Bitcoin ETFs: Do they have a place in your portfolio?
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On January 10, 2024, the Securities and Exchange Commission (SEC) approved listing eleven spot Bitcoin ETFs. This paved the way for easier access to investing in Bitcoin. But what are spot Bitcoin ETFs? And should you use them in your portfolio?
What is a Bitcoin ETF?
Exchange Traded Funds (ETFs) are an investment vehicle consisting of a basket of underlying investments pooled together to achieve a desired outcome. Some common ETF strategies include tracking the S&P 500 or a broad market bond index.
ETFs were first created in the early 1990s and, as of September 2023, had a whopping $7.2 trillion of U.S. investor assets, according to Morningstar data. So, the vehicle itself is not a new concept.
These spot Bitcoin ETFs aim to mimic the performance of Bitcoin itself. The ETFs will do this by simply purchasing Bitcoin (i.e., the underlying holding of the ETFs is Bitcoin). Therefore, if the spot price of Bitcoin increases, you would expect these investments to do the same and vice versa.
It’s important to note that a handful of Bitcoin ETFs were trading before the SEC’s decision. However, those funds utilized Bitcoin futures contracts rather than Bitcoin itself. Some investor frustration occurred because their performance could stray from Bitcoin’s.
Pros of Bitcoin ETFs
With any investment comes pros and cons. Let’s look at some of the pros of Bitcoin ETFs.
Easier access: ETFs allow everyday investors to buy and sell Bitcoin exposure as easily as a stock. You can purchase these in your brokerage account, Roth IRA, Traditional IRA, etc. at most common custodians. Many custodians charge $0 transaction fees when trading ETFs.
Ongoing Fees: In many circumstances, it will be cheaper for investors to buy and sell Bitcoin through an ETF than on a cryptocurrency exchange. Currently, the ETF expenses range between 0.0% to 1.5%. (Some of the ETFs offer an introductory 0% expense, which will sunset in the next three to twelve months). The fee spread among these ETFs will likely tighten over the coming months/years as competition ensues. Fees on a platform like Coinbase will vary depending on the size of your transaction but typically range between 0.5% to
4.5% per trade.
Safety: It is still too early to know, but exposure to Bitcoin ETFs seems safer than holding it directly. It lowers the probability of having your Bitcoin stolen, hacked, or losing your password.
Cons of Bitcoin ETFs
Let’s look at some of the cons of Bitcoin ETFs.
Currency: One appeal that Bitcoin has is its ability to be used as a form of currency. You could use it to purchase goods or transfer to another individual. This will not be possible if you own a Bitcoin ETF.
Volatility: Bitcoin is already a very volatile investment. Introducing a wave of new investors into the asset with ease of trading will likely only add to more volatility as they buy, sell, and speculate.
No Direct Exposure: Some people like the thought of holding Bitcoin directly in an online wallet, which gives you more flexibility of use. This is similar to how some people prefer to hold gold bullion instead of a gold ETF.
Limited Trading: Bitcoin trades 24/7, but the ETFs will only trade during market hours.
Should they be in your portfolio?
Although the approval of these ETFs is a major improvement for this space, they are still speculative assets and, thus, will continue to be volatile. Adding Bitcoin ETFs doesn’t change our overall philosophy of holding Bitcoin: it is a speculative asset and should be treated as such.
Any investment should be made with the understanding that loss could occur. However, if you are comfortable with the risks and feel strongly that Bitcoin is a good investment, then a Bitcoin ETF might be a good option compared to holding it directly. As with any investment, be mindful of the size of the position relative to your overall portfolio to avoid concentration or overexposure.
Summary
The addition of Bitcoin ETFs to the investment landscape is a huge development. While additional changes and regulations for Bitcoin ETFs are probably on the horizon, it also raises the question: Will the SEC approve other cryptocurrency ETFs? That doesn’t seem likely in the short term, but time will tell. For now, be sure you do your due diligence when choosing which ETF to use for Bitcoin exposure—or whether you want that exposure at all.
Austin Stagman, CIMA®, is a Portfolio Manager with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Austin at astagman@bedelfinancial.com.