Should You Invest in a Spot Bitcoin ETF?

Yesterday, the Securities and Exchange Commission (SEC), approved 11 spot Bitcoin ETFs for trading. Most of those spot Bitcoin ETFs began trading on the open markets today. This provides another way for investors to invest in Bitcoin, and a way for many investors who haven't to been able to previously to now gain exposure to Bitcoin.

Before proceeding with a discussion about spot Bitcoin ETFs, it's important to understand that investing in spot Bitcoin ETFs is similar to investing in actual Bitcoin. Therefore, it's still important to understand what Bitcoin is. The previous Escient Financial Insights article Bitcoin – The Who, What, When, Why, and How provides a great summary and overview of Bitcoin.

A spot Bitcoin ETF is an investment fund that invests in Bitcoin. These funds actually take cash that's invested in the fund and go to an exchange and buy Bitcoin. It's an alternative way to invest in Bitcoin without actually going to an exchange (such as Coinbase) and buying actual Bitcoin yourself.

Up until now, U.S. investors only had access to Bitcoin inside an ETF with futures ETFs. Futures are contracts that speculate on the future price of an asset. In this case, the performance of those futures ETFs would be based on how well the investment managers of those funds are able to trade Bitcoin futures contracts. With the Bitcoin futures ETFs there's an increased chance that they wouldn't be able to track the price of Bitcoin accurately. With spot Bitcoin ETFs, since the funds actually buy and hold actual Bitcoin, they should track the performance of Bitcoin very accurately.

Spot Bitcoin ETFs open up investing in Bitcoin within a variety of accounts. Essentially, any account that allows you to invest in an ETF could theoretically invest in a spot Bitcoin ETF. This includes taxable brokerage accounts, traditional IRAs, Roth IRAs, Solo 401(k)s, and even employer-sponsored retirement accounts (such as 401(k)s, 403(b)s, etc.) as long as the manager and sponsor enables it as an option. It's important to note that it's possible not all broker-dealers will allow trading of these spot Bitcoin ETFs at this time.

If you decide that Bitcoin is the right investment for you, but you would rather invest in actual Bitcoin instead of through an ETF, check out the previous Escient Financial Insights article How and Where to Make Your First Purchase of Cryptocurrency.

It's important to understand that there are different kinds of risk associated with any investment. Investing in a spot Bitcoin ETF may reduce some risks related to investing in Bitcoin specifically, but does not necessarily reduce all risk, and could actually increase the overall risk of an investment portfolio. Many of the investment managers that are now offering spot Bitcoin ETFs (as well as the custodians they are using) are well-known and trusted, but Bitcoin itself is still a highly volatile asset that will likely continue to experience large swings in it's price over shorter periods of time, especially when compared to many traditional assets.

While there is a chance that there could be less volatility with Bitcoin over time, spot Bitcoin ETFs buying up a lot of the Bitcoin supply could reduce liquidity in the asset. That would mean that there is less Bitcoin on the open market available for buying and selling. Reduced liquidity could actually increase volatility at times, which would result in large price swings over short periods of time.

One of the risks that Bitcoin ETFs could solve is the risk involved with the custody of Bitcoin. There have been issues with some centralized exchanges in the past where investors lost some of all of their Bitcoin or other crypto assets due to mismanagement of the centralized exchange. Some investors have also lost their Bitcoin or other crypto assets due to there own mismanagement while self-custodying their assets (i.e. forgetting a seed phrase, losing a backup, or sending to a wrong address). With Bitcoin ETFs, there could be less risk with a qualified and trusted custodian holding the Bitcoin within the fund. It's important to note here, however, that the majority of the approved spot Bitcoin ETFs are using Coinbase for the custody of their Bitcoin, which is a centralized exchange. Coinbase is the first and currently still the only publicly-traded centralized crypto exchange.

Bitcoin has historically had high volatility over short periods of time, but over longer periods of time (such as 4 to 5 years) has generally seen positive performance and returns. If that trend continues, then Bitcoin should be a better investment for long-term goals versus short-term goals. Note that past performance should not be taken as a predictor for future performance.

Also with Bitcoin's monetary policy of disinflation, and eventually reducing to zero inflation around the year 2140, Bitcoin is viewed by many as a long-term hedge against inflation and the debasement of fiat currencies, and as an asset that will only grow over the long-term. However, any asset could become worthless (companies go bankrupt and out of business), and Bitcoin is no different. Bitcoin is still considered to be a speculative investment, so risk management is still very important.

Whether or not you should invest in one or more spot Bitcoin ETFs really depends on your goals, your current financial situation, your risk tolerance, your need for risk, and more. It's important to evaluate your goals and your current financial situation. Are you already on track to achieve your goals? Are you comfortable with the risk that Bitcoin could introduce to your portfolio, especially the short-term risk? If you might come up short with achieving your goals, would an investment in Bitcoin potentially improve the probability of success?

Those questions, and more, are important to ask and evaluate before developing and implementing any investment strategy. Investing in spot Bitcoin ETFs, or actual Bitcoin or other crypto assets, may be right for one investor, but not another. Every individual investor is different and needs to evaluate their own financial plan to determine the right investments for them. This is what Escient Financial does when it delivers personalized financial plans and personalized investment advice to its clients.

Investing in Bitcoin does have its risks, as does investing in crypto in general. The previous Escient Financial Insights articles Should You Invest in Crypto? It's not a Simple Answer. and Cryptocurrency Pitfalls provide a good general overview of the advantages and disadvantages, as well as risks and other things, that should be considered before investing in Bitcoin or cryptocurrencies.

Investors are still able to invest in Bitcoin directly as well. That brings up the question of investing in Bitcoin in an ETF in a brokerage account versus investing in Bitcoin directly. Investing in Bitcoin directly does have some advantages. For example, depending on where you keep your bitcoin there may be no or less annual fees compared to the expense ratio of the ETFs. You also have the ability to hold actual Bitcoin instead of something that represents Bitcoin, which keeps you more in line with the original thesis of Bitcoin and the reason for its creation.

As of today, there are 11 spot Bitcoin ETFs that have been approved by the SEC and most have already begun trading in the markets. Each has its own advantages and disadvantages. They have different amounts of assets under management, different histories, different experience, different fees, and are traded on different exchanges. Any investor investing in any fund should review the prospectus of the fund to determine if the fund is right for them. Escient Financial is here to provide fiduciary advice to clients so they can make the right choice for their investments, including which assets to invest in and where to invest in them.

The amount of money that any investor should invest in spot Bitcoin ETFs (or any investment for that matter) should be dictated by their financial plan and their investment thesis and investment policy statement. It will be a different amount for every investor, and will depend on many factors, including their goals, their financial situation, their risk tolerance, and their need for risk exposure. Escient Financial takes great care in providing investment advice to clients that aims to achieve their goals and keeps their risk level at a comfortable level.

The right investment strategy is important to achieving financial goals. A properly developed financial plan helps with setting goals and determine the right investment strategy for achieving those goals. Escient Financial is here to provide personalized financial planning and personalized investment advice so you can achieve your goals. Go ahead and...