFs.

Some notable ETFs include:

ETF	Investment	Value of assets under management
iShares Bitcoin Trust ETF (IBIT)	Spot BTC	$21.1 billion
Bitwise Bitcoin ETF	Spot BTC	$2.2 billion
Grayscale Bitcoin Trust (GBTC)	Spot BTC	$13.3 billion
ProShares Bitcoin Strategy ETF (BITO)	Bitcoin Futures	$1.8 billion
VanEck Bitcoin Trust (HODL)	Spot BTC	$760.300M
Ark 21Shares Bitcoin ETF (ARKB)	Spot BTC	$2.85 billion
Volatility Shares 2x Bitcoin ETF (BITX)	Bitcoin Futures	$1.44 billion

Key Differences Between Bitcoin and Bitcoin ETFs

While Bitcoin and Bitcoin ETFs share some similarities, their key characteristics set them apart. Here’s an in-depth look at the major distinctions:

Ownership

When you buy Bitcoin, you own the actual asset, with full control over its private keys and storage. 

In contrast, owning Bitcoin ETFs means holding shares that represent exposure to Bitcoin’s price movements without directly managing the underlying asset. 

Trading Structure

Bitcoin trades on cryptocurrency exchanges, where transactions are not restricted by time — trades occur 24/7. 

Bitcoin ETFs, however, are traded on traditional stock exchanges and are subject to standard market hours. For major exchanges like Nasdaq and the New York Stock Exchange (NYSE), this is typically Monday to Friday from 9:30 a.m. to 4 p.m., except on public holidays. 

Liquidity

Bitcoin’s liquidity is influenced by factors such as the crypto exchanges‘ trading volume, transaction fees (investors may be hesitant to trade if exchange fees are high), and price volatility. 

For Bitcoin ETFs, liquidity depends on stock market dynamics, including interest rates — higher rates can reduce the liquidity of speculative assets like Bitcoin ETFs. 

The type of fund also plays a role: spot-based ETFs have liquidity closely linked to the Bitcoin market, while futures-based ETFs depend on the liquidity of Bitcoin futures contracts. 

Custody and Storage

With direct ownership of Bitcoin, investors must manage and secure their assets. This often involves using hot wallets (online) for day-to-day trading and cold wallets (offline) for added security, as cold wallets are less susceptible to hacking.

In contrast, Bitcoin ETF investors don’t need to handle asset management or security; the fund provider typically does this, making ETFs appealing to those less familiar with the crypto space. 

Regulation and Compliance

Bitcoin is largely unregulated, with most countries lacking clear legal frameworks. Unfortunately, this regulatory uncertainty increases the risk of market manipulation and adds to BTC’s volatility. 

Bitcoin ETFs are subject to more stringent regulation and oversight by financial regulators like the SEC and, therefore, offer a bit more protection for investors. 

Taxation and Fees

Bitcoin’s tax obligations are more complex than Bitcoin ETFs. While ETF investors typically pay capital gains tax on profits, Bitcoin investors face additional taxable events. The Internal Revenue Service (IRS) requires them to not only pay tax when they sell BTC, but also when:

• Exchanging Bitcoin for another asset (e.g., Ethereum)
• Mining Bitcoin (treated as self-employment income)
• Using Bitcoin to pay for goods or services
• Earning staking rewards

Fee structures also differ. Bitcoin traders pay crypto exchange fees (e.g., deposit, withdrawal, trading, and spread fees), while Bitcoin ETF investors incur administrative costs, fund management fees, and trading expenses. 

Pros and Cons of Investing in Bitcoin vs. Bitcoin ETFs

Bitcoin and Bitcoin ETFs each offer unique advantages and disadvantages that can impact investment decisions. 

Bitcoin Pros and Cons

Some of the pros of investing directly in Bitcoin include:

• Ownership: Investors have complete control over BTC, allowing them to sell, trade, or hold it as a store of value. 
• 24/7 trading: Bitcoin can be traded at any time, as crypto exchanges operate around the clock. 
• High liquidity: The 24/7 nature of the market and the ease of transferring Bitcoin on major exchanges (e.g., Coinbase) makes it simple to find buyers and sellers. 
• Fewer ongoing fees: There are no fund management fees since there’s no intermediary involved; however, trading fees still apply. 

Some of the cons of owning Bitcoin directly include:

• Security risks: Investors are responsible for securing their holdings, which can be challenging without the right knowledge.
• Volatility: Bitcoin’s price can fluctuate, leading to potential losses. 
• Limited regulatory protection: The crypto space is largely unregulated, offering little to no recourse if issues arise. 
• Technical knowledge required: Investors need to understand how to use digital wallets and manage private keys to transact efficiently and securely. 

Bitcoin ETFs Pros and Cons

The pros of Bitcoin ETFs include:

• Easier access for traditional investors: Bitcoin ETFs can be traded through regular brokerage accounts, eliminating the need to learn about crypto exchanges, wallets, and private keys. 
• Regulatory oversight: ETFs are regulated by entities like the SEC, providing greater investor protection. 
• No custodial obligations: The fund issuer manages security and custody, removing the burden from investors. 

Its cons include:

• Limited trading hours: Buying and selling activities are limited to standard market hours. 
• Management fees: Investors pay fees to the fund provider, which can impact returns. 
• Indirect exposure: ETF investors don’t own Bitcoin; they hold shares in funds that track BTC‘s price movements. This can sometimes result in discrepancies between the ETF’s performance and BTC‘s spot price, potentially resulting in lost gains. 

What Exchanges Need To Know About Listing Bitcoin and Bitcoin ETFs

Listing Bitcoin and Bitcoin ETFs can be profitable, given their popularity. However, it’s essential to understand the infrastructure required, the regulatory environment, and the risks associated with each asset before proceeding. Let’s take a deeper look at these considerations:

Bitcoin Exchange Requirements

Efficient BTC trading requires robust digital infrastructure. Key features to consider in crypto exchange software include:

• Scalability: The platform should be scalable and capable of handling sudden traffic surges without downtime. 
• Security: Offer solutions like multi-signature wallets and cold storage to safeguard assets and minimize the risk of losses from hacking. 
• Wallet integration: Ensure compatibility with wallets to facilitate transactions, storage, and management, with multi-signature options for added protection. 
• Liquidity: Invest in a strong matching engine and integrate with liquidity providers to maintain a smooth trading experience. 
• User-friendly interface: An intuitive platform helps attract and retain traders. 

AlphaPoint provides a comprehensive infrastructure to meet these needs, allowing you to launch a secure and efficient crypto exchange. Our solution eliminates the need for extensive crypto banking software development, with most essential features built in. 

Listing Bitcoin ETFs on Stock Exchanges

Bitcoin ETFs are subject to significant regulatory oversight. To list an ETF, exchanges must obtain approval from regulatory bodies.

This process involves:

1. Preparing a proposal: Outline your fund’s operations, risk management strategies, and methods for tracking the price of Bitcoin.

2. Submitting the proposal: Send to the relevant regulatory body — in the U.S., this is the SEC.

3. Approval and listing: Once approved, finalize terms like market-making obligations and listing fees with your chosen exchange.

Compliance and Regulatory Considerations

While Bitcoin remains largely unregulated, exchanges must comply with certain rules, including AML (Anti-Money Laundering) and KYC (Know Your Customer) requirements, to prevent traders from using their platforms for illegal activities. In the EU, exchanges must comply with the Markets in Crypto-Assets Regulation (MiCA), a framework governing the crypto market. 

Bitcoin ETF providers are typically required to comply with SEC regulations, such as:

• Transparency: Disclosing daily portfolio information. 
• Recordkeeping: Meeting the SEC’s filing and recordkeeping requirements to ensure investors have pertinent fund information. 
• Fund processes: Providing clear information on their funds’ arbitrary processes. 
• Cost disclosure: Informing investors about the fees and expenses associated with investing in their funds. 

Liquidity and Volatility Management

Both Bitcoin and Bitcoin ETFs present liquidity and volatility challenges that can affect market efficiency and investor returns. 

For Bitcoin trading, liquidity issues can arise from order book imbalances, where buy and sell orders do not match, leading to price slippage. Further, the decentralized nature of the crypto market can make it susceptible to manipulation, such as wash and whale trading, which can heighten volatility. 

To mitigate these risks, consider the following strategies:

• Engage market makers and liquidity providers to enhance liquidity. 
• Invest in advanced order-matching engines to reduce imbalances.
• Maintain dark pools for large institutional traders. 

Bitcoin ETFs also face risks, including liquidity issues and tracking errors, where the ETF’s price diverges from Bitcoin’s spot price. To manage these risks effectively:

• Partner with diverse authorized participants capable of providing sufficient liquidity. 
• Track Bitcoin prices across multiple exchanges and update your fund’s Net Asset Value (NAV) frequently. 

Manage the Complexities of Trading Bitcoin and Bitcoin ETFs

Bitcoin and Bitcoin ETFs attract different types of investors. Bitcoin appeals to those seeking direct asset ownership, often with experience in the crypto space. In contrast, Bitcoin ETFs cater to traditional investors who want exposure to BTC without engaging directly in the crypto space. 

If you’re considering listing these digital assets, AlphaPoint offers the ideal solution. Our scalable white-label software allows you to quickly enter the market with infrastructure that’s not only configurable but also built for security, compliance, and high-performance trading. AlphaPoint’s platform equips you with the tools you need to manage liquidity, minimize risks, and optimize trading efficiency. 

Schedule a demo with AlphaPoint today to discover how our platform can help you launch these investment vehicles.