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It's official. The Securities and Exchange Commission on Wednesday gave the green light to the listing and trading of 11 Bitcoin exchange-traded funds (ETFs). And they're going to be online soon, and some of them are starting to come online. Thursday trading.
So, if you're interested in investing in Bitcoin, an SEC-regulated product reduces the technical and cybersecurity risks associated with investing directly in Bitcoin.
But before you jump on the Bitcoin bandwagon, there are a few things to consider.
Understand what Bitcoin is and what it is not
It is important to understand what kind of asset Bitcoin is.
Bitcoin is not tied to anything tangible like a company's goods or natural resources.
And it is not legal tender in the US or most other countries. The U.S. Department of the Treasury's Financial Crimes Enforcement Network characterizes the Financial Crimes Enforcement Network as a “medium of exchange that functions like currency in some circumstances.”
But in the eyes of cryptocurrency proponents and some traditional asset managers like Fidelity, this is a bet on the future of an increasingly digital world that is limited and therefore The bet is that it will retain its value longer than any other cryptocurrency. In terms of numbers. Its creator designed it so that the number of Bitcoins available is finite.
“Bitcoin is best understood as a monetary good…because it is the most secure, decentralized, and sound digital money (compared to other digital assets),” Fidelity said in a recent report. Stated. “Other projects and blockchain networks that need to make users believe that they are transacting with tokens that have real monetary value have no direct or indirect interest in Bitcoin as an ultimate monetary good. It's likely you'll need to connect.”
Given the lack of protection, backup, and regulatory oversight for wallets and cryptocurrency exchange custodial accounts, being able to invest in Bitcoin through an SEC-regulated exchange-traded fund may be appealing to some. unknown.
For example, blockchain data researcher Chainanarise reported that in 2023, digital wallet owners were scammed out of millions of dollars through phishing scams, giving scammers permission to use the digital tokens in their wallets. In 2021, the New York Times published a report showing how crypto investors lost access to their crypto holdings after forgetting their digital wallet codes. And investors have learned the hard way about the lack of consumer protection when crypto exchanges run into trouble, such as the collapse of Sam Bankman Fried’s FTX.
One of the benefits of investing in any type of ETF, including Bitcoin, is that you can store your ETF with a registered broker-dealer that is a member of the nonprofit Securities Investor Protection Corporation and insured by SIPC. That means you can get up to $500,000 of protection if something goes wrong with your brokerage. Someday I'll go bankrupt.
In addition, “newly approved items” are [are trading] It trades on established and trusted exchanges (CBOE, NASDAQ, NYSE) and is generally more stable and secure than cryptocurrency exchanges. … [And] “Having access to Bitcoin in ETF form means investors can easily add Bitcoin to a diversified portfolio and monitor it without the need for a separate account.” President Alex Michalka said. Wealthfront said in an email.
Additionally, Bitcoin ETFs make it easier for financial advisors to access cryptocurrencies for clients who can afford to invest in alternative asset classes.
But make no mistake, the price of Bitcoin fluctuates just as much whether you invest directly on your own or through an ETF.
“Over the past five years,[Bitcoin's]volatility has increased four times as much as Bitcoin.” [the] “The stock market,” said Brian Armor, director of passive strategies research at Morningstar. “The exposure is the same. …It’s still Bitcoin.”
The price of Bitcoin has fluctuated wildly over the years. For example, it hit an all-time high of nearly $69,000 in November 2021, but fell below $17,000 in the “crypto winter” of 2022, with prices reaching almost $45,000 heading into the SEC's decision. It is trading at a higher price than the dollar. As of noon Thursday, it was about $46,000.
Furthermore, the cryptocurrency market is notorious for being subject to price manipulation and criminal activity.
Better Markets, a nonprofit organization that advocates for stronger investor protections, strongly opposes the SEC's approval of Bitcoin ETFs. Among the naysayers is that the Bitcoin market has a history of artificially inflating trading volumes, known as “wash” trading, which can give the appearance of more investor interest than there actually is. And there remains uncertainty as to whether the SEC's efforts to increase transparency in the Bitcoin trading market, which is not regulated by the SEC, will provide adequate protection to retail investors.
Investment companies approved to offer Bitcoin ETFs are in fierce competition for investor funds. All but one company is offering very low administration and management fees, and will waive fees for several months.
But none of that should influence your decision to invest in the first place. Your financial goals, risk tolerance, and time horizon are important factors in evaluating whether it's worth putting your money into a Bitcoin ETF.
Frankly, “it's not for the faint of heart,” Armor says. “There's no way to fundamentally assess where prices should be set. It's up to the vagaries of supply and demand.”
Certified Financial Planner Alex Lozano believes clients should take as much risk on their investments as necessary to achieve their goals.
Given that Bitcoin ETFs are likely to be considered speculative investments, Lozano said, “I don't recommend them.” [it]unless [investors] You could lose your investment or hold it for too long. ”
If you decide to invest in Bitcoin ETFs, Certified Financial Planner Trent D. Porter recommends keeping Bitcoin ETFs under 3% of your total portfolio. Also, if you typically invest in a platform that automatically rebalances your portfolio, make sure that the system does not rebalance your holdings based on your Bitcoin investment.
“Even a small percentage of a Bitcoin fund can cause large swings in the overall portfolio,” Porter said. “As an extreme example, if Bitcoin goes to zero, the automated system will continue to rebalance into the fund until the entire portfolio is gone.”
