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How Everyday Investors and Savers Should Approach Spot Bitcoin ETFs
Shortly before the United States Securities and Exchange Commission approved Spot Bitcoin exchange-traded funds (ETFs) On Wednesday evening, he reissued a “no FOMO” warning to investors.
The warning not to invest for “fear of missing out” highlighted the volatility of digital assets, highlighting how trendy cryptocurrency investments go through extreme highs and lows, accounting for billions of dollars in gains – and losses.
Even after Wednesday’s announcement, SEC Chairman Gary Gensler said in a statement that despite approving the ETF listing, “we have neither endorsed nor endorsed bitcoin.”
The SEC’s blessing brings industry standardization and regulation to digital asset investing. But financial experts are urging caution, warning traditional investors to exercise caution as bitcoin (BTC-USD) is still considered a speculative asset.
“From a very conservative financial standpoint, you have to be very careful,” Kiran Garimella, an assistant professor at the University of South Florida’s Muma College of Business, told Yahoo Finance. “If the financial instrument being traded doesn’t actually represent anything of specific underlying value, then you’re going to have to sit down and question that.”
But first, what exactly is a spot bitcoin ETF?
Spot Bitcoin ETFs are investment vehicles that track the performance of Bitcoin. Investors buy shares in the fund, which is managed by asset managers who hold actual bitcoin and its immediate (“spot”) value as the underlying asset. These managers make money from management fees and the small margin between the actual price of bitcoins (which fluctuates) and the price at which they sell the shares.
Although the value of ETFs moves in tandem with Bitcoin, the funds can be more stable because fund managers can use different financial instruments within the fund to mitigate volatility.
“An ETF not only makes it easier to buy, sell and trade these bitcoins, but it could also cover some of the strategic risk for you,” Garimella said.
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The world’s first bitcoin was born in 2008 and is attributed to a still unknown person who used the pseudonym Satoshi Nakamoto. It was formed on the basis of a free market, decentralized ideology where digital currencies are created, distributed, exchanged and stored in a peer-to-peer ledger known as a blockchain.
Bitcoin’s price has hovered around $46,500 recently, hitting $49,000 last week as reactions to the SEC approval took hold. The value of a coin reached an all-time high in 2021 when the price exceeded $65,000. But it collapsed to around $16,000 just 12 months later as investors slowly lost confidence in the sector.
Should Bitcoin ETFs be part of your portfolio?
The highly anticipated SEC approval means that everyday investors can now own bitcoin in their investment or retirement accounts without having to purchase digital tokens directly from a crypto exchange.
The crypto world is still opaque and out of reach for many Americans, but the 11 new cash funds are listed on the NYSE, CBOE and Nasdaq – the same platforms on which stocks, ETFs and other traditional securities are listed. bought and sold.
Garimella said the new funds significantly reduce the administrative risks of investing in Bitcoin. Previously, interested investors had to open a “wallet” and use “private keys” just to own the tokens. Crypto exchanges themselves also carried risks, including hacking and fraud.
“Oh, boy, you would have to jump through hoops just to acquire a fraction of bitcoin or any other cryptocurrency for that matter,” Garimella said. “Most people had no idea what a wallet or private key was.”
Even today, only the funds are standardized; Strategic risk is always associated with investing in a Bitcoin fund.
“It’s great if you can achieve this by investing at $5, selling it for $500 and making a lot of money,” Garimella said. “But can you be consistent and systematic, and can you strategize to capitalize on the value generated by this?
Much skepticism remains about cryptography in general and its speculative nature. With such instruments, the digital asset has no intrinsic value, only the belief of investors that its price will increase.
“Cryptocurrency looks like speculation that the central bank will be replaced — that maybe the U.S. dollar will be replaced as the dominant reserve currency,” said Mark Higgins, CFA, CFP and author of “Investing in US Financial History,” he told Yahoo Finance. . “I’m skeptical.”
Vanguard Group, the second largest ETF provider, announced that it has no plans to launch a bitcoin spot ETF or offer crypto-related products.
“Our view is that these products do not fit our offering focused on asset classes such as stocks, bonds and cash, which Vanguard considers to be the building blocks of a long-term investment portfolio well balanced,” the company said.
On the other hand, Fidelity Investment, one of the largest asset managers in the world, launched its Fidelity Wise Origin Bitcoin fund (FBTC) on Thursday, calling the product an effective way for investors to gain exposure to bitcoin.
“We have long believed that a spot exchange-traded product would be an effective way for investors to gain exposure to bitcoin,” Cynthia Lo Bessette, head of digital asset management at Fidelity, said in a statement.
However, a sign of how unexplored this territory is, Loyalty requires Investors must execute its Designated Investment Agreement (DIA) when placing an order for the FBTC fund. The DIA certifies that investors are experiencedhave a high risk tolerance and can afford to lose part or all of their investment in the digital product.
Eleven of the world’s largest financial asset managers have launched a Bitcoin ETF. (Chesnot/Getty Images) (Chesnot via Getty Images)
Still, these ETFs could provide a safer way to own bitcoins because asset managers can reduce the funds’ risk through sophisticated tactics such as opening futures, hedging, setting up purchasing options and improvement of the staging strategy.
“When you have an ETF that does all of that, it introduces a certain level of stability or risk management for that underlying instrument,” Garimella said. “In a crypto market, you expose yourself to a certain level of risk, which could be minimized with the right ETF.”
Perhaps the biggest appeal of bitcoin, the world’s best-known cryptocurrency, is the future potential of blockchains. Technology could transform monetary transactions, his supporters believe. Personally, Garimella said he owns Bitcoin from an educational standpoint and may invest more money in an ETF because the digital coin could be tied to a tangible asset class in the future, considering given innovation in the field.
“But would I advise my grandmother to invest in it? Probably not,” Garimella said.
Where to buy ETFs and what fees to expect
Investors looking to diversify their portfolio with digital assets can purchase shares in Bitcoin ETFs for cash through their brokerage accounts. The funds will be listed in the same way as other funds and can be traded throughout the day to obtain liquidity. Approved ETFs are fund products from major financial players such as Fidelity, Invesco and BlackRock.
Many companies have announced their ETF management fees. black rock (BLACK), the world’s largest asset manager with nearly $10 trillion in assets under management, charges investors 0.25%, a decrease compared to the 0.30% previously set. Grayscale charges 1.5%, while Franklin announced it would waive management fees until August, a sign of the competitiveness of this new market.
Today, bitcoin remains the largest cryptocurrency in the world in terms of market capitalization. 913 billion dollars as of January 11.
Rebecca Chen is a reporter for Yahoo Finance and previously worked as a Certified Investment Tax Accountant (CPA).
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