Exchange-traded funds come in many shapes and sizes. Some are plain vanilla, diversified index funds that let you invest in the entire stock and bond markets, and are excellent core holdings for the great majority of people.
Then there are the quirky, narrowly focused E.T.F.s like the Inverse Cramer Tracker, which enables you to bet against the stock picks of the CNBC television host Jim Cramer. The fund is legal, approved by the Securities and Exchange Commission — and a money-loser since its inception last year. Betting against Jim Cramer just isn’t a great investing strategy.
Neither is fear of missing out. Yet FOMO is the main reason for putting money into Bitcoin, which remains highly speculative, difficult to categorize and without an immediately identifiable economic function.
The S.E.C. this month approved 11 new E.T.F.s that track the price of Bitcoin, and the decision has been heralded by promoters of Bitcoin — and of the new funds — as an important event, legitimizing Bitcoin as an asset class.
I don’t think so.
The S.E.C.’s action, in itself, doesn’t give Bitcoin any new stature. It merely adds Bitcoin funds to a long list of E.T.F.s that are perfectly legal and simple to buy, but that don’t belong in anybody’s core portfolio. I’d put the Inverse Cramer Tracker in this category, as well as E.T.F.s that track a single stock like Tesla, PayPal or Nvidia, or that use leverage to triple a bet on energy prices or quadruple one on the S&P 500. I could go on and on.
Simply being legal doesn’t make a strategy sensible for most investors. In fact, while approving the Bitcoin E.T.F.s, the agency also issued an explicit warning against FOMO investing in so-called digital assets — as it has done many times before.
“Just because others around you might be buying into these kinds of opportunities, it doesn’t mean you have to,” said Lori Schock, director of the S.E.C.’s Office of Investor Education and Advocacy.
The agency’s approval of the new Bitcoin funds does change things in one important sense, though. Until now, it was easy for me to avoid discussing Bitcoin in the context of investing. Why bring attention to something that isn’t right for most people? But now that major financial services companies like BlackRock, Fidelity, Franklin Templeton, Invesco and Wisdom Tree are beginning to operate Bitcoin E.T.F.s, and make them available to their clients, silence seems unnatural and, maybe, irresponsible.
So here goes.
Making Sense of Bitcoin
I don’t want to dismiss Bitcoin entirely.
Granted, it’s possible to make — and lose — a great deal of money buying and selling it. And Bitcoin is a serious proposition, in terms of its underlying structure. The use of blockchain, the decentralized, peer-to-peer structure and the complex mathematical code demand respect. Concepts embedded in Bitcoin and other so-called cryptocurrencies could have real-world importance at some point, and in some way, though perhaps not as Bitcoin.
As Bryan Armour, who directs research into strategies based on index funds at Morningstar, told me, “Not believing that Bitcoin E.T.F.s are a good investment doesn’t mean that blockchain isn’t a good or useful technology.”
But Bitcoin itself? He put it politely. “I’d say Bitcoin is still in the price discovery stage. We’re still trying to figure out what it might be worth.”
For large corporations or other big institutional investors interested in getting some Bitcoin exposure, the new E.T.F.s may be a better and more convenient option, said Samara Cohen, chief investment officer of E.T.F. and index investments at BlackRock. “It’s the start of a journey,” she said.
But for ordinary people investing for important things like retirement or a house or a child’s education, I’d be very careful. The collapse of the FTX trading platform in 2022 and the fraud and conspiracy conviction of Sam Bankman-Fried only a few months ago are reminders that Bitcoin is extremely risky. Its future is uncertain, and so is its very definition.
Defining Terms
Just to start, I find the term cryptocurrency to be a misnomer. These things aren’t currencies because they can’t be widely exchanged for products and services in the real world. But even if they were currencies, it wouldn’t make sense for ordinary people to invest in them. Major corporations hedge against fluctuations in currency values, but most of us invest in assets that at least have the potential of producing income and cash flow — assets that can be purchased with currency.
Then we get to the central claim for the new E.T.F.s — that they are helping to create “an asset class,” one that “protects you” in times of uncertainty, much as gold did “for thousands of years,” in the words of…
Read More: Bitcoin Funds Are Here. But You Probably Don’t Need Them.