Bitcoin Self-Custody Alternatives: ETFs And Corporate Strategies

Since the introduction of BTC and other cryptocurrency investments, investors have been presented with unique opportunities and challenges. One such example is BTC self-custody: Managing and holding one’s own BTC in a self-custody wallet can be a daunting experience for any investor, with new details to consider, such as security implications and the learning curve of technical complexity.

This article explores alternative avenues of BTC self-custody available to investors, such as Bitcoin ETFs (Exchange-Traded Funds) and BTC investment companies; assesses the pros and cons of each; and addresses the importance of paying attention to regulatory considerations.

Modern Investment And Bitcoin

Modern investment strategies have spanned over a century, from mutual funds and regulation in the 1920s to the introduction of ETFs in the 2000s. With the emergence of BTC in 2009, this new digital asset class began to gradually shake up the investment space as many early adopters were attracted to Bitcoin's decentralized, anti-establishment nature. They saw it as a way to challenge the traditional financial system and promote individual freedom and privacy.

Fast-forward to 2024, and traditional investors are facing serious considerations when contemplating the inclusion of BTC into their investment strategies and portfolios. Although buying in 2009 would have most certainly been the best move, BTC still creates FOMO (fear of missing out) in many investors, as reported by CNBC.

Despite the readily available investment diversity of digital assets, such as BTC and ETH, investors face a now-common dilemma: Whether to personally hold their own assets or invest indirectly via Bitcoin ETFs (exchange-traded funds) or BTC investment companies.

Bitcoin ETFs grant investors exposure to BTC without having to directly purchase and store it themselves. In this case, the ETF owns the BTC — directly or via a BTC Futures contract — while investors own shares of the ETF. An example is BTF (Valkyrie Bitcoin Strategy ETF) which focuses on investing in BTC Futures contracts and is approved by the SEC (Securities & Exchange Commission).

The Pros And Cons Of Self-Custody

Self-custody entails the practice of retaining control of your BTC, including management of private keys and seed phrases associated with your Bitcoin wallet addresses and hard wallets, respectively. As ownership requires a private key to view held assets and carry out transactions, security is paramount when it comes to storing one’s private key.

The Pros

Retaining holistic control of your BTC holdings allows you to carry out complete management of the asset(s) without interference of an intermediary. It also grants both increased privacy due to the ability to transact in a decentralized fashion and increased security by decreasing the risks associated with bankruptcy and hacks.

The Cons

Despite the reduction of bankruptcy risk and hack exposure, there is one inherent security risk to BTC self-custody: Private keys. Without correct and meticulous management of private keys, loss of access to assets and theft can occur. Multiple cases of locked wallets, missing passwords, and private keys have already been reported by Cointelegraph as of October 2023, some consisting of the loss of thousands of BTC worth millions of dollars.

In speaking with Oleksii Pavlov, Founder and CEO of Kauri Finance, a licensed financial platform that combines a secure crypto wallet, Mastercard crypto debit cards and bank accounts, he shared the following considerations with me: “If choosing self-custody of their BTC, investors should prioritize securing their private keys. To enhance security, investors should opt for non-custodial, decentralized Web3 wallets. These wallets not only provide greater control and ownership, but also mitigate the risk of centralization and potential loss associated with exchanges.”

The Pros And Cons Of Bitcoin ETFs

As a means of exposure to BTC investment without direct ownership and management of the asset, Bitcoin ETFs offer a less-technical approach to BTC access. IBIT (iShares Bitcoin Trust) is a recent example of a Bitcoin ETF, launched by asset management firm BlackRock in January 2024. So far, this asset is up approximately 34% YTD (year-to-date).

The Pros

Without the need for private key management, one immediate benefit of Bitcoin ETFs investment is the decreased security risk of poor wallet security practices. You can easily access Bitcoin ETFs like other traditional stocks under regulatory oversight that is not provided by direct ownership and management of self-custodied BTC.

The Cons

On the flipside, investment in Bitcoin ETFs means that you do not own any BTC, but rather, shares of the fund that holds BTC. Similar to stock market trade, this also means that unlike self-custody management of BTC, there are limited trading hours with Bitcoin ETFs.

Additionally, investing in Bitcoin ETFs exposes you to both potential management fees and risk of regulatory changes that could alter the legality of Bitcoin ETFs in the future.

Corporate Gateways To Bitcoin Investing

Investors are also able to gain indirect investment into BTC by investing in the companies — such as those mentioned earlier and the likes of MicroStrategy — that invest in BTC themselves. MicroStrategy, founded by Michael J. Saylor and Sanju Bansal, reported that as of February 2024, the company held 190,000 BTC.

I reached out to a traditional investor with no professional interest in crypto for some perspective: Danny Reardon, CEO of forex trading platform EFX Algo, shared, “Bitcoin funds are on the rise, not because of diverse business activities, but due to the substantial amount of Bitcoin it persistently acquires. For those apprehensive about self-custody, the traditional finance sector can offer a viable alternative without the risks that come with private key management.”

Though corporate gateways to BTC investments offer professional management and secure access to BTC exposure, there are still risks to consider, such as exposing investors to the company’s overall stock performance as well as BTC price fluctuations.

Evaluating BTC Investment Pathways

With the introduction of Bitcoin ETFs and corporate routes to BTC investment, investors seeking alternatives to self-custody of their assets now have secure investment vehicles available to them.

Bitcoin ETFs provide a simplified, indirect investment route to BTC without the technical complexities or regulatory concerns posed by self-custody, but with limited trading hours. On the other hand, corporate investment offers a combination of traditional investment methods and BTC exposure, though it opens investors to company-specific risks.

Both approaches require careful consideration as the cryptocurrency market develops. As such, investors should keep up-to-date with any recent regulatory changes and follow shifts in market trends to determine what asset management option is best for them.