You Can Now Invest in a Bitcoin ETF, but Is It Worth It?
Thanks to the recent approval of several Bitcoin exchange-traded funds (ETFs), investors now have a sacred way to gain exposure to the popular cryptocurrency. Major investment firms such as Fidelity and BlackRock have already begun offering this product. Bitcoin ETFs offer a way to invest in cryptocurrency without having to directly own or manage Bitcoin yourself. Investors can simply buy ETF shares like any stock or fund. So what does SEC approval mean for whether (and how much) cryptocurrency is included in your investment portfolio ?
The potential: “Investors who wouldn’t want to store Bitcoin themselves or use a cryptocurrency exchange will now be able to access it,” says Ben Weiss, CEO and co-founder of Bitcoin ATM provider CoinFlip . But while this newfound accessibility is an exciting development for Bitcoin investors, it also comes with notable risks. Here’s an overview of the potential pros and cons of investing in a Bitcoin ETF, but before investing on your own, it’s always a good idea to discuss your personal situation with a financial advisor.
Bitcoin ETFs Offer the Potential for Attractive Returns
Bitcoin has demonstrated the ability to generate incredible returns in short periods of time . Bitcoin ETFs provide access to these types of returns without having to deal with the hassles or risks of crypto exchanges and wallets. Given Bitcoin’s growing mainstream adoption and despite periods of market volatility, there will likely be more demand and higher prices over time. Bitcoin ETFs offer a way to benefit from this potential appreciation. Generally speaking, cryptocurrency is seen as a hedge against inflation and a way to diversify a portfolio away from stocks.
Notable Risks of Bitcoin ETFs
ETFs are traded on stock exchanges and prices change every second, just like stocks. Bitcoin in particular is highly volatile and speculative, with the price fluctuating wildly from day to day. Because Bitcoin ETFs have the same volatility, they may be best suited for risk-tolerant investors who can weather a sudden market drop. Such drops can be severe: in 2021, one Bitcoin will reach a record high of $65,000; During 2022 , prices fell approximately 65% and fell below $20,000 . At the time of writing this article, the value of Bitcoin is hovering in the $43,000 range.
There are also security risks associated with Bitcoin itself. Exchanges can be hacked, leading to theft of funds. Bitcoin ETFs mitigate this risk somewhat because they work with custodians and asset protection mechanisms, but the cryptocurrency market itself is still relatively young and faces regulatory uncertainty. Governments are still trying to decide how to regulate cryptocurrencies, and any unfavorable regulations could seriously affect the price of Bitcoin and related ETFs.
The choice of investment depends on your risk tolerance.
“ETFs allow people with brokerage accounts to participate in cryptocurrency in more traditional ways,” explains Evander Smart, a former Wall Street banker and CEO of Bitcoin University. “But you still need to do your research—it’s not just a short-term cash grab.”
Cryptocurrency can be a profitable investment if you are willing to accept significant risks. This is why financial advisors typically recommend allocating just 1-5% of cryptocurrency to your overall investment portfolio and only if you can afford to lose it all, given the highly volatile nature of investments.
Bottom line: Even with the glow of SEC approval, Bitcoin ETFs are primarily suited to risk-tolerant investors. Maintaining a balanced portfolio with safer assets is recommended for those who cannot tolerate risk. Before you buy, ask yourself if you really understand how Bitcoin works and if it fits with your long-term investment strategy. For those willing and able to weather market fluctuations, Bitcoin ETFs can provide significant returns. Just buckle up for a bumpy ride.