Exchange-traded funds come in many shapes and sizes. Some are simple, diversified index funds that allow you to invest in entire stock and bond markets, which are excellent core holdings for the vast majority of people.
Then there are quirky, narrowly focused ETFs like the Inverse Cramer Tracker, which lets you bet on CNBC TV host Jim Cramer’s stock picks. The fund is legal, approved by the Securities and Exchange Commission — and has been loss-making since its inception last year. Betting against Jim Cramer is not a great investment strategy.
Nor the fear of losing. However, FOMO is the main reason people put money into Bitcoin, which remains highly speculative, difficult to categorize, and without an immediately identifiable economic function.
This month, the Securities and Exchange Commission approved 11 new ETFs that track the price of bitcoin, and the decision was heralded by bitcoin promoters — and the new funds — as a milestone, legitimizing bitcoin as an asset class.
i don’t think so.
The SEC’s action, in and of itself, does not give Bitcoin any new status. It just adds Bitcoin funds to a long list of ETFs that are perfectly legal and easy to buy, but don’t belong in anyone’s primary wallet. 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 or quadruple a bet on energy prices or quadruple a bet on the S&P 500. I could choose repeatedly. And again.
Just being legal does not make the strategy sensible for most investors. In fact, while approving Bitcoin ETFs, the agency also issued an explicit warning against FOMO investing in so-called digital assets — as it has done several times before.
“Just because others 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 has been easy for me to avoid discussing Bitcoin in an investing context. Why draw attention to something that is inappropriate for most people? But now that major financial services firms like BlackRock, Fidelity, Franklin Templeton, Invesco, and Wisdom Tree are starting to operate Bitcoin ETFs and making them available to their clients, the silence seems unnatural, and perhaps irresponsible.
So here it goes.
Understanding Bitcoin
I don’t want to completely rule out Bitcoin.
It is certainly possible to make – and lose – a great deal of money by buying and selling them. Bitcoin is a serious proposition, in terms of its infrastructure. The use of blockchain, its decentralized peer-to-peer structure, and complex mathematical code demand respect. The concepts involved in Bitcoin and other cryptocurrencies could have real-world relevance at some point, in some way, though perhaps not like Bitcoin.
As Brian Armor, who runs research on index fund-based strategies at Morningstar, told me, “Just because you don’t think Bitcoin ETFs are a good investment doesn’t mean blockchain isn’t a good or useful technology.”
But Bitcoin itself? He said it politely. “I would say bitcoin is still in the price discovery phase. We’re still trying to figure out what it might be worth.”
For large companies or other large institutional investors interested in getting some exposure to bitcoin, new ETFs may be a better, more convenient option, said Samara Cohen, chief investment officer for ETFs and index investments at BlackRock. “It’s the beginning of the journey,” she said.
But for regular people who are investing in important things like retirement, a house, or a child’s education, I would be very careful. The collapse of the FTX trading platform in 2022 and the conviction of Sam Bankman-Fried for fraud and conspiracy just a few months ago are reminders that Bitcoin is extremely risky. Its future is uncertain, as is its definition.
Definition of terms
Just to start, 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 ordinary people to invest in them. Big companies 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 bought. with currency.
Then we get to the central claim of the new ETFs — that they help create an “asset class,” one that “protects you” in times of uncertainty, much as gold has done “for thousands of years,” in the words of Lawrence D. Fink, the head of BlackRock. I think this comparison is strained.
Gold has a historical character, has actually been used as money, is still held by central banks, has commercial uses in jewelry and industry, and has an important cultural role in countries like India. Bitcoin has none of these attributes.
But I agree with this comparison in some sense. Gold is not an important part of a diversified modern investment portfolio, which contains stocks, bonds and cash.
Many studies have shown that small amounts of gold may not hurt you much, but they won’t help you much either. The stock market has performed better over the long term than gold as an inflation hedge. No one needs gold as an investment now.
This applies to Bitcoin as well, which, during its short life since its inception during the financial crisis of 2008-2009, has not been an effective inflation hedge.
But it is different from gold. Bitcoin has added significant risk to the portfolios of those who hold it.
A study last year by Morningstar’s Madeleine Hume found that owning as little as 2 percent of bitcoin can turn a conservative stock-bond portfolio into a much riskier one. Investors may be attracted to Bitcoin when its price rises, but beware: “However, compared to other assets, Bitcoin’s volatility is more kerosene than kindling,” the report states.
Already exposed
In a very small way, even without new ETFs, there’s a good chance you already have exposure to Bitcoin in your portfolio.
Most new ETFs rely on Coinbase, which calls itself a “reliable, easy-to-use platform for accessing the broader cryptocurrency economy,” to perform important functions: converting cash to Bitcoin and Bitcoin to cash, storing and custodizing Bitcoin, and assisting. In monitoring the Fund’s operations, and sometimes all of these operations.
Coinbase is a publicly traded company, and the largest holders of most of them are mutual funds and ETFs managed by giants like Vanguard, BlackRock, State Street, and Fidelity. I checked: My Vanguard retirement accounts at work include broad, diversified stock index funds that contain Coinbase.
And that’s not all. They also include penny stocks from companies like MicroStrategy, which owns a lot of bitcoin. Then there are companies like Riot Platforms and CleanSpark that call themselves “bitcoin miners” — entities that run the computers that generate new bitcoin and keep the bitcoin world spinning.
I don’t see much social purpose for Bitcoin mining. A 2022 White House report stated that global electricity consumption for “cryptoassets” is 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 an interest in it, and you probably will too. This is how investing in index funds goes. You own a part of the world 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, in some way, necessary to save the planet — well, these companies will grow in size, and my portfolio will grow. It will also swell. It would be a win-win, although I wouldn’t count on it.
I should point out that Vanguard has taken a principled stance against Bitcoin. Broad index funds own companies in the cryptocurrency space because these funds own all of the companies. But if you want to buy new Bitcoin ETFs — or older funds that track the bitcoin futures markets as of January 12 — you can’t do that at Vanguard.
“We also have no plans to offer Vanguard Bitcoin ETFs or other cryptocurrency-related products,” Karen Baldwin, a company spokeswoman, said in an email. Instead, Vanguard “focuses on asset classes such as stocks, bonds and cash, which Vanguard views as the building blocks of a balanced, long-term investment portfolio,” she said.
This seems logical to me. Bitcoin and other cryptocurrencies are not considered a legitimate asset class, at least not yet. Publicly traded Bitcoin companies are. I can live with that weirdness.
In short, although new ETFs may help the companies involved in them and may cause interest in Bitcoin to grow, Bitcoin is still not important to serious individual investors.
And nothing the SEC did this month changed that.
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 evenings at the casino, betting online on your favorite sports team – or buying Inverse Cramer Tracker stock.
If you can spend your money on entertainment like this, by all means enjoy. But don’t kid yourself that you’re making a solid long-term investment.
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