With so much interest now in cryptocurrencies, many advisory clients are asking about a Bitcoin exchange-traded fund.
After all, investors have easy access to ETFs tracking all manner of themes, including cannabis, cloud computing, clean energy, robotics and even pet care.
But no Bitcoin ETF exists at the moment.
That creates challenges for some advisors. Nancy Hetrick, CEO and senior financial advisor at Smarter Financial Solutions in Phoenix, says she is not encouraging clients to invest in Bitcoin now.
“The volatility is far beyond any asset class in a healthy, diversified portfolio,” she says, adding that her clients are wary of the cryptocurrency and prefer to avoid it. “As the digital currency market matures, this may change. But for now, it’s a speculative investment.”
If a client were to express interest in and insist on investing in Bitcoin, “as a firm, we would document carefully that we had explained and educated about the portfolio risks and would enter a trade as nonsolicited,” she says. “This isn’t an investment that is ready for a long-term portfolio yet.”
As advisors continue to navigate this complex slice of the market, the absence of a Bitcoin ETF is notable. But that reality might change at some point in the foreseeable future.
Here’s what financial advisors should know about the potential for a Bitcoin ETF, why they’re still awaiting approval and what benefits they might provide once they’re launched.
Regulation and Bitcoin ETFs
Earlier this month, Securities and Exchange Commission Chair Gary Gensler effectively put the kibosh on any imminent regulatory approval of a Bitcoin fund. But he also left the door open for a particular structure of ETF that would give investors exposure to the popular cryptocurrency.
Gensler told the Aspen Security Forum: “This asset class is rife with fraud, scams and abuse in certain applications.” He added, “We need additional congressional authorities to prevent transactions, products and platforms from falling between regulatory cracks.”
He also noted that the cryptocurrency world has few protections and could leave investors vulnerable.
Nonetheless, advisors and cryptocurrency investment consultants say a Bitcoin ETF will eventually see the light of day.
“It is not a question of if, but a question of when,” says Daniel Strachman, managing partner of A&C Advisors in Coral Springs, Florida.
Strachman says the SEC is working out the kinks inherent with launching any financial products tied to a new asset class.
“I would expect that they will approve a product early next year,” he says.
Strachman notes that cryptocurrencies such as Bitcoin and Ethereum are here to stay, and regulators are proceeding with caution before approving new financial products.
Approval Takes Time
Gensler is no stranger to crypto or to being a regulator. Before becoming SEC chair, he served as chair of the Commodity Futures Trading Commission. He also taught a cryptocurrency course at the Massachusetts Institute of Technology last year.
Gensler’s Aspen Institute speech showed extensive knowledge of the industry, says Sasha Hodder, senior counsel at Jacksonville, Florida-based Exodus, which provides platforms for investors to secure, manage and exchange cryptocurrencies on their devices.
“His main concerns focused on what he considered a lack of investor protections or disclosures across the crypto industry,” she says.
“The security of the underlying assets in an ETF has been one of the SEC’s largest concerns,” Hodder adds. “While the Bitcoin custody field is fairly deep, the SEC hasn’t found a way to get comfortable with it yet.”
She notes that Gensler signaled that an ETF properly regulated by the Investment Company Act of 1940 and other federal securities laws may have sufficient investor protections. She adds that a proper regulatory plan may involve ETFs that settle in Bitcoin futures traded on the Chicago Mercantile Exchange.
In his recent speech, Gensler said he supported that path.
“Regulatory approval of a Bitcoin ETF is likely encompassed in a comfort level with how Bitcoin operates, is custodied and is secured appropriately,” says Chris Kline, co-founder and chief operating officer at Bitcoin IRA, a digital platform where owners of self-directed individual retirement accounts can trade cryptocurrencies.
“ETF approvals have an extensive checklist of steps. Being so new and innovative, it will take more time for a Bitcoin ETF to gain approval compared to other asset classes,” Kline adds.
Is Bitcoin Right for an ETF?
Kline believes Bitcoin’s characteristics are partly responsible for delays in launching Bitcoin ETFs.
“ETFs are designed to aggregate exposure into assets that aren’t easily accessible in traditional investing,” he says. But with Bitcoin, he explains, all an account owner needs to do is download an app to begin trading and managing his or her digital assets.
He adds that Bitcoin differs from an investment like gold, where an ETF eliminates the hassle of storing, shipping and securing the hard assets.
“To some, putting Bitcoin in an ETF is like putting gasoline in a Tesla. It doesn’t quite make sense,” Kline says.
Alternatives to Bitcoin ETFs
There has been progress toward launching a Bitcoin ETF, and investors may have some alternatives.
For example, crypto asset manager Valkyrie filed an application this month with the SEC to launch an ETF that tracks Bitcoin futures traded on the CME. ProFunds also launched a mutual fund, the Bitcoin Strategy Fund (BTCFX), which invests in Bitcoin futures, on July 28.
There are other products that offer Bitcoin exposure, such as the Simplify U.S. Equity Plus GBTC ETF ( SPBC). SPBC holds an 85% stake in the iShares Core S&P 500 ETF ( IVV). Outside of that core holding, over 10% of the fund is comprised of the Grayscale Bitcoin Trust ( BTC), a closed-end fund.
Other asset managers recently bought into Grayscale Fund to gain Bitcoin exposure for their clients. In addition, Grayscale is planning to convert its popular closed-end fund to an ETF once the vehicles gain SEC approval.
Investors and Advisors Should Do Their Homework
Once new Bitcoin ETFs are launched, they will be good investments for investors looking for exposure to the asset class, Strachman says.
“However, before an investor jumps, they need to do due diligence, learn about the risks, the volatility and market itself,” he adds. “Like any investment, these products should only be used if they fit with an investor’s objectives and fit their investment plan.”
Kline says exposure to Bitcoin and other digital assets is becoming key to a well-diversified portfolio. He says interest has expanded beyond the millennial and Gen Z generations of younger investors, with older investors now buying crypto.
“It’s not just the allure of skyrocketing gains that has their attention,” he says. “They also see Bitcoin as a potential hedge against looming inflation, as it is a finite asset, contrary to other currencies in the world today.”
Strachman says he’s excited about the prospects for a Bitcoin ETF in the not-so-distant future. “I think that when these products become a reality, they will provide a great tool for investors to access this asset class in a way that many people are already accessing other asset classes.”
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