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Bitcoin ETFs: Should You Invest?

Bitcoin ETFs Are Now Available

Cryptocurrency dominated TV commercials and the media sphere a couple of years ago. The number of times we heard that Bitcoin was the new gold, FTX was a safe haven, and that cryptocurrency was not a security subject to regulators' whims was plentiful. But oh my, have the times changed.

While many still clamor that Bitcoin is the new gold, FTX collapsed in a scandal for the ages, and the US Securities Exchange Commission (SEC) has begun reining in the vast number of exchanges that dabble in cryptocurrency to ensure compliance with securities laws.

But while the crypto-sphere has faced many reckonings in the past two years, they do have news to celebrate: the approval of several exchange-traded products that track the spot price of bitcoin by the SEC.

Such approval is a big step forward for the legitimacy of Bitcoin since investors can now access a regulated cryptocurrency-esque product through their broker of choice. However, as the SEC stated in their approval notice, Bitcoin is still not comparable to gold exchange-traded products:

"Though we're merit neutral (on investment products), I'd note that the underlying assets in the metals ETPs (like gold) have consumer and industrial uses (such as in electronics), while in contrast bitcoin is primarily a speculative, volatile asset that's also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing." SEC

With Bitcoin ETPs now available in the market, bitcoin has surged by 40% in 2024. According to some, "The current rally was triggered mostly by the successful launch of US exchange-traded funds that hold the coins—vehicles that have attracted more than $6 billion since they began trading Jan. 11. But at the heart of this particular rally is a simple tenet of economics: Supply and demand. The surge in demand for the cryptocurrency resulting from new ETFs is vastly outstripping the supply of new tokens being created in the mining process, as well as the Bitcoin long-time holders are willing to sell. That is what's set the crypto market on fire of late.David E. RovellaBloomberg

However, despite Bitcoin's surging value and popularity, it is important to understand that the SEC did not approve or endorse Bitcoin itself as an investment vehicle. Rather, they approved products that own and store Bitcoin for investors:

"While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.SEC

How Spot ETFs Work

Spot Bitcoin exchange-traded products work by having the custodian of the product or fund go out and purchase a multitude of Bitcoins. These are then stored in a secure wallet that the custodian of the investment manages. 

With ETFs, the custodian/fund manager then issues shares in the fund that track the real-time price of the Bitcoin held during regular market hours. 

Should Bitcoin increase in value by 10%, the Bitcoin ETF will rise by the same amount. Meanwhile, if Bitcoin drops by the same amount, so will the ETF. However, once the market closes for the day, these products will only change with the price of Bitcoin once the market reopens. While Bitcoin ETFs still provide consumers with liquidity, they do not offer the same 24-hour liquidity of individual Bitcoin ownership. 

Another stark contrast between Bitcoin ETFs and individual Bitcoins is storage. With ETFs, consumers can outsource the secure storage of their coin ownership to a fund that will likely be greater than they could replicate easily on their own. Additionally, by purchasing Bitcoin through a fund, investors will save substantially on transaction costs that are often high on many crypto exchanges.

A Word Of Caution

While Bitcoin is now easier than ever for investors to safely access when it comes to buying, storing, and selling, these ETFs do not change the underlying risk that Bitcoin is speculative. Unlike gold, which has viable uses by industry, or stocks, which have underlying fundamentals and tangible assets, Bitcoin and the broad cryptocurrency industry are still in their infancy without extensive adoption. Yes, Bitcoin or other digital currencies could go up in value, but they could also go down, as with other innovative technologies and companies. 

At Lundeen Abrams Advisors, we believe in a diversified investment strategy that meets our client's specific needs. While Bitcoin is alluring, given its past explosive growth, it is our responsibility to ensure that we are helping our clients by putting their money to work in sound investments. If you need a financial review, please get in touch with us today so we can schedule a consultation. 

We are here to help!

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