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Canopy Commentary - Cryptocurrency ETFs

January 19, 2024

Are you looking to invest in a relatively new type of asset that is roughly four times as volatile as the S&P 500 index?  Then you might be interested in some new Exchange Traded Funds (ETFs) that have come to market.

The new ETFs, some from venerable names like Franklin Templeton, Invesco, Fidelity, Blackrock and iShares, others from firms like Valkyrie and Bitwise, have one thing in common: they were set up to invest in a cryptocurrency such as Bitcoin. They all put their investor money directly into the tokens, which are stored in digital wallets.  These are known as “spot price” ETFs.  Previously, the SEC only allowed ETFs to invest in cryptocurrencies indirectly through futures markets, which were more expensive and did not always track the underlying currencies as closely.

This can be a good thing or a bad thing, depending on how you view investing.  The first thing to know is that the Bitcoin tokens, like all the 1,000+ cryptocurrency tokens circulating on various exchanges, are not backed by any government or tangible asset, and the SEC seems to be bending over backwards to tell the world that these are highly-speculative investments.  Is crypto a currency or an investment?  A currency should be a stable store-of-value, and be widely accepted for transactions.  Currently, it is neither.  Yet, its value as an investment seems to be tied only to its potential to be a currency. 

The second thing is risk (often measured by volatility of returns) vs. return.  Bitcoin fell more than 81% in 2022 and 72% in 2018.  But it gained 160% in 2023 and 302% in 2020.   If you were lucky enough to buy $100 worth of Bitcoin when the tokens were first issued in 2008, you would be a multi-millionaire today.  If you had purchased in the middle of 2013, you would have enjoyed a 2,500% return by the end of 2023.  Proponents will point out that Bitcoin has outperformed all other asset classes over various time periods.  Detractors will note that Bitcoins exist only as blips in a computer network called the Blockchain, unlike tangible assets like gold or silver, unlike shares of actual companies like Apple and Amazon.

Who’s right?  Only time will tell.  But the point of the ETFs is that they allow ordinary investors who wouldn’t know how to exchange dollars for Bitcoin on the Coinbase exchange, who don’t have the expertise to move Bitcoins to a cold wallet to protect them from poaching hackers in North Korea, to invest in the asset in a convenient manner.  It’s helpful to remember the SEC’s characterization of the tokens as speculative; most investors would be wise to limit their cryptocurrency exposure to a small percentage of their portfolio that they are willing to lose.  Caveat emptor.