Bitcoin ETFs shouldn’t excite you … yet

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This week’s financial headline is the introduction of the very first bitcoin-linked exchange-traded fund, which debuted on Tuesday.

The ProShares Bitcoin Strategy ETF (ticker: BITO) is a possible game changer and can be viewed in a number of ways, but it is not the bitcoin fund that investors have been waiting for and hoping for.

Many investors are not at all interested in bitcoin and cryptocurrency, but it is undeniable that crypto is increasingly accepted by the community of financial advisers, who have historically had heavy thoughts when it comes to it. is something new and different. Traditional financial advisers have become increasingly comfortable with the idea that ordinary investors view cryptocurrency as an asset class, part of a broadly diversified portfolio strategy.

Bitcoin sharpies and traders – the true believers who fueled the crypto investing craze – have been going all-in for years and have the big profits to show for it. But Main Street investors weren’t so intrigued with an asset that they couldn’t easily buy into their standard brokerage account, and it involved a special electronic wallet or trading platform to add a small position.

The long-awaited solution is of course to make bitcoin available in the form of traditional mutual funds or exchange-traded funds. While there have been a few crypto-oriented funds, they haven’t actually invested in the currencies themselves; options such as the Bitwise Crypto Industry Innovators ETF (ticker BITQ) are akin to buying gold mining companies to gain exposure to gold, sensitive to asset price fluctuations, but not the same as holding gold. the asset itself.

Unlike gold and precious metal ETFs such as SPDR Gold Shares (GLD), which invest in the physical metal, a fund has no way of buying and storing “physical” bitcoin; crypto is ethereal, not tangible, and if you can’t touch it, the Securities and Exchange Commission doesn’t know how a fund that buys and sells an unregulated asset will react.

So while investors want funds that trade crypto at the spot price of bitcoin, what they are getting instead is what the SEC is currently willing to allow.

Bitcoin futures, as opposed to actual cryptocurrency, are already regulated and traded on an exchange, which addresses some of the top concerns of regulators about the potential for fraud and market manipulation.

Judging by past SEC statements on the matter, the ProShares fund – and a host of others that are in the works and likely to be marketed in the weeks and months to come – are more “allowed” than ‘”Approved”.

An ETF built on buying crypto and tied to the spot price or the market price is still a long way off.

Yet with the ProShares fund in the news, the question most investors are asking is whether it belongs in their portfolios.

Start answering this question in your own headspace rather than in the fund market.

Cryptocurrency remains a very volatile asset class. In terms of investing, this is still new, and there are valid fears on the part of skeptics wondering what, exactly, determines its market value and whether that value can be maintained.

Historically, investors have struggled with volatile asset classes, buying and selling at the wrong time; they are excited by gains and defeated by declines and the resulting performance is disappointing even when the underlying asset appreciates in value.

ETFs will make it easier to drive with crypto, but if you’re not ready to go for the long haul, it’s probably not worth it.

The chatter under the headlines about the ProShares fund was about the structure of futures contracts; that’s a legitimate concern, but considerably less important than just deciding if you want crypto now.

However, you need to know how a term fund will work and the potential hot spots.

Futures funds typically focus on “first month” futures, those with the closest expiration date, with some leeway to exit for longer. When these contracts expire, the money must be reinvested; if the price of bitcoin skyrockets, the price of future futures will be much higher than what a fund owns, meaning that the fund will steadily and consistently sell low and buy high.

At worst, the price curve will “contango”, a situation in which money can be lost by simply trying to maintain exposure to the underlying commodity (in this case bitcoin).

This is how a futures fund sometimes deviates from spot prices, which has been seen in the past with volatile ETFs trading oil and natural gas futures.

Another concern for a hot futures fund is that there is a limit on the number of futures that these funds can hold; if funds were to run into this limit and stop issuing new shares as a result, ETFs could trade at a premium to their underlying net asset value. Sounds good, but it’s usually not for too technical reasons to cover here.

If this all sounds complicated – even if cryptocurrency looks attractive as an alternative asset in your wallet – the right strategy might be to wait a bit longer.

One thing is clear about cryptocurrency: it is not going to go away, and with the registration funds of Ark Invest, VanEck, Valkyrie Digital Investments and many more – as well as the efforts of Grayscale Investments to transform its Grayscale Bitcoin Trust in ETF – there will be many more options to choose from in the near future.

Over time, investors can expect some resolution to enable a fund that also trades at the crypto’s spot price.

But no one needs to rush into these issues to be “the first”. Crypto has been around for over a decade now – bitcoin was created in 2009 in the wake of the financial crisis of the previous year – so unless you are one of the first to embrace the revolution, the revolution has begun. without you.

If cryptocurrency has become an asset class that will be considered for a small portion of the average investor’s portfolio – and it is – and you are considering it, wait for the tools to develop, mature, and prove something before taking the risk.

Chuck Jaffe: [email protected]; on Twitter: @MoneyLifeShow. Chuck Jaffe is a nationally unionized financial columnist and host of “Money Life with Chuck Jaffe”. Log on to moneylifeshow.com.

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