Should You Invest in Bitcoin? It depends. Bitcoin’s not a sector, but I’m starting to think of it as sort of an asset class. Cryptocurrency and mainly bitcoin gained renewed interest last year. But this time is a little different than the boom in 2017 (which was followed by an 80% crash in 2018) because it’s not just individual investors buying in but financial institutions, companies and now investment vehicles.
ProShares just launched the first bitcoin futures ETFA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., which derives its price from underlying futures contracts. What are those? Contracts that have a predetermined locked-in price to either buy or sell bitcoin in the future.
The SEC was more comfortable approving a futures ETF than an ETF that directly invests in the spot price of bitcoin because futures ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. can be much more easily regulated. That being said, it was still a big win for bitcoin bulls because it’s going to push the SEC to think about how they want to regulate bitcoin and allow more vehicles that directly invest in bitcoin to become publicly traded.
So, what does this mean for your portfolio? EquitiesThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. and bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. offer somewhat predictable behaviors for diversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not. and return purposes. Bitcoin, on the other hand, is so volatile and unpredictable that I recommend not investing more than you’re willing to lose 50% of. And, given the wild price swings, you might want to invest over time so you can smooth out your cost basis. I mean, over the last week, probably due to the ETF announcement, bitcoin has gone up about 30%. It actually hit a new high over $66,000 today. Compare that with July, when it was below $30,000. So investing over time might help you smooth out some of those swings.
As for the future, I think that the hold crypto now has on the economy means that it’s not going away. Virtual currency and its related technologies have a place in the future of finance; I’m just not 100% sure what that’s going to look like.
*Webinar recorded after the market closed on Wednesday, October 20, 2021.
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