BitCoin ETFs: Proceed With Caution

By Bruce Herbert, AIF

Note: This material is intended for educational purposes only. As with all our public writing, blog posts do not constitute tax or financial planning advice; likewise, they are neither an offer to sell nor solicitation to buy any investment or security.

After news broke that the U.S. FTC had approved the creation of several Bitcoin ETFs (exchange-traded funds), a client asked for guidance about the wisdom of allocating some portion of their portfolio to these new funds. What follows is the client's original question, followed by my response.

Question: A piece on public radio just reminded me I've been meaning to ask whether there's any risk of my investments including Bitcoin or Bitcoin ETF?

Answer: I think I heard that same NPR piece on bitcoin.

Proper diversification means not putting too much in any one thing, and the more risky any individual “thing” is the less one should allocate (if any at all).

Interestingly, we have a client who when working on his PhD in Russian history needed bitcoin to buy specialized books out of Russia – because that’s the only currency the sellers would accept! The small portion he had left over following book purchases hit a bounce, and when he asked what to do with it the approach suggested was to sell enough to recoup the original investment, then let the rest ride for as long as he wanted.

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Several bitcoin-based ETFs started trading this year and they all are down from inception just a few weeks ago. Below is a chart that goes back to 2014, which shows bitcoin’s meteoric rise, then fall, then bounce, then...

Rounding the numbers, here’s the recent history:

10,000 2020 Sept | trading range before the big surge
60,000 2021 April | +500%
31,000 2021 July | -48%
65,000 2021 Nov | +109%
16,000 2022 Nov | -75%
42,648 2024 now | +166%

It's important to remember that crypto is not an asset class – it’s really nothing beyond sentiment – so cannot legitimately be called a portfolio diversifier.

However, if for fun one wants to own a few thousand dollars worth, that may be alright. Not enough that if lost it would hurt, but enough that if you were lucky and hit a bounce it might provide a little trip or vacation somewhere.

Bruce Herbert is the chief executive of Newground Social Investment