by Exchange-traded funds come in many shapes and sizes. Some are simple, diversified index funds that allow you to invest in all stock and bond markets, and are great core holdings for the vast majority of people.
Then there are quirky, narrowly focused ETFs, like the Inverse Cramer Tracker, which lets you bet against CNBC TV host Jim Cramer’s stock picks. The fund is legal, approved by the Securities and Exchange Commission, and has lost money since its creation last year. Betting against Jim Cramer is simply not a great investment strategy.
Neither is the fear of missing out. Still FOMO It is the main reason to invest money in Bitcoin, which remains highly speculative, difficult to categorize and without an immediately identifiable economic function.
This month, the SEC approved 11 new ETFs that track the price of Bitcoin, and the decision has been heralded by Bitcoin (and new fund) promoters as a major event that legitimizes Bitcoin as an asset class.
I do not think.
The SEC’s action, in itself, does not give Bitcoin any new stature. You simply add Bitcoin funds to a long list of ETFs that are perfectly legal and easy to buy, but don’t belong in anyone’s main portfolio. I would put the Inverse Cramer Tracker in this category, as well as ETFs that track a single stock like Tesla, PayPal or Nvidia, or that use leverage to triple a bet on energy prices or quadruple one in the S&P 500. I could go on and on.
Simply being legal does not make a strategy sensible for most investors. In fact, in approving Bitcoin ETFs, the agency also issued an explicit warning against FOMO investing in so-called digital assets, as it has done many times before.
“Just because other people around you may be buying these types of opportunities doesn’t mean you have to,” said Lori Schock, director of the SEC’s Office of Investor Education and Advocacy.
However, the agency’s approval of new Bitcoin funds changes things in an important way. Until now, it was easy for me to avoid talking about Bitcoin in the context of investing. Why draw attention to something that is not suitable for most people? But now that leading financial services companies Although BlackRock, Fidelity, Franklin Templeton, Invesco and Wisdom Tree are starting to operate Bitcoin ETFs and make them available to their clients, the silence seems unnatural and, perhaps, irresponsible.
So there it goes.
Understanding Bitcoin
I don’t want to rule out Bitcoin completely.
Of course, it is possible to make (and lose) a lot of money by buying and selling it. And Bitcoin is a serious proposition, in terms of its underlying structure. The use of blockchain, the decentralized peer-to-peer structure, and the complex mathematical code demand respect. The concepts embedded in Bitcoin and other so-called cryptocurrencies could have real-world importance at some point, and in some way, although perhaps not like Bitcoin.
As Bryan Armour, who leads research on index fund-based strategies at Morningstar, told me, “Not believing Bitcoin ETFs are a good investment doesn’t mean blockchain isn’t a good or useful technology.”
But Bitcoin itself? She put it politely. “I would say that Bitcoin is still in the price discovery stage. “We are still trying to determine what it might be worth.”
For large corporations or other large institutional investors interested in gaining some exposure to Bitcoin, the new ETFs may be a better and more convenient option, said Samara Cohen, chief investment officer of ETFs and index investments at BlackRock. “It’s the beginning of a journey,” she said.
But for ordinary people investing in important things like retirement, a house or a child’s education, I would be very careful. He collapse of the FTX trading platform in 2022 and the fraud and conspiracy conviction of Sam Bankman-Fried just a few months ago are reminders that Bitcoin is extremely risky. Its future is uncertain, as is its very definition.
Definition of terms
To begin with, I consider the term cryptocurrency to be a misnomer. These things are not currencies because they cannot be widely exchanged for goods and services in the real world. But even if they were currencies, it would make no sense for ordinary people to invest in them. Large corporations hedge against fluctuations in currency values, but most of us invest in assets that at least have the potential to produce income and cash flow: assets that can be purchased. with badge.
Then we come to the central claim of the new ETFs: that they are helping to create “an asset class,” one that “protects you” in times of uncertainty, in the same way that gold did “for thousands of years.” In the words of Laurence D. Fink, president of Black Rock. I think this comparison is forced.
Gold has historical prestige, in fact it has served as money, it is still in the hands of central banks, it has commercial uses in jewelry and industry and it has an important cultural role in countries like India. Bitcoin has none of those attributes.
But in a sense I agree with the comparison. Gold is not a major part of a modern diversified investment portfolio, which contains stocks, bonds and cash.
Small amounts of gold may not hurt you much, but they won’t help you much either, numerous studies have shown. The stock market has performed better over the long term than gold as a hedge against inflation. Nobody needs gold as an investment now.
This also applies to Bitcoin, which, in its short life since its creation during the 2008-2009 financial crisis, has not been an effective hedge against inflation.
But it is different from gold. Bitcoin has added considerable risk to the portfolios of those who have held it.
A Morningstar study last year by Madeline Hume found that holding as little as 2 percent of Bitcoin can transform a conservative portfolio of stocks and bonds into a much riskier one. Investors may be tempted by Bitcoin when its price rises, but beware: “However, compared to other assets, Bitcoin’s volatility is more kerosene than firewood,” the report says.
Already exposed
To a small extent, even without the new ETFs, there’s a good chance you already have Bitcoin exposure in your portfolio.
Most new ETFs rely on Coinbase, which calls itself “a trusted, easy-to-use platform for accessing the broader crypto economy,” for important functions: converting cash to Bitcoin and Bitcoin to cash, Bitcoin storage and custody, support . in monitoring the fund’s operations and, sometimes, all of them.
Coinbase is a publicly traded company and the largest holders of most of these companies are mutual funds and ETFs managed by giants like Vanguard, BlackRock, State Street and Fidelity. I checked: My Vanguard workplace retirement accounts include broad, diversified stock index funds held by Coinbase.
And that’s not all. They also include small shares of companies such as Microstrategy, which owns a large amount of Bitcoin. Then there are companies like Riot platforms and clean spark who call themselves “Bitcoin miners,” entities that run the computers that generate new Bitcoin and keep the Bitcoin universe running.
I don’t see much of a social purpose for Bitcoin mining. TO The 2022 White House report said Global electricity consumption for “crypto assets” was greater than “the total annual electricity use of many individual countries, such as Argentina or Australia.” That’s hard to justify in an era of global warming.
I’m not happy about this, but I have an interest in them, and you probably do too. This is how to invest in index funds. You own part of the entire universe of publicly traded companies. On the plus side, if it turns out that I’m wrong about Bitcoin and that it really is the next big thing (and somehow necessary to save the planet), well, these companies will grow in size and my portfolio will swell too. That would be beneficial for everyone, although I don’t count on it.
I should note that Vanguard has taken a principled stance against Bitcoin. Their vast index funds own the companies involved with cryptocurrencies because those funds own all the companies. But if you want to buy the new Bitcoin ETFs (or, as of January 12, the older ones that track Bitcoin futures markets), you can’t do so at Vanguard.
In an email, Karyn Baldwin, a spokeswoman, said: “We also have no plans to offer Vanguard Bitcoin ETFs or other cryptocurrency-related products.” Instead, she said, Vanguard “focuses on asset classes such as stocks, bonds and cash, which Vanguard views as the building blocks of a well-balanced long-term investment portfolio.”
That makes sense to me. Bitcoin and other cryptocurrencies are not a legitimate asset class, at least not yet. Publicly traded Bitcoin companies are. I can live with that weirdness.
In short, while new ETFs may help the companies involved with them and may grow interest in Bitcoin, Bitcoin is still not important to serious individual investors.
Nothing the SEC has done this month has changed that.
That doesn’t mean you should avoid Bitcoin. Having a few can be fun and profitable. But I would make the same statement about buying lottery tickets, spending afternoons at a casino, placing online bets on your favorite sports team, or buying shares of Inverse Cramer Tracker.
If you can afford to spend your money on entertainment like these, have fun. But don’t fool yourself into thinking you’re making a solid long-term investment.
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