With the recent approval of several Bitcoin exchange-traded funds (ETFs), investors now have a sanctified way to gain exposure to the popular cryptocurrency. Major investment firms like Fidelity and BlackRock have already begun to offer the product. Bitcoin ETFs offer a way to invest in crypto without having to directly own or manage bitcoins yourself. Investors can simply buy shares of the ETF, just like you would any stock or fund. So what does this U.S. SEC approval mean for whether (and how much) crypto belongs in your investment portfolio?
The upside: "Investors who would not want to hold bitcoin themselves or navigate a crypto exchange will now be able to have exposure to 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, but also comes with notable risks. Here is an overview of the potential upsides and downsides of investing in Bitcoin ETFs—but before investing yourself, it's always a good idea to discuss your personal situation with a financial advisor.
Bitcoin ETFs offer the possibility of attractive gains
Bitcoin has demonstrated the ability to deliver incredible returns in short periods of time. Bitcoin ETFs provide exposure to these types of gains without having to deal with the hassle or risks of crypto exchanges and wallets. Given Bitcoin's growing mainstream adoption, and despite periods of market volatility, there will likely be greater demand and higher prices over time. Bitcoin ETFs offer a way to benefit from this potential appreciation. Generally speaking, crypto is seen as a hedge against inflation and as a way to diversify a portfolio away from stocks.
Notable risks of Bitcoin ETFs
ETFs are traded on stock exchanges with prices that vary second by second, just like a stock. Bitcoin in particular is highly volatile and speculative, and the price fluctuates wildly day-to-day. Because Bitcoin ETFs come with the same volatility, they may be best suited for risk-tolerant investors who can ride out a sudden market dip. Such dips could be severe—in 2021, a single bitcoin hit an all-time high of $65,000; over the course of 2022, prices dropped by some 65% to fall below $20,000. As of this writing, the value of a 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, as they operate with custodians and mechanisms to secure assets, but the crypto market itself is still relatively young, and facing regulatory uncertainty. Governments are still grappling with how to regulate cryptocurrencies, and any adverse regulations could severely impact the price of bitcoin and related ETFs.
The choice to invest comes down to your risk tolerance
"ETFs allow people with brokerage accounts to partake in crypto through more traditional means," explains Evander Smart, former Wall Street banker and CEO of Bitcoin University. "But you still need to do your research—this is not just some money grab of the moment."
Crypto can be a lucrative investment if you’re prepared to accept the considerable risks. This is why financial advisors commonly recommend an allocation of just 1-5% crypto in your overall investment portfolio, and only provided that you can afford to lose it all, given the extremely volatile nature of the investment.
The bottom line: Even with this sheen of SEC approval, Bitcoin ETFs primarily suit risk-tolerant investors. Maintaining a balanced portfolio with safer assets is recommended for those who can't tolerate the risk. Before buying, ask yourself if you truly understand how bitcoin works, and whether it aligns with your long-term investing strategy. For those willing and able to stomach the market swings, Bitcoin ETFs could generate rewarding gains. Just buckle up for a bumpy ride.