Exchange-traded funds come in many shapes and sizes. Some are plain vanilla, diversified index funds that let you invest across entire stock and bond markets, and are excellent core holdings for most people.
Then there are quirky, narrowly focused ETFs like the Inverse Cramer Tracker, which enables you to bet against CNBC television host Jim Cramer’s stock picks. The fund is legal, approved by the Securities and Exchange Commission – and has been losing money since its inception last year. Betting against Jim Cramer is not a great investment strategy.
Nor is there any fear of losing. As yet FOMO The main reason to invest money in Bitcoin is that Bitcoin remains highly speculative, difficult to classify, and without an immediately recognizable economic function.
The SEC this month approved 11 new ETFs that track the price of Bitcoin, and the decision has been heralded by Bitcoin promoters – and new funds – as a significant event that will further establish Bitcoin as an asset class. Makes it valid as.
I do not think so.
The SEC’s action, in itself, does not give Bitcoin any new stature. This simply adds Bitcoin funds to a long list of ETFs that are completely legal and easy to buy, but which do not belong in one’s core 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. triple betting on energy prices or quadruple One on the S&P 500. I could go on and on.
Just because it’s legal doesn’t make a strategy sensible for most investors. In fact, when approving the Bitcoin ETF, the agency also issued a clear warning against FOMO investing in so-called digital assets – as it has done many times before.
“Just because other people around you are 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 sense. Until now, it was easy for me to avoid discussing Bitcoin in the context of investing. Why draw attention to something that isn’t true for most people? but now he Major Financial Services Companies As BlackRock, Fidelity, Franklin Templeton, Invesco and Wisdom Tree are beginning to operate Bitcoin ETFs, and make them available to their clients, silence seems unnatural and perhaps irresponsible.
So here goes.
Making sense of bitcoin
I don’t want to dismiss Bitcoin completely.
Granted, it’s possible to make and lose a lot of money 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 complex mathematical code demand respect. The concepts underlying Bitcoin and other so-called cryptocurrencies may have real-world significance at some point and in some way, though perhaps not as much as Bitcoin.
As Brian Armour, who directs research on index fund-based strategies at Morningstar, told me, “Not believing that a Bitcoin ETF is a good investment does not mean that blockchain is not a good or useful technology. Is.”
But Bitcoin itself? He put it politely. “I would say Bitcoin is still in the price discovery phase. We’re still trying to figure out what its value might be.
For large corporations or other large institutional investors who are interested in getting some Bitcoin exposure, the new ETFs may be a better and more convenient option, said Samara Cohen, chief investment officer of ETF and index investing at BlackRock. “This is the beginning of a journey,” she said.
But for normal people who are investing for retirement or important things like a home or child’s education, I would be very careful. collapse The FTX trading platform in 2022 and the fraud and conspiracy conviction of Sam Bankman-Fried just a few months ago are a reminder that Bitcoin is extremely risky. Its future is uncertain, and so is its definition.
To begin with, I find the term cryptocurrency to be a misnomer. These things are not currencies because they cannot be widely exchanged for products and services in the real world. But even if they were currencies, it would not make sense for common people to invest in them. Major corporations hedge against fluctuations in currency values, but most of us invest in assets that have at least the potential to generate income and cash flow – assets that can be bought. with currency.
Then we come to the central claim for the new ETFs – that they are helping to create “an asset class” that “protects you” in times of uncertainty, just as gold did “for thousands of years.” In the words of Laurence D. Fink, President of black Rock, I think this comparison is strained.
Gold is a historical treasure, it actually functions as money, is still held by central banks, has commercial uses in jewelery and industry and has an important cultural role in countries like India. Bitcoin has none of these characteristics.
But in a sense I agree with the comparison. Gold is not a significant part of a modern diversified investment portfolio, which includes stocks, bonds and cash.
Many studies have shown that a small amount of sleep won’t harm you much, but it also won’t help much. In terms of inflation protection, the stock market has performed better than gold over the long run. Now no one needs gold as an investment.
This is also true of Bitcoin, which, in its brief life since its inception during the financial crisis of 2008–9, has not been an effective inflation hedge.
But it is different from gold. Bitcoin adds considerable risk to the portfolios of those who hold it.
A Morningstar study last year by Madeline Hume found that just a 2 percent stake in Bitcoin could transform a conservative stock-bond portfolio into a riskier one. Investors may be attracted to Bitcoin when its price is rising, but be careful: “However, compared to other assets, Bitcoin’s volatility is more kerosene than burning,” the report said.
In a very small way, even without a new ETF, there’s a good chance you already have a Bitcoin exposure in your portfolio.
Most of the new ETFs rely on Coinbase, which calls itself “a trusted and easy-to-use platform to access the broader crypto economy,” for key functions: converting cash into Bitcoin and Bitcoin into cash, storing Bitcoin and the safekeeping, operation of aid funds, and sometimes monitoring of all these.
coinbase is a publicly traded company, and the largest holders of most such companies are mutual funds and ETFs run by giants like Vanguard, BlackRock, State Street, and Fidelity. I checked: My Vanguard workplace retirement accounts include the broad, diversified stock index funds that Coinbase holds.
and that’s not all. These also include small shares of companies like micro strategyWho has a lot of bitcoins. Then there are such companies riot platform And cleanspark who call themselves “Bitcoin miners” – entities that run computers that generate new Bitcoins and keep the Bitcoin universe spinning.
I don’t see any major social purpose for Bitcoin mining. A 2022 White House report says Global electricity consumption for “crypto assets” was greater than “the total annual electricity use of many individual countries such as Argentina or Australia”. This is difficult to justify in the age of global warming.
I’m not happy about it, but I have my share of them and maybe you do too. This is how index fund investing works. You are part of an entire universe of publicly traded companies. On the positive side, if it turns out I’m wrong about Bitcoin, and it really is the next big thing – and, somehow, essential to saving the planet – well, these companies will grow in size, And my portfolio will also swell. It would be a win-win, although I’m not counting on it.
I should say that Vanguard has taken a principled stance against Bitcoin. Its broad index funds own crypto-related companies because these funds own all the companies. But if you want to buy the new Bitcoin ETF — or, as of January 12, the old one tracking the Bitcoin futures market — you can’t do it at Vanguard.
In an email, a spokeswoman, Karin Baldwin, said: “We also have no plans to offer the Vanguard Bitcoin ETF or other crypto-related products.” Instead, he said, Vanguard focuses on “asset classes such as equities, 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 legitimate asset classes, at least not yet. There are publicly traded Bitcoin companies. I can live with that weirdness.
In short, while new ETFs may help the companies associated with them and increase interest in Bitcoin, Bitcoin is still not worth much to serious individual investors.
There is no change in what the SEC has done this month.
This doesn’t mean you should avoid Bitcoin. Owning some can be fun and profitable. But I would make the same statement about buying lottery tickets, spending an evening at a casino, betting online on your favorite sports team – or buying shares of Inverse Cramer Tracker.
If you can spend your money on this kind of entertainment, by all means, enjoy. But don’t assume you’re making a solid long-term investment.