Do Bitcoin ETFs Mean It's Now Time to Invest in Crypto?
February 1, 2024
The first ever Bitcoin (BTC) exchange traded funds (ETFs) have finally been approved by the SEC! We expect many more will follow. Unlike previously available Bitcoin ETFs, which are derivatives, these newly launched ETFs hold – and are directly tied to – the price of bitcoin. However, an SEC approval is not an endorsement. Rather, it is a regulatory clearance to invest in these ETFs. For the first time, investors can invest in this popular cryptocurrency via an ETF, versus a crypto specific exchange or a digital wallet. While these bitcoin ETFs make it easier to invest, that doesn’t mean that you now should. There are benefits to an ETF structure, but Bitcoin has the same risk-versus-reward characteristics that it had before these SEC approvals.
The Pros & Cons of a BTC ETF
Bitcoin ETF approvals by the SEC make it a lot easier to invest. A crypto exchange requires a separate account and some exchanges have had fraudulent histories (most notably FTX). Digital wallets are generally considered more secure but are too complex to establish for the everyday investor. With a Bitcoin ETF, investors can use their existing brokerage or custodian account to invest.
Investors should be reminded, however, that without a digital wallet, they won’t be able to transact in commerce with their bitcoin coin. They will only be able to hold it as a store of value investment. Unlike digital wallets, ETFs also have fees associated with holding them. For example, the fees for owning an S&P 500 ETF are as low as 0.05%, but the recently approved BTC ETFs range from 0.20% to 0.95%.
An ETF is a plus for institutional investors who require the regulation, auditing, and tracking that was lacking for cryptocurrencies in exchanges or wallets. An increase in institutional investors will create more demand. Since the quantity of possible BTCs is finite, this will likely increase its value over time.
Is BTC now a good investment?
At any point in time, there have been as many proponents as there are naysayers regarding the future of Bitcoin. We just don’t know which half is right! BTC has historically performed better in a declining interest rate environment, which 2024 is starting out to be. Then, there are other tailwinds which could boost its value longer term.
Most importantly, the BTC halving is expected early this year. This event occurs about every four years, when the reward for mining BTC is cut in half. Historically when halvings have occurred it has decreased the cryptocurrency’s supply and – as a result – increased its value.
BTC could also benefit longer term by the adoption of the blockchain (which it operates upon) by application developers and their use of Bitcoin, also known as Web 3. These developments along with the advent of the newly announced ETFs should further drive up demand and therefore, its value.
Bitcoin is still . . . Bitcoin
Despite the benefits of a crypto ETF, BTC remains one of the riskiest among all publicly available investments. Unlike stocks of companies, which have the intrinsic value of the underlying assets that they own (land, plants, people, patents, cash, etc.), BTC is only based on what someone else is willing to pay for it.
In the last six months, in anticipation of the SEC’s approval of bitcoin ETFs, BTC’s value has nearly doubled. BTC is now at a two year high. In the 24 hours following the SEC’s approval, BTC ETFs ran up ever further, closing on average <25%. With such a run up in value, short-term minded investors might find it difficult to make a quick profit from investing in these newly announced ETFs.
Longer term investors need to be concerned with more macro-economic factors. BTC has proven to be highly sensitive to interest fluctuations, which makes it very volatile. Bitcoin has not historically been a hedge against inflation, unlike gold.
For the foreseeable future, it remains primarily a store of value, not functional currency. The blockchain it is built on is still too slow to use for consumer transactions. BTC can only process seven transactions per second versus high speed networks like Visa’s at 24,000 per second. While new technologies could change this, they are still very speculative.
In addition, there are regulatory concerns. BTC is decentralized, meaning it is not coordinated by a country’s central banking authority. There will likely be increased regulation of its use, and it could be subject to some countrywide bans – all of which could impact its supply, demand, and price.
Should you press the Bitcoin ETF easy-button?
Investing in any asset is a personal decision, based on one’s individual risk-versus-reward preferences. A highly speculative investment within a highly diversified portfolio might be acceptable, as long as the investor understands the risk.
Your financial advisor can help evaluate your current portfolio and assist in determining if a BTC ETF makes sense. They can also cull through the wave of newly approved funds to evaluate the fees, composition of the fund, and its quality.
The bottom line is that BTC still has the same basic risk and reward potential that it had right before this SEC announcement. While there may be reasons that you now want to invest in it, ease of investing should not be one of them.
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This material is for informational purposes only and should not be construed as investment advice. Please consult with your advisor for specifics. It is not a recommendation of, or an offer to sell or solicitation of an offer to buy, any particular security, strategy or investment product. Investing in securities involves risks, including the potential loss of money, and past performance does not guarantee future results. Farther suggests you consult with your tax professional as we do not provide legal or tax advice.
