Is a Bitcoin ETF a Good Investment?
Main Street investors will need to wait longer to find out after the SEC rejects the proposed exchange-traded fund.
The Securities and Exchange Commission denied approval of the Winklevoss Bitcoin Trust ETF, an exchange-traded fund that would track the value of digital currency bitcoin. Friday's highly anticipated decision came nearly four years – and a dozen amendments – after the fund was first proposed and delayed indefinitely making gaining access to the currency as easy as logging into your online brokerage account.
Bitcoin is a so-called “cryptocurrency” – an encrypted digital currency created by computer programmers that can be exchanged electronically for goods and services. It serves as an alternative to traditional currencies, such as the U.S. dollar or the euro. For now, you can buy bitcoins on online exchanges, which often require an involved registration process and premium prices. Or you can “mine” them (create them), using extremely sophisticated computer codes. The value of a single bitcoin is determined by investor speculation. Worth almost nothing when it was created eight years ago, bitcoin hit a record high above $1,300 this week, topping the price of an ounce of gold, before tumbling on the heels of the SEC rejection. The rise of bitcoin has been volatile, marked by steep dips that were triggered, in some cases, by high-profile hacks of online bitcoin exchanges.
The ETF proposed by Cameron and Tyler Winklevoss (yes, the same set of twins who claimed Mark Zuckerberg stole their idea for Facebook and sued him over it) would have traded on the Bats Global Markets exchange under the symbol COIN. The fund would have tracked the value of bitcoins, backed by "baskets" of the virtual currency. Like any other ETF, the fund could have been bought or sold through a brokerage account. The SEC expressed concern over the unregulated nature of bitcoin markets, though ETF Trends Editor Tom Lydon said investors could've been relatively confident that the ETF would be structurally sound. That’s to say, it would have accurately tracked the price of bitcoin and would have sufficient security measures in place to deter the sorts of hacks that have cropped up at online bitcoin exchanges.
Eight years into a bull market, Lydon says, the appeal of such an instrument is apparent. “Alternative investing is something that individual investors, advisers and institutions are thinking about. Bitcoin is an area of the market that’s not well-correlated with stocks, bonds or even other currencies,” he says.
But even if the ETF had been deemed suitable for individual investors, like any investment, Lydon says, you need to look under the hood. Two other bitcoin ETFs are currently under review by the SEC, and it's unclear what, if any, next steps the Winklevoss brothers will take. Bitcoin is surprisingly widely held and regularly traded — but nowhere near the level of mainstream ETFs. Because of the way they’re created, bitcoins are available on a limited basis, which, based on increased demand, would help increase the price. These factors check many investors’ boxes for alternative investments. But investors who own any bitcoin ETF would need to understand the factors that cause prices to fluctuate and have a plan in place for rapid swings in the marketplace. For individual investors, tracking the complex world of digital currencies might be too much to ask. The risk factors listed in the prospectus include attacks by malicious actors and botnets that could corrupt the bitcoin code, among other things.
Even if the bitcoin ETF had been approved, the wisest move an investor could have made would be to hold off, says Ben Johnson, director of global ETF and passive strategies research at Morningstar. “The reason ETFs tracking the U.S. dollar work is that there are more than 7 billion people who think it’s worth something. That may not always be the case with bitcoin,” he says. If you’re looking for “non-correlated” investing instruments, you might explore precious metals, via SPDR Gold Shares ETF (GLD), or more active strategies, such as Merger Fund (MERFX), a mutual fund that aims to capture upticks in stock price when mergers are announced. As for bitcoin, says Johnson: “It’s every bit as suitable to an individual investor as a lottery ticket.”