Buzz is continuing to grow over the imminent launch of the first spot Bitcoin (BTC 0.80%) exchange-traded fund (ETF) for the U.S. market. This investment product is widely perceived to be bullish not only for Bitcoin, but also for the entire crypto industry. As a result, just about any bit of ETF-related news can send the price of Bitcoin soaring. On Oct. 23, for example, Bitcoin soared by $4,000 in a span of just 24 hours after a positive update from BlackRock (BLK -0.79%) on its planned Bitcoin ETF.

But just because a spot Bitcoin ETF might be good for the overall crypto market doesn't mean that it's necessarily good for your portfolio. Here's a closer look at the pros and cons.

Pros

For individual investors, the biggest advantage of a spot Bitcoin ETF is the lack of many of the biggest barriers to entry for crypto. You don't have to worry about creating an account with a cryptocurrency exchange. You don't have to worry about creating a blockchain wallet to hold your crypto. And you don't have to worry about crypto taxes, which can be hard to figure out.

Moreover, a spot Bitcoin ETF will help to remove much of the perceived "sketchiness" of the crypto industry. Any Bitcoin ETF product will have the full blessing of government regulators, including the Securities and Exchange Commission (SEC). And it will have the support of big institutional investors on Wall Street. Right now, a handful of different firms are rushing to create spot Bitcoin ETFs, and all of them are instantly recognizable brand names.

And, most importantly, any spot Bitcoin ETF will be audited, monitored, tracked, and highly transparent. In short, you won't have to worry about a guy in the Bahamas walking away with all of your Bitcoin holdings, as we saw last year with the collapse of cryptocurrency exchange FTX.

Cons

However, buying a Bitcoin ETF does come with a few downsides. For one, you are losing direct access to Bitcoin. When you hold Bitcoin in your own crypto wallet, you can do with it whatever you want. Now that Ferrari accepts Bitcoin, for example, you could use your Bitcoin stash to buy a new car. Or, if a lender allows you to use Bitcoin as collateral for a loan, you could use your Bitcoin holdings. When you buy an ETF, though, you are buying shares in a fund that holds Bitcoin, and not a direct stake in Bitcoin itself.

Moreover, with a Bitcoin ETF, you are paying highly compensated professionals on Wall Street (via fund management fees and expenses) to do something that you can easily do yourself. I have no issue whatsoever paying 1% a year in expenses if these Wall Street professionals are putting together, say, a diversified basket of Brazilian stocks so I can gain access to the Brazilian market. This is something that I couldn't possibly do myself. 

However, when it comes to Bitcoin, doing it yourself is certainly feasible. And it doesn't require creating an account at a cryptocurrency exchange or dealing with crypto wallets. For example, you can buy and sell Bitcoin via PayPal and Robinhood these days, and all it takes is a few clicks. 

Can ETFs really track the performance of Bitcoin?

The question of whether to buy a spot Bitcoin ETF really comes down to how closely this product will actually track the price of Bitcoin. For example, if the price of Bitcoin goes up by 100% in one year, then you want to make sure that your Bitcoin ETF also goes up 100% in one year. Otherwise, you are potentially leaving money on the table. Over time, these differences could add up.

The good news is that there are spot Bitcoin ETFs in Canada already, and they seem to do a good job of tracking the price of Bitcoin. When Bitcoin zigs, the ETF zigs. When Bitcoin zags, the ETF zags. This is highly important because the Bitcoin ETFs available today in the U.S. market rely on derivatives (such as futures contracts) to mimic the price of Bitcoin, and this can lead to disparities between the performance of Bitcoin and the performance of the ETF.

Certainly, I expect the introduction of spot Bitcoin ETF products to be a huge positive for Bitcoin. They will open the door even wider for experienced investors to get access to Bitcoin. And these ETFs should help to make Bitcoin go even more mainstream with crypto-curious investors who might be hesitant about getting direct access to Bitcoin these days. If you decide that the pros outweigh the cons, they could be a useful addition to your investment portfolio.