The biggest financial headline this week is the launch of the first ever bitcoin-linked exchange-traded fund, which made its debut on Tuesday.
The ProShares Bitcoin Strategy ETF (ticker: BITO) is a potential game-changer and could be viewed in many ways, but it’s not what bitcoin fund investors are waiting and hoping for.
Many investors aren’t interested in bitcoin and cryptocurrencies at all, but there’s no denying that crypto is gaining serious acceptance with the financial advisory community, which historically tends to be weird about anything new and different. Is. Mainstream financial advisors have become increasingly comfortable with the idea of ordinary investors considering cryptocurrency an asset class as a part of a widely diversified portfolio strategy.
Bitcoin sharps and traders – the true believers who fueled the crypto investing craze – have been all-in for years, and have huge profits to show for it. But Main Street investors weren’t so keen on an asset that they simply couldn’t buy in their standard brokerage account, and it involved a special electronic wallet or trading platform to add a short position.
The long-awaited solution, of course, is to make bitcoin available in the form of traditional mutual funds or exchange-traded funds. While there have been some crypto-oriented funds, they are not actually investing in the currencies themselves; Options such as the Bitwise Crypto Industry Innovators ETF (ticker BITQ) are similar to buying gold mining companies to gain exposure to gold, which are sensitive to asset price movements, but are not the same as holding assets.
Unlike gold and precious metals ETFs such as the SPDR Gold Shares (GLD), which invest in the physical metal, there is no way for the fund to buy and store “physical” bitcoin; Crypto is ether, not physical, and if you can’t touch it, the Securities and Exchange Commission isn’t sure how a fund that buys and sells an unregulated asset will react.
So while investors want funds that trade crypto at the spot price of bitcoin, they are instead getting what the SEC is currently willing to allow.
Bitcoin futures, unlike the actual cryptocurrency, are already regulated and traded on an exchange, addressing the major concerns of some regulators over the potential for fraud and market manipulation.
Judging by the SEC’s previous statements on the issue, ProShares funds — and a whole bunch of others that are in the pipeline and likely to hit the market in the coming weeks and months — are more “allowed” than “approved.”
Buying crypto and ETFs tied to spot or market price is still a way off.
Yet with the ProShares fund in the news, most investors are asking the question whether it belongs in their portfolio.
Start answering that question in your head space instead of in the fund marketplace.
Cryptocurrencies remain a highly volatile asset class. In terms of investments, it is still new, and there are some well-founded fears from skeptics who are wondering what, exactly, its market value is and whether that value can be maintained.
Historically speaking, investors have had a hard time with volatile asset classes, buying and selling at the wrong times; They get bullied by gains and lose out on drops and the resulting performance is disappointing, even when the underlying asset gains in value.
ETFs will make it easier to ride with crypto, but if you’re not ready for the long haul, it’s not worth your effort.
The talk at the bottom of the headlines on ProShares Fund was about the futures structure; It’s a valid concern, but dramatically less important than deciding if you want crypto right now.
Still, you need to know how a futures fund will work and the potential trouble.
Futures-based funds typically focus on “front-of-the-month” futures contracts that have the closest expiration date, with some time to go out. When those contracts expire, the money must be reinvested; If the price of bitcoin is rising, the price of the next futures contract will be higher than that owned by the fund, meaning the fund will regularly and systematically sell low and buy high.
In the worst case, the pricing curve becomes “contango”, a situation where money can be lost simply trying to maintain exposure to the underlying commodity (in this case, bitcoin).
In this way a futures fund sometimes gets carried away with spot prices, which was seen in the past with volatile ETFs trading in oil and natural-gas futures.
Another concern for hot futures-based funds is that there is a limit to the number of futures contracts these funds can hold; If the fund should move against that limit and stop issuing new shares as a result, the ETF can trade at a premium to its underlying net asset value. It sounds cool, but it’s generally not for a lot of technical reasons to cover here.
If all this sounds complicated – even if cryptocurrencies seem attractive as an alternative asset in your portfolio – the right strategy may be to wait a while.
One thing is clear about the cryptocurrency: it’s not going away, and with funds in registration from Ark Invest, VanEck, Valkyrie Digital Investments and many others — as well as Grayscale Investments’ effort to convert its Grayscale Bitcoin Trust into an ETF. Try – there will be many more options to choose from in the near future.
Over time, investors can expect some solution that allows a fund that also trades at the spot price of crypto.
But no one needs to rush into these issues to be “first”. Crypto has been around for over a decade now — bitcoin was created in 2009 on the heels of the financial crisis the previous year — so unless you were an early-adopter, the revolution began without you.
If the cryptocurrency has matured into an asset class that would be considered a small portion of the average investor’s portfolio — and it is — and you’re considering it, it’s important to take the risk before the tool develops, matures And wait to prove something.