Opinion: Why Holding Actual Bitcoin is Vital Despite the Potential of Bitcoin Spot ETFs

In a recent opinion editorial by David Waugh, a business development and communications specialist at bitcoin investing platform Coinbits, he discusses the potential impact of spot bitcoin exchange-traded funds (ETFs) on the market. BlackRock and other major financial firms have filed for permission to offer these ETFs, which would allow institutional and retail investors to access exposure to bitcoin’s price without actually owning bitcoin.

On the surface, this development seems like a positive step for Bitcoin adoption. Financial advisors who were previously hesitant or unable to enter the Bitcoin market would now be able to assist clients in allocating funds to bitcoin. Additionally, traditional financial players would increase their exposures to bitcoin, potentially influencing its exchange rate with the dollar.

However, Waugh argues that while spot ETFs may increase accessibility to bitcoin, they do not provide complete protection from market, government, or compliance risks. These products still exist within the traditional financial system, and external forces could impact their issuers. Governments can enact and enforce regulations that devalue or debase the assets held by consumers.

In contrast, holding real bitcoin allows individuals to access a digital bearer asset outside of the control of governments and traditional financial institutions. While this introduces new risks associated with private key management, Waugh recommends that every diversified portfolio should have a real bitcoin allocation, regardless of any additional allocation to a bitcoin ETF.

The article emphasizes the importance of diversification and protection from market shocks. Financial advisors have traditionally allocated clients’ wealth across a variety of assets, but allocations entirely within the traditional financial system are exposed to risk stemming from the boom and bust financial market cycle. As a result, it is crucial to have liquid assets outside of the traditional financial system to ensure proper diversification.

Historically, physical gold has been regarded as the best asset for this purpose. However, with the release of bitcoin by Satoshi Nakamoto in 2009, a new bearer asset with a fixed monetary policy emerged. Bitcoin operates on a monetary network that runs continuously, allowing individuals and institutions to instantly transfer value without third-party approval. They can also sell bitcoin for fiat currencies at any time via exchanges or peer-to-peer platforms.

On the other hand, shares of a spot bitcoin ETF can only be exchanged for fiat liquidity during financial markets’ working hours, which limits their saleability compared to actual bitcoin. Exchanges can also halt trading or be subject to regulatory orders, further restricting liquidity.

In conclusion, while spot bitcoin ETFs may bring advantages such as exposure to bitcoin’s price movements and diversification from traditional financial markets, they lack the saleability and independence offered by holding real bitcoin. Waugh argues that individuals should have a real bitcoin allocation in their diversified portfolios to protect themselves from market risks and geopolitical shocks. Financial advisors should consider these factors when assisting clients with their investment strategies.