Bitcoin ETFs are Now Available for Investment, but Should You Invest?
With the recent approval of several Bitcoin exchange-traded funds (ETFs), investors now have a regulated way to gain exposure to the popular cryptocurrency. Major investment firms like Fidelity and BlackRock have begun offering these products. Bitcoin ETFs allow investors to buy shares in the fund, similar to purchasing stocks, without directly owning or managing bitcoins. So, what does this U.S. SEC approval mean for the place of crypto in your investment portfolio?
The Upside: Easier Access to Bitcoin
“Investors who don’t 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. This newfound accessibility is exciting for bitcoin investors, but it also comes with notable risks. Here’s an overview of the potential upsides and downsides of investing in Bitcoin ETFs. Before investing, it’s wise to discuss your personal situation with a financial advisor.
Potential Gains with Bitcoin ETFs
Bitcoin has shown the potential for incredible returns in short periods. Bitcoin ETFs offer exposure to these gains without the hassle or risks of dealing with crypto exchanges and wallets. With Bitcoin’s growing mainstream adoption, despite market volatility, demand and prices are likely to rise over time. Bitcoin ETFs provide a way to benefit from this potential appreciation. Generally, crypto is seen as a hedge against inflation and a means to diversify a portfolio away from traditional stocks.
Risks of Bitcoin ETFs
ETFs are traded on stock exchanges with prices that vary minute by minute, similar to stocks. Bitcoin, in particular, is highly volatile and speculative, with prices fluctuating wildly. This means Bitcoin ETFs may be best suited for risk-tolerant investors who can endure sudden market dips. For instance, in 2021, a single bitcoin hit an all-time high of $65,000 but dropped by 65% to below $20,000 in 2022. Currently, the value of bitcoin is around $43,000.
There are also security risks associated with Bitcoin. While Bitcoin ETFs mitigate some risks by operating with custodians to secure assets, the crypto market is still young and faces regulatory uncertainty. Any adverse regulations could severely impact the price of bitcoin and related ETFs.
Assessing 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 considerable risks. Financial advisors commonly recommend allocating just 1-5% of your portfolio to crypto, and only if you can afford to lose it all, given the volatile nature of the investment.
The Bottom Line
Even with the SEC’s approval, Bitcoin ETFs are primarily suited for risk-tolerant investors. Maintaining a balanced portfolio with safer assets is recommended for those who can’t tolerate high risk. Before buying, ensure you understand how bitcoin works and whether it aligns with your long-term investing strategy. For those willing and able to handle market swings, Bitcoin ETFs could offer rewarding gains. Just be prepared for a bumpy ride.
