Spot Bitcoin ETFs Are Here. Should You Buy In?
Last year I wrote about the progress being made on the Bitcoin investment front (https://www.cognizantwealth.com/2023/07/07/is-bitcoin-almost-ready-for-prime-time/). At the time there were only two ways to invest in Bitcoin: through a private exchange or via an ETF holding Bitcoin futures. Last week the SEC authorized eleven spot (current price) Bitcoin ETFs to begin trading. Is this the right time to take the plunge?
For investors, the added regulatory oversight associated with ETFs should provide a much greater level of comfort than having to work through the exchanges. The SEC – which had initially resisted spot ETFs on the grounds that no exchange would reliably be able to detect market manipulation or fraud – changed its stance for two reasons. The first was the loss of a lawsuit brought against them by Grayscale Investments alleging that if futures-based ETFs were allowed, spot ETFs should also be acceptable. The second reason is the “exchanges’ comprehensive surveillance-sharing agreement with the CME [Group],” a well-established derivatives marketplace through which the SEC believes the risk can effectively be managed.
So now that it is easy and presumably safe to invest in spot Bitcoins, should you? There are still two things that concern me. The first is obvious: there are no assets with greater volatility than cryptocurrencies. To cite a few examples: in November 2013 Bitcoin’s price doubled in just twelve days. In February 2014 it had collapsed by 90%. The price grew from about $1,000 to over $19,000 in 2017, after which it plunged to $3,709 by the end of 2018, a 73% loss. According to LazyPortfolioETF.com, over the past ten years Bitcoin has achieved a 50% compound average annual return (CAGR) but with a concomitant 77% standard deviation. Although its returns have been spectacular, that level of volatility is so great that your return can be significantly affected by the specific day and time you choose to purchase it. It makes the 15.2% standard deviation of the S&P 500 over the same period (Source: https://curvo.eu/backtest/en) look miniscule by comparison.
My second concern is the inability to value Bitcoin with any level of accuracy. It has no purpose for anything except speculation. Because it takes about ten minutes for every new block of transactions to be added to Bitcoin’s public blockchain ledger, it’s pretty useless as a broadly-accepted medium of exchange. Imagine if it took that long to produce your receipt every time you used a credit card for a retail purchase. There are other cryptocurrencies such as Etherium that were created to resolve this limitation. Perhaps it might be worth waiting for an Etherium ETF if one ever shows up.
There is also the question of Bitcoin supply. There are currently 19.6 million Bitcoins in existence today with only 1.4 million left to create (the term they use is “mine”). Bitcoin works by paying “miners” with new Bitcoins to manage Bitcoin’s ledger. If the cost of ledger management exceeds the reward once new Bitcoins are no longer available to use as payment, Bitcoin could literally collapse or perhaps get taken over by some centralized organization. Also, as supply diminishes, economic theory suggests that Bitcoin’s price should continue to increase. But its extreme historical volatility indicates that demand must be the overwhelming driver of value since its supply has been continuously decreasing ever since introduction. So its value at any future point in time is dependent on investor sentiment to a substantially greater degree than almost any other investment.
If you have play money available – that is, more money that you need to fully support all your future lifestyle and legacy goals – it might be OK to dabble in one of these new ETFs. If not, caveat emptor!