Is the iShares Bitcoin Trust ETF worth playing?

For the uninitiated, Bitcoin (BTC 0.83%) it can be very confusing and complex. But fear not — Wall Street has come to the rescue with an exchange-traded fund (ETF), iShares Bitcoin Trust ETF (IBIT -3.11%)as a quick and easy way to gain exposure to cryptocurrency. Except the two are not the same, and that’s important for investors to understand.

What is Bitcoin?

Bitcoin is a digital currency that has value because the people who own it believe it has value. There is no government behind it, only the people who buy it.

That said, unlike government-backed fiat currency, crypto is global. As long as you can access the internet, you can buy and sell it or use it to buy and sell products and services.

But it seems that most of the Bitcoin in existence is traded as a commodity and not used as if it were a common currency. To some extent, this is because it is not a government-backed currency and therefore not easily accepted by all merchants.

Image source: Getty Images.

This last point helps explain the extreme levels of its price volatility. In fact, the chart below is quite shocking from a price perspective. The digital currency has lost half of its value three times since it was introduced. It is currently about 20% below its peak value.

If a government-backed currency displayed this kind of volatility, most investors wouldn’t touch it with a 10-foot pole. Only the most aggressive investors (and maybe gamblers) would get involved.

Bitcoin Price Data by YCharts.

The big problem with Bitcoin is that emotions determine its value. As anyone who invests on Wall Street knows, emotions can change dramatically in very short periods of time. That is why there are bear and bear markets.

However, some consider Bitcoin as a safe asset like gold. This is not unreasonable given that it exists outside of countries and is beyond the direct reach of Wall Street.

Is the iShares Bitcoin Trust ETF the way to go?

So for some investors, owning Bitcoin could be seen as a valuable diversification play. However, the complexity of the purchase could deter some of these investors.

That’s where the iShares Bitcoin Trust ETF comes in. It allows you easy exposure to Bitcoin and the ability to easily buy and sell on a traditional stock market. You might think it’s a winning strategy. Not so fast.

Buying Bitcoin directly, like buying gold directly, provides diversification and the ability to fall back on the asset should the economy crash. But buying the iShares Bitcoin Trust ETF is not the same as buying Bitcoin. As the ETF prospectus clearly states, “While the Shares are not the exact equivalent of a direct investment in bitcoin, they provide investors with an alternative method of obtaining investment exposure to bitcoin through the securities market that may be more familiar to them.” .

Step back and think about this for a second: If you buy the iShares Bitcoin Trust ETF, you’re not actually benefiting from having an asset that lives outside of Wall Street. You can’t spend it. It is not a storehouse of wealth. All you get is a security that tracks crypto price movements, which is very volatile.

And you can pay a 0.25% expense ratio for the privilege. All in all, the iShares Bitcoin Trust ETF looks more like a way to bet on Bitcoin price movements than anything else.

There’s nothing wrong with gambling if that’s what you want to do

If you want to own Bitcoin as a long-term investment and because of its diversification benefits, you should probably do your homework and learn how to buy it directly. That way, you really own it.

If you want to play the volatility of Bitcoin prices, which is more like gambling than investing, then the iShares Bitcoin Trust ETF could be a great choice for you, given how easy it is to buy and sell.

Just go in knowing that this ETF is not the same as owning Bitcoin and that what you are doing could end up with huge losses (more than 50%) given Bitcoin’s volatile history. And you would have little to show for those losses since you own an ETF and not Bitcoin.