Bitcoin Self Custody Vs ETFs

Which Has the Biggest ROI?

Rick Messitt

Written By Rick Messitt: Content creator and Bitcoin educator at The Bitcoin Way.

By now you will have heard 1000 times over how Bitcoin is ‘freedom money’ operating outside the control of Governments and Central Banks. You’ll have heard that it’s permissionless, hard to confiscate and that your payments can’t be censored. These are some of Bitcoin’s most interesting properties, and it’s certainly what seems to get Bitcoiners the most excited…..

But what if that’s not you? What if all this talk about a financial revolution and ‘ending the FED’ just doesn’t really appeal to you? Your interest in Bitcoin isn’t driven by the fact that you’re some freedom fighter or evangelist. What if the truth is that your interest in Bitcoin is simply as a vehicle to either remain or become wealthy? What if you’re just here for the money?

Well, despite what the vitriol on social media might suggest, there is absolutely nothing wrong with that. Bitcoin is for everyone and appeals to different people for all sorts of reasons. One of the main reasons Bitcoin is attractive at all is because it preserves and increases purchasing power. You don’t have to be an anti-Government freedom fighter to find that appealing.

If this is you, and its price exposure rather than self-sovereignty that appeals to you most, then you might also conclude that you needn’t bother worrying about taking self-custody of your Bitcoin. You can get exposed to Bitcoin’s price without holding it yourself. So why bother? Wouldn’t it be easier to just buy shares in a spot Bitcoin ETF and let them HODL for you?

Well, we are here to make the case that self-custody will do more for you than just grant you sovereignty, given a reasonable time horizon it can also grant you far better returns on your investment than an ETF can.

Read on to find out why….

Your Bitcoin ROI – Self Custody Vs ETF

We want to demonstrate to you that holding Bitcoin in self-custody not only grants you all the extremely valuable benefits of self-sovereign ‘freedom money’, but, given enough time, can also maximise the value of your investment vs buying shares in an ETF.

To do that, we are going to follow the journey of two imaginary Bitcoin investors who decide to take quite different approaches to investing in Bitcoin but who are primarily interested in making as much money as possible. We’ll call them Tony and Larry.

In our illustrative example both Tony and Larry recently scaled out of their property investments, deciding to reallocate to Bitcoin. After their property sales they both ended up with $350,000 to invest. When Tony and Larry decide to invest, one Bitcoin costs $70,000 meaning they are able to purchase the equivalent of 5 whole coins.

Our first investor Tony is based and prefers the idea of taking self-custody of his Bitcoin. He has some experience of using Bitcoin already and feels confident this is the best approach. He isn’t intimidated by learning new things but given this is his biggest investment to date, he wisely decides to also invest in some professional help to make sure his self-custody setup is secure.

Our second investor Larry on the other hand is a little lazy and a bit of a slow learner. He only came to Bitcoin very late. He wants the fastest and most convenient way to throw his money at Bitcoin with no hassle. He decides that buying spot Bitcoin ETF shares from some Wall Street Banksters is the simplest and ‘most professional’ route to go.

Each of them decided to invest in Bitcoin because they noticed that between 2011 and 2024 Bitcoin had an average Compound Annual Growth Rate (CAGR) of close to 110%. They are buying Bitcoin to bet that this trend continues and are both expecting Bitcoin’s CAGR to continue to run at 50% for the next decade, and that is how long they intend to HODL.

If they are right, both will make a great return on their investment. But which one has the better strategy and importantly, which one will see their investment grow the most over those next ten years?

Well, let’s take a look….

Tony Invests in Self-Custodied Bitcoin

Given we are pro self-custody it would be easy to paint a picture that it’s essentially cost free for Tony to store Bitcoin himself. It is possible, but we don’t think that would be entirely accurate or helpful for an average user.

The reality is that if you want to take self-custody in such a way that we can be sure you will keep your Bitcoin secure long term, then there will be some necessary costs to incur. These come in the form of buying certain pieces of hardware and in our example, our character Tony also invests in some additional expert tuition to ensure he gets things right.

So, what do we think would be a reasonable assumption for the costs that Tony will incur to properly self-custody his $350k investment of 5 Bitcoin over a ten-year period?

Well, at a minimum we would think it sensible that Tony invests in a couple of different hardware wallets, some aluminium plates to store his seed phrases, and whilst not 100% essential for storing Bitcoin, a dedicated machine to run a full Bitcoin node. His shopping list might look something like this:

Along with spending $1058 on hardware Tony also commits to investing in some tuition and ongoing remote support from self-custody experts. He opts to pay for tuition in Yr1 to help him get set up and then a couple hours of ongoing yearly remote support to make sure he stays up to date. This is what Tony expects to spend over the course of the next 10 years on this expert guidance:

This means that Tony spent $3,358 in getting his self-custody set up in year 1 and will invest a further $500 per year on remote support from technical experts to ensure his setup and skills always remain up to date.

Armed with these numbers we can now take a look at how Tony’s investment performs, assuming his prediction is correct that Bitcoin runs for the next ten years at a CAGR of 50%:

The results show that Tony bears most of his costs up-front to build a secure self-custody setup. In year 1 his costs represent 0.68% of his total investment and after these costs he is left HODLing 4.949 BTC. What is worth noticing is that in the subsequent years, the cost Tony incurs for maintaining his self-custody decreases rapidly as a % of his overall investment pot every year. This is because most of his costs are incurred up-front, and as BTC appreciates the cost of ongoing support relative to the value of his BTC stack is always dropping.

When plotted on the chart below this demonstrates that the relative cost of maintaining your Bitcoin investment in self-custody trends downwards as the value of your Bitcoin investment rises:

Whilst this is good news for a long term hodler, one obvious drawback is that having larger costs up front does prevent you from acquiring a bigger stack of Bitcoin initially, whilst prices are lower. Given the expectation that Bitcoin’s value will increase significantly, Tony would be remiss not to consider that expenditure on tuition and hardware rather instead of BTC does have a significant opportunity cost.

By the end of Tony’s 10-year HODL he has spent $8058 on maintaining his self-custody setup and his final portfolio balance stands at 4.935 BTC worth an equivalent value of $19.9m. His costs over the ten years consume 0.04% of the gross value of his investment.

Nice investment Tony!

Larry Invests in a Bitcoin ETF

Now let’s take a look at how Larry’s investment into Bitcoin compares. Larry started with the same $350,000 to invest as Tony but instead chose to forgo taking self-custody of his Bitcoin and instead opted to invest in spot Bitcoin ETF shares.

Larry doesn’t have any of the upfront hardware costs that Larry has but instead he does have to pay annual fees to the ETF provider he decides to invest with at the end of the year. Typically, these fees are charged per annum as a percentage of the total value of your holdings denominated in dollars. These are the various provider’s offers that Larry would have to choose from:

We don’t know exactly which provider Larry would choose so we will take an average fee from them all. We decided to exclude Grayscale from this average as it is a clear outlier, and we can assume Larry would choose one of the lower cost providers.

The average ETF fee (excluding Grayscale) works out to be 0.36% of the total $ value of your investment per annum, so that’s the fee rate we will apply in this example. For the purpose of this illustrative example, we will assume that these fees are collected based on the value of the fund at the end of each year.

At first glance, at a fee of just 0.36% it looks like Larry might have made the better choice here. Bitcoin rose 50% on the year as he expected, and the ETF fee of just 0.36% comes to only $1,890 despite Bitcoin’s sharp rise in value. This is significantly less than the $3,558 Yr. 1 costs that Tony spent on his self-custody setup and tuition. After the first 12 months Larry is more than $3,000 ahead and his stack is worth 4.982 BTC compared to Tony’s 4.949 BTC.

If we continue to run the numbers for the next ten years however, we notice that there is an obvious difference between Tony’s costs for maintaining his investment and Larry’s. Tony’s costs to setup and maintain his self-custody fall after Yr. 1 and remain flat for the remainder of the period.

Larry on the other hand is committed to giving his ETF provider a fixed 0.36% of the total $ value of his investment every year. As the value of Bitcoin increases, so does the size of Larry’s pot in $ terms and this means the % fee he pays in dollars each year also increases. Let’s compare the costs (denominated in $) that both pay over the full ten years to secure their investments:

We can see that by the end of the ten-year period Tony has spent a total of $8,058 and Larry has spent a total of $208,726 respectively to secure their investments. A significant difference!

So, Larry’s upfront costs started off lower than Tony’s, allowing him to secure more Bitcoin at the start of his journey while Bitcoin was at its lowest price. And this put Larry at a significant advantage as he started with a bigger stack than Tony before Bitcoin’s rapid appreciation.

However, whilst Larry did get a significant head start, as time goes on, the cost to service his holdings quickly starts to cost him a bigger % of his stack than Tony’s costs do. Eventually Tony will start to catch up on Larry in a classic tale of Tortoise Vs Hare.

But who ultimately wins the race?

Well that of course depends on how long the race is….

Let’s take a look at how both Tony and Larry’s portfolios perform year on year to see which strategy, on which time frame, performs best….

Bitcoin Self-Custody Vs ETFs; Are You a Tortoise or a Hare?

When we run the numbers for the full ten years, we discover that despite his higher upfront costs and the opportunity cost of acquiring more BTC at a lower price, Tony’s self-custody strategy still ends up outperforming Larry after just 4 years

By the end of year 4, Tony’s pot is worth 4.939BTC whilst Larry’s is worth 4.928BTC. So, it turns out that it didn’t take long for the tortoise to overtake the hare after all. And once it does, it will continue to extend its lead indefinitely!

And let’s not forget, not only does Tony outperform Larry financially during this 10-year investment, but he also gets all the benefits that come with adopting and using Bitcoin properly:

  • Tony has zero counterparty risk. His Bitcoin could never be confiscated by the authorities or mismanaged by a third party.  The same can’t be said for Larry.
  • Tony can exchange Bitcoin for goods and services whenever he wants. Larry can’t do that with ETF shares.
  • Tony can relocate anywhere and easily take his wealth with him. He might even move to a tax haven. Larry has no opportunity to take advantage of jurisdictional arbitrage.
  • Tony increased his knowledge and learned a whole new set of skills that equip him well for a future of freedom and wealth. Larry still asks for permission…

Ultimately, Tony has actual Bitcoin. Larry never had any. Larry’s investment into Bitcoin has underperformed Tony’s and all he has to show for it is a promissory note with lots of strings attached and ever-increasing fees. He made this trade-off for just a shred of convenience.

Master Bitcoin Self Custody with The Bitcoin Way

If you made it this far, you probably have a time horizon longer than 5 years and want both the greatest return on your investment AND all the benefits of having this investment be firmly under your sole control.

Clever tortoise!

By taking proper self-custody of your Bitcoin, you can reap both the greatest financial rewards while also benefitting from not having to worry about counterparty risk or eye watering Wall Street fees.

Coming to the right conclusion is one thing. Taking action is another entirely. If you’re ready to take your self-custody seriously and protect yours and your family’s financial interests for decades to come, then reach out and get in touch.

You are mere hours from never needing to give Wall Street a single dime ever again…

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