Cryptocurrency
Bitcoin ETFs vs. Bitcoin Self-Custody: Understanding the Difference
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In Brief
Explore the nuances of Bitcoin ETFs vs. Self-Custody: a guide to secure, direct BTC ownership and investment exposure with Trust Wallet.
Bitcoin is a decentralized digital currency built on a distributed peer-to-peer network that enables anyone in the world to send, receive, and store value. Bitcoin exchange-traded funds (ETFs) track the performance of bitcoin (BTC), enabling investors to gain investment exposure to the asset class without having to actually own the digital currency.
Before diving into the intricacies of Bitcoin ETFs and bitcoin ownership, we must understand the self-custody of digital assets. Traditional financial assets like stocks and bonds are held by a qualified custodian on your behalf when you purchase them with an online broker. The custodian is a financial institution like a bank, and your ownership of the asset is recorded in a centralized database of the custodian.
Bitcoin can be held in self-custody in a Bitcoin wallet, to which you hold the private keys needed to access your coins on the blockchain, giving you direct ownership of your bitcoin.
Crypto self-custody means you take control of your digital assets by holding their private keys, enabling you to send, receive, and store your crypto assets without relying on a centralized custodian like a crypto exchange.
Before You Get Started
It’s important to note that you can seamlessly and securely self-custody your BTC using a non-custodial wallet like Trust Wallet, giving you complete control over your bitcoin.
Trust Wallet can be downloaded as a mobile app, or you can install the Trust Wallet Extension for your desktop browser.
Step 1: Get the most updated version of Trust Wallet
Below you’ll see the steps to create a new wallet, but you could just as easily import an existing Web3 wallet to Trust Wallet, if that’s your preference.
To create a new wallet:
Download, install and then open Trust Wallet
Choose “Create a new wallet”.
Choose your backup option, or you can optionally postpone the backup process by choosing “Skip”.
Start using Trust Wallet.
Step 2: Buy crypto using your Trust Wallet
Select the “Buy” button, from the wallet’s Home screen.
Choose Bitcoin (BTC), and enter the amount you wish to purchase.
Select the third party provider & payment method you’d like to use.
Select “Buy BTC”, and then follow the steps to complete the purchase.
Direct Bitcoin Ownership Explained
Bitcoin is a bearer asset that can be held in self-custody, unlike traditional assets like stocks and bonds, which must be held with a regulated custodian on your behalf.
To custody your bitcoin yourself, you need a self-custody wallet, like Trust Wallet, that allows you to hold your wallet’s private keys yourself. You use your private keys to access and manage your bitcoin.
Now, let’s take a look at the benefits of holding your bitcoin in a self-custody wallet.
Control of your funds - Ownership of your private keys through a self-custody Bitcoin wallet gives you access to your funds at all times. You are solely responsible for your funds. There is no counterparty to limit access to or manage your assets.
Security over your assets - Bitcoin self-custody is like having a personal safe, and only you have the means to access and possess the items therein. The lack of third-party custodians eliminates the risk of hackers or other malicious actors stealing your keys.
Financial privacy - By taking control of your keys, you have control of your personal information and financial activities as you don’t need to provide any personal information when setting up a self-custody wallet. That is not the case when setting up an account with an exchange or a brokerage to store your assets.
Participate in decentralized finance (DeFi) - Having self-custody of BTC allows you to directly interact with decentralized applications (dApps) without relying on custodial services as an intermediary.
However, direct bitcoin ownership isn’t without risks. Let’s look at the disadvantages of crypto next.
Self-custody is complex - Direct ownership of your BTC can be more complicated than storing it with a trusted third-party. You will need to set up a crypto wallet, back up your wallet, and stick to wallet security best practices.
Loss of private keys - If you lose access to your private keys, then you will end up losing access to your crypto assets permanently.
Sole responsibility of your crypto - By self-custodying your bitcoin you are solely responsible for the security of your assets. If any of your assets are lost or stolen, there is no one to turn to for redress.
Understanding Bitcoin ETFs
A Bitcoin ETF is a regulated, exchange-traded investment vehicle that gives you investment exposure to bitcoin without you owning the cryptocurrency directly.
Instead, you purchase shares in the Bitcoin ETF, which tracks the price of bitcoin through ownership of “physical” BTC or Bitcoin futures. In other words, a Bitcoin ETF has custody of the assets, and you invest in the fund holding the assets.
There are two main Bitcoin ETFs: spot Bitcoin ETFs and Bitcoin futures ETFs.
A spot ETF typically holds actual bitcoin as an underlying asset and tracks the prevailing market price of bitcoin, allowing the price of shares of the ETF to mirror the price of BTC. The ETF would be traded on a traditional stock exchange like the NYSE.
Bitcoin futures ETFs don’t hold actual bitcoin but use Bitcoin futures contracts to give you exposure to the price movements of the digital asset. A Bitcoin futures contract allows you to speculate on the future price of bitcoin without owning the underlying asset. However, the prices of Bitcoin futures contracts don’t track the price of BTC exactly, resulting in a price differential between actual bitcoin and holding shares on a Bitcoin futures-based ETF.
A big benefit of Bitcoin ETFs is that investors are purchasing a regulated investment vehicle, allowing even institutional investors (who have to follow strict rules on what they can and can’t invest in) to add bitcoin exposure to their portfolios. As a result, we can expect a large influx of money to stream into the asset class bitcoin, should the spot Bitcoin ETF be approved in the US next year.
Moreover, Bitcoin ETFs are easier to access on traditional online brokerage accounts, opening up the digital asset class to a much broader range of retail investors. Not only can they use their existing online brokerage accounts to add bitcoin exposure to their portfolios, but they also don’t have to deal with the technical intricacies of crypto self-custody.
That said, let’s take a look at the main differences between owning shares in a Bitcoin ETF and holding actual bitcoin in self-custody.
Conclusion
Buying bitcoin directly and holding it in a non-custodial wallet provides you with financial privacy, complete control over your digital asset, and direct ownership of bitcoin. Investing in a Bitcoin ETF offers you the ability to gain exposure to the price development of bitcoin without having to worry about the technical aspect of securely buying and storing bitcoin.
Trust Wallet is the most trusted Web3 wallet, allowing you to buy, send, receive, and own your bitcoin while having complete control of your private keys. Download Trust Wallet now!
Frequently Asked Questions
What is the difference between Bitcoin ETFs and Bitcoin self-custody?
Bitcoin ETFs allow investment exposure to BTC without direct ownership, while self-custody means holding your BTC directly with private keys for full control and responsibility.
How does Trust Wallet facilitate Bitcoin self-custody?
Trust Wallet is a non-custodial wallet that allows you to securely store, send, and receive BTC, ensuring you have complete control over your private keys and, consequently, your funds.
Are there risks to Bitcoin self-custody?
Yes, while it offers full control, self-custody comes with responsibilities. Loss of private keys means losing access to your BTC. It requires diligence in security and backup procedures.
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Note: Any cited numbers, figures, or illustrations are reported at the time of writing, and are subject to change.