Bitcoin is a decentralized digital currency and is the world’s largest cryptocurrency by market capitalization. Bitcoin operates free from any centralized control without any oversight from banks, governments, or financial institutions.
If you want to buy in, how do you invest in Bitcoin? There are multiple options to add Bitcoin to your portfolio. The smartest way to buy Bitcoin is directly through a cryptocurrency exchange. But some alternatives allow you to invest in Bitcoin without buying it directly.
An increasingly popular option is buying shares in a cryptocurrency Exchange Traded Fund (ETF).
A cryptocurrency ETF is a fund that tracks the price of a single cryptocurrency, like Bitcoin. It might also track the price of a basket of different digital tokens and currencies. By purchasing a share in a Bitcoin ETF, your investment would track the price of the Bitcoin without you buying it directly.
ETFs are not new. These funds are a popular investment option in the equity market. They are publicly-traded funds that track underlying assets, like gold or the oil industry. For example, instead of buying individual shares in a company like Apple, Meta, or PayPal, you invest in a fund tied to the entire tech industry. You are making a bet on the growth of a whole sector of the economy rather than a single company.
Physical cryptocurrencies back the cryptocurrency ETFs. There is a fund manager that purchases cryptocurrencies directly. They open up that fund to investors who can buy shares in the ETF. As an investor, you do not own crypto directly, but you get to buy in without having the knowledge, resources, and risk of outright ownership.
A crypto ETF is available on a publicly-traded stock market, along with shares in other companies, including non-crypto businesses and industries.
What is a Bitcoin ETF?
Bitcoin ETFs are a new product for inventors. For many years, The US Securities and Exchange Commission (SEC) blocked proposals for Bitcoin ETFs. In 2013, the Winklevoss twins first filed a proposal for a Bitcoin ETF, which was subsequently blocked by the SEC.
The first cryptocurrency ETF in the US started trading in October 2021, the ProShares Bitcoin Strategy ETF. The fund saw massive investment instantly. It took just two days for the fund to accumulate $1 billion, making it the second-fastest ETF to hit that number.
Canada beat the US to a Bitcoin ETF when the Purpose Bitcoin ETF began trading on the Toronto Stock Exchange seven months before the ProShares ETF. The fund purchases physical Bitcoin, not derivatives or futures.
Benefits of a Bitcoin ETF
So what are the advantages of buying a Bitcoin ETF versus actually purchasing Bitcoin?
The primary benefit is that it can be tax-efficient. Because a Bitcoin ETF is regulated, you can invest money in a TFSA or RRSP in an ETF. Currently, you cannot invest those funds directly in Bitcoin.
A Bitcoin ETF outsources all the purchasing and storing of Bitcoin to the fund manager. You no longer have to worry about passwords to your digital wallet.
If you are more comfortable navigating the stock market, an ETF may be for you. Like buying shares in other stocks, an ETF allows you to buy and sell Bitcoin seamlessly in your existing portfolio.
As ETFs are still emerging, with only about a year on the market, there is always the option to buy Bitcoin directly. And the best way to do that is through a Cryptocurrency Exchange.
Cryptocurrency exchanges are platforms that facilitate buying, selling, or exchanging cryptocurrencies for other digital currency or traditional currency. They make the buying experience easy.
A reputable exchange allows you to invest in crypto assets easily and safely in a regulated environment. You create an account, which includes verifying your identity. Once you create your account, you can add funds and start investing in cryptocurrencies directly.
You must choose a regulated platform because you give personal financial information and add money to an account. You can verify the exchange’s information to ensure you are dealing with a regulated Canadian platform. The OSC has a published page that lists all registered crypto-asset trading platforms in Ontario. Be sure to check in with your provincial or state regulators to ensure that the platform you are using is legitimate.
Not only should you do your due diligence on Bitcoin or the cryptocurrency of your choosing, but you should also comb through the world of exchanges and trading platforms to find the right one for you. Each platform will offer unique features to appeal to different types of investors.
An international exchange might not be as valuable to you as a Canadian exchange, as few accept Canadian currency, leaving you stuck with high exchange fees. International exchanges won’t let you turn Bitcoin back into Canadian dollars, while some even have small limits on how much Bitcoin Canadians can buy.
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You can access a crypto exchange 24/7. This convenience allows you to buy, sell, and trade in real-time as you instantly react to price changes. You are in control and not reliant on a fund manager to make decisions.
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