Exchange-traded funds, or ETFs, come in various forms. There are traditional, diversified index funds that provide exposure to the entire stock and bond markets, making them a great option for most investors. On the other hand, there are also unique and narrowly focused ETFs, such as the Inverse Cramer Tracker, which allows investors to bet against the stock picks of CNBC television host Jim Cramer. However, this fund has proven to be a money-loser since its establishment last year, showing that betting against Jim Cramer is not a wise investment strategy.
Another example of a risky investment is bitcoin, which remains highly speculative and difficult to categorize. Despite this, the Securities and Exchange Commission (SEC) recently approved 11 new ETFs that track the price of bitcoin. This decision has been celebrated by promoters of bitcoin and the new funds as a legitimization of bitcoin as an asset class. However, this does not necessarily hold true.
The approval of these new bitcoin ETFs does not give bitcoin any new stature. It simply adds it to the long list of ETFs that are legal and easy to purchase, but not suitable for a core portfolio. Other examples of ETFs that fall into this category include those that track a single stock, use leverage to bet on energy prices or the S&P 500, and the Inverse Cramer Tracker mentioned earlier. The fact that these ETFs are legal does not mean they are a sensible investment strategy for most investors. In fact, the SEC has explicitly warned against investing based on fear of missing out (FOMO).
According to Lori Schock, director of the SEC’s Office of Investor Education and Advocacy, just because others are investing in opportunities like bitcoin, it does not mean you have to follow suit. The fact that major financial services companies like BlackRock, Fidelity, and Franklin Templeton are now operating bitcoin ETFs and making them available to clients does not change this.
While it may be tempting to invest in bitcoin when its price is rising, it is important to be cautious. The collapse of the FTX trading platform in 2022 and the recent fraud and conspiracy conviction of Sam Bankman-Fried are reminders of the extreme risk associated with bitcoin. Additionally, its future and definition are uncertain, making it a questionable investment for long-term goals like retirement.
Despite its risks, it is worth noting that the underlying technology of bitcoin, known as blockchain, has potential real-world applications. However, this does not necessarily mean that bitcoin itself is a good investment. As Bryan Armour, who researches index fund strategies at Morningstar, points out, not believing in bitcoin ETFs as a good investment does not mean that blockchain is not a useful technology.
Furthermore, the term “cryptocurrency” is a misnomer, as these assets cannot be widely exchanged for goods and services in the real world. Even if they were considered currencies, it would not make sense for most individuals to invest in them. Additionally, the comparison of bitcoin to gold as a hedge against uncertainty is a strained one. Gold has a long history as a store of value and has commercial uses, whereas bitcoin lacks these attributes.
Despite the hype surrounding bitcoin and the new ETFs, it is important to remember that it is not a significant part of a diversified investment portfolio. In fact, a small 2% allocation to bitcoin can significantly increase the risk of a conservative portfolio. It is also worth mentioning that even without the new bitcoin ETFs, many investors likely have exposure to bitcoin through their holdings in companies like Coinbase, which is included in many broad stock index funds.
Ultimately, it is up to the individual to decide whether they want to invest in bitcoin for potential short-term gains. However, it is important to recognize that this type of investment is more akin to gambling and entertainment rather than a solid long-term investment strategy. As the saying goes, “If you can afford to lose it, then go ahead and invest in it.” But for serious investors looking to build a strong portfolio, the recent approval of bitcoin ETFs by the SEC does not change the fact that bitcoin is not a necessary or prudent investment.
