Exchange-traded funds come in many shapes and sizes. There are also run-of-the-mill diversified index funds that can invest across the stock and bond markets, making them a good core asset for most people.
There are also quirky, narrowly focused ETFs like the Inverse Cramer Tracker, which lets you bet on CNBC television host Jim Cramer's stocks. The fund is legal and approved by the Securities and Exchange Commission and has suffered losses since its inception last year. Betting on Jim Cramer is not a great investment strategy.
There is no fear of missing out on opportunities. However, FOMO is the main reason for putting money into Bitcoin, which remains highly speculative, difficult to classify, and has no readily identifiable economic function.
The SEC approved 11 new ETFs this month to track the price of Bitcoin, a decision hailed by Bitcoin and new fund advocates as a significant milestone in legitimizing Bitcoin as an asset class.
i don't think so.
The SEC's action itself does not give Bitcoin new status. This just adds Bitcoin funds to the long list of ETFs that are completely legal and easy to buy, but don't belong in anyone's core portfolio. I would invest in ETFs that track single stocks like Tesla, PayPal, or Nvidia, or that use leverage to triple your bet on energy prices or quadruple your bet on the S&P 500, as well as Inverse Cramer. I think I would put Tracker in this category. On and on.
Merely being legal does not make a strategy a smart one for most investors. Indeed, while approving the Bitcoin ETF, the authorities also issued a clear warning against FOMO investing in so-called digital assets, as they have done many times before.
“Just because others may be in favor of this type of opportunity doesn't mean you should be,” said Lori Schock, director of the SEC's Office of Investor Education and Advocacy. Not,” he said.
However, the approval of a new Bitcoin fund by a government agency changes the situation in one important way. Up until now, it has been easy for me to avoid discussing Bitcoin in an investment context. Why pay attention to something that is inappropriate for most people? But major financial services companies like BlackRock, Fidelity, Franklin Templeton, Invesco, and Wisdom Tree are launching Bitcoin ETFs. But now that customers are starting to make it available, silence seems unnatural and perhaps even irresponsible.
So here we go.
I don't intend to completely deny Bitcoin.
Indeed, 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, decentralized peer-to-peer structures, and complex mathematical code requires respect. The concepts built into Bitcoin and other so-called cryptocurrencies may not be as important as Bitcoin, but at some point, they may become important in the real world in some way.
Brian Armor, who leads research on index fund-based strategies at Morningstar, said: “Not believing that Bitcoin ETFs are a good investment doesn't mean that blockchain is a good or useful technology.'' That's not to say there aren't,” he told me.
But what about Bitcoin itself? he said politely. “I think Bitcoin is still in the price discovery stage. We are still figuring out how much it is worth.”
Samara Cohen, chief investment officer of ETF and index investing at BlackRock, said the new ETF could be a better and more convenient option for large companies and other large institutional investors interested in exposure to Bitcoin. He said that there is a sex. “It’s the beginning of a journey,” she said.
But for the average person investing in important things like retirement, housing, and children's education, I would be very cautious. The 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 dangerous. Its future is uncertain, and so is its very definition.
Definition of terms
First of all, I think the term cryptocurrency is a misnomer. These are not currencies because they cannot be widely exchanged for goods and services in the real world. However, even if it were a currency, there would be no point for ordinary people to invest in it. While major corporations hedge against fluctuations in currency values, most of us invest in assets that at least have the potential to generate income and cash flow – assets that can be purchased. and currency.
And that brings us to the new ETF's central claim. The idea is that gold is helping to create an “asset class” that “protects you” in times of uncertainty, just as it has done “for thousands of years.” Lawrence D. Fink, Chairman of BlackRock; I think this comparison is strained.
Gold has a historical reputation, has actually served as money, is still held by central banks, has commercial uses in jewelery and industry, and plays an important cultural role in countries like India. I am. Bitcoin has no such attributes.
But in a way I agree with this comparison. Gold is not an important element in a modern diversified investment portfolio that includes stocks, bonds, and cash.
Numerous studies have shown that while small amounts of gold may not do much harm, they also don't do much good. As an inflation hedge, stock markets have fared better than gold over the long term. No one needs gold as an investment these days.
This also applies to Bitcoin, which has failed to act as an effective inflation hedge in its short life since its creation during the 2008-2009 financial crisis.
But it's different from money. Bitcoin adds considerable risk to the portfolios of those who hold it.
A Morningstar study by Madeline Hume last year found that owning just 2% of Bitcoin can transform a conservative stock and bond portfolio into a much riskier portfolio. Investors may be tempted by Bitcoin's rising price, “but compared to other assets, Bitcoin's volatility is more like kerosene than oil,” the report said.
has already been exposed
Although it's very small, there's a good chance you already have exposure to Bitcoin in your portfolio, even without a new ETF.
Most of the new ETFs offer key features such as cash-to-Bitcoin conversion, Bitcoin-to-cash conversion, Bitcoin storage and custody, and support as “a reliable way to access the broader crypto economy.'' It relies on Coinbase, which bills itself as an “easy-to-use platform.” Oversee the operation of the fund and, in some cases, all of these.
Coinbase is a publicly traded company, and the largest holders of such companies are mutual funds and ETFs run by major companies such as Vanguard, BlackRock, State Street, and Fidelity. Just checked: My Vanguard workplace retirement account includes a broad diversified stock index fund that holds Coinbase.
That's not all. These include small stakes in companies like MicroStrategy, which own large amounts of Bitcoin. Additionally, there are companies like Riot Platforms and CleanSpark that call themselves “Bitcoin miners.” This is the organization that runs the computers that generate new Bitcoins and keep the Bitcoin world spinning.
I don't think Bitcoin mining has any major social purpose. A 2022 White House report said that “cryptoassets” consume more electricity globally than “the combined annual electricity use of many individual countries, such as Argentina and Australia.” That's hard to justify in an era of global warming.
I'm not happy about this, but I have a vested interest in them, and perhaps you do too. That's how index fund investing works. You control a piece of the entire world of public companies. On the positive side, if I turn out to be wrong about Bitcoin and it turns out that Bitcoin really is the next big thing and is somehow needed to save the planet, then these companies It will grow in size and my portfolio will grow as well. It also swells. It would be a win-win, but I'm not counting on it.
I would like to point out that Vanguard takes a principled position on Bitcoin. Its broad index fund owns companies related to cryptocurrencies. Because these funds own all the companies. However, if you want to buy a new Bitcoin ETF or, as of January 12th, an older ETF that tracks the Bitcoin futures market, you can't do so on Vanguard.
“We also have no plans to offer the Vanguard Bitcoin ETF or any other crypto-related products,” spokeswoman Karin Baldwin said in an email. Instead, Vanguard “focuses on asset classes such as stocks, bonds, and cash, which Vanguard views as components of a balanced long-term investment portfolio,” she said.
That makes sense to me. Bitcoin and other cryptocurrencies are not legitimate asset classes, at least not yet. Companies that list Bitcoin are listed. I can live with that strangeness.
In other words, while the new ETF may help the companies involved and increase interest in Bitcoin, Bitcoin remains irrelevant to serious retail investors.
The SEC's actions this month change nothing.
That doesn't mean you should avoid Bitcoin. Owning a few can be fun and profitable. But I'd say the same thing about buying a lottery ticket, spending a night at the casino, betting online on your favorite sports team, or buying Inverse Cramer Tracker stock.
If you have money to spend on this kind of entertainment, go for it. But don't kid yourself that you're making a solid long-term investment.