Market Overview
ETFs: Extremely Troubling Fliers?
The latest – to use a term of art – “gimmick” in investing is buying and selling spot Bitcoin through exchange-traded funds. These ETFs are perfectly legal now and are offered by some of the most august houses of Wall Street. They’re also a solution in search of a problem that never existed, so they’re not off to a great start. As of this writing, every one of the “best” bitcoin ETFs, as described by The Motley Fool, is trading below its initial price on January 11, the day after the Securities and Exchange Commission approved the new asset. (Editor’s note: Values have since risen in tandem with a recent surge in Bitcoin pricing.)
That’s in large part because Bitcoin, trading under the BTC symbol, took a big dip on January 12, which surprised nobody. Smart investors buy on the rumor and sell on the news, so they bid up BTC for weeks before dumping it as soon as the ETFs became a reality. Crypto enthusiasts then moved their money – or whatever it is – into Ethereum, Solana, Cardano or other well-capitalized blockchain projects. The thinking is, now that the bellwether cryptocurrency can be traded on a traditional exchange like a stock, it’s just a matter of time before these “alt-coins” follow suit.
The thinking, though, rarely dwells on, “Why?”
What’s new
Bitcoin futures ETFs have been around since 2021, even though spot bitcoin ETFs are barely a month old. This is expected to be a more liquid, less volatile market than futures, but it’ll never be much more stable than the underlying asset itself. These spot bitcoin ETFs might have launched in a particularly tranquil month – crypto prices were uncharacteristically stable in January – but there was a whole decade and more before that when the market was far less stable. As prices spike in mid-February, we’re inclined to believe the next decade will be just as much a rollercoaster ride.
And it’s nice to have the option of trading in crypto on the Nasdaq or the Big Board. Unlike any crypto exchange at this date, these larger and more traditional exchanges have the benefit of SEC oversight and SIPC insurance. If you read this space one year ago, when we wrote about FTX, you know how important that can be.
Still, if certainty and market maturity are important to you, why would you ever want to invest in crypto?
That’s especially true because you’re paying a premium to have someone manage the fund for you. Grayscale Investments was among the first asset management companies to focus on digital currencies and they have been at it since 2013. And on January 11 of this year, it was among the first to dive into the spot Bitcoin ETF market. With more than $20 billion under management, Grayscale is an order of magnitude larger than any other player. But if you want them to manage your crypto investment, you’ll have to pay them a 1.5% annual fee. Grayscale’s competitors charge less – and that triggered some outflows – but you’re still likely to pay more to invest in ETFs than you would if you bought BTC on Coinbase on some other crypto exchange.
Alternative reality
Bitcoin isn’t the oddest thing to be traded inside ETFs, just the one that the SEC is the most skittish about. Is it a security? A currency? A new asset class? A scam? Depends on who you ask and on what day.
ETFs, though, offer a smorgasbord of underlying assets. According to the ETF.com site, there are a number of different broad categories, each intended to provide similar returns to the indices they track at a lower cost and with greater liquidity:
- Hedge fund strategies: Some alternative ETFs replicate the investment strategies employed by hedge funds, such as long/short equity, market-neutral or event-driven strategies.
- Factor ETFs: These have a set of specific criteria to identify and weight companies that meet their desired factor profile.
- Alternative income strategies: These generate income beyond traditional investment-grade bonds by investing in junk bonds, dividend-paying stocks, preferred securities or mortgage-backed securities.
- Volatility and risk management: Certain ETFs use options and other derivatives to manage risk or exploit market volatility.
- Commodities and managed futures: Such ETFs invest in precious metals, energy, agriculture or broader commodity indexes; this is probably where the Bitcoin ETFs – both spot and futures – would fit.
- Antiques and collectibles: These ETFs invest in companies involved in the production, distribution or sale of antiques and collectibles, or they may directly hold such physical assets as rare coins, stamps, fine art, vintage cars, wine or sports memorabilia in their portfolios.
There are multi-asset ETFs as well, which combine any or all of these.
We understand the logic of wanting to choose any of these investment objectives, and the allure of using an instrument that looks and feels like a share of stock to mimic results that Wall Street professionals get from deep modeling and real-time data. But when you consider how much less expensive it is to buy and sell BTC on your own account, and how much inherent risk is baked into the entire crypto market, maybe an ETF isn’t the right tool for the job at this moment if you’re looking to trade in spot Bitcoin.
Many paths
The fact remains, there are any number of ways of pursuing the same investment objective. Some will give you a higher yield. Some will be easier to understand. Others will be easier to trade.
And some might just give you a headache.
It might be helpful to first determine what your objectives are before deciding what vehicle you want to take you there. In either case, it couldn’t hurt to discuss both the what and the how with a trusted financial advisor.
