SEC Approves Bitcoin ETFs. Should You Invest?

After years of avoiding it, the SEC has recently approved the listing and trading of 11 Bitcoin ETFs. But, are Bitcoin ETFs right for your portfolio? If they are, how much should you invest in them?

In this episode of Capital Conversations, CERTIFIED FINANCIAL PLANNER™ Professional Colin Day and portfolio manager Ryan Potts discuss the evolution of cryptocurrency investments, who the new ETFs may be most suitable for, and the smart, safe ways to include crypto in your portfolio.

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Below is the transcript for our most recent podcast, "SEC Approves Bitcoin ETFs. Should You Invest?"

Colin Day: Hi there, everyone. Colin Day, CERTIFIED FINANCIAL PLANNER™ Professional. Welcome to another Capital Conversation. Today I've got Ryan Potts. Ryan, welcome back.

Ryan Potts: Thank you, Colin.

Colin Day: I like that you're wearing the vest today.

Ryan Potts: Always. It's a little chilly outside. You guys can't tell, obviously.

Colin Day: We can definitely see out the window here. There's a reason we look in this direction as opposed to that one. Yeah, it's been weird. It's been in the 70s some days and now we're back, I think we're going to hit the 50s today. Some rain. Ryan Potts: A little rain, a little cold. Yeah.

Colin Day: Well, it's spring, right?

Ryan Potts: It is. It's Missouri also.

Colin Day: Yeah, it's the fall-spring, I guess is what they call it, right? I think we're supposed to warm up again, but hopefully all you are enjoying the spring weather wherever you might be catching us.

Today, the reason that Ryan is in the hot seat again is because we're talking about portfolios. We're talking about investments. We're talking about securities. But we're going to talk about one specifically that's been interesting. Some newer issuances that you might have seen out there and they are Bitcoin ETFs. So Ryan, we are working with a lot of folks that might be interested in knowing more about this. We're gonna save a little bit of that to the very end of the conversation as to whether it's appropriate or not.

But could you walk me through a little bit of maybe the history of Bitcoin or cryptocurrencies in general. And as it comes to consumers and what we as consumers have had as options to be able to invest in cryptocurrencies either as an individual or within a professional setting like with a financial advisor.

Ryan Potts: For those that don't know, cryptocurrencies have actually been around for quite a while. Getting close to almost 20 years at this point now, not quite there. But I think it's really interesting, people associate Bitcoin as kind of the mothership of cryptocurrencies, and I think that's a fair thing to say, it's definitely the largest coin out there and the most popular.

But really going way back in the day when it originally started, the only way you could really get your hands on Bitcoin was mining them individually and owning them as an individual after you did the mining process. Throughout the years they've become a little bit more popular and garnered some demand from investors.

We've gotten to a point now where roughly 10 years ago or so companies were really pushing to have funds or mutual funds, ETFs that were able to replicate Bitcoin as, as an asset that we can put in portfolios. The issue with this was the SEC was not really on board with that. So you have companies like Grayscale that spend a lot of money kind of battling back and forth with the SEC. And they were able to provide a solution that we would consider kind of a spot price fund. So investors could allocate to Bitcoin or cryptocurrencies within their portfolios without having to go through Wallets or certain platforms to purchase these coins. Those were expensive. But as of recently, within the last month, we've seen the SEC has approved spot price ETFs. And what is so popular about these ETFs is not only that they're able to track the actual price of cryptocurrencies – Bitcoin predominantly – but also they're able to do it at a really cheap cost. So we're getting into that kind of passive indexing type of cost, um, that we see out of like Vanguard with the S&P 500.

That's where we are today. That's the exciting thing that recently has transpired.We have these Bitcoin ETFs and I think it's really changed the dynamic or the landscape in terms of how investors can allocate to Bitcoin.

Colin Day: Yeah. And I think – for our clientele at least, and I think for many other financial advisor offices this is probably true – that the availability of something to be able to allocate to those securities when appropriate, or when approached [by] a client when that they express that kind of want or need in their portfolio to have cryptocurrency exposure, has been incredibly limited. Groups like Grayscale have done the lion's share of the work in terms of actually pushing for legitimacy – is how I would put it. When it comes to cryptocurrency – and if you're new to cryptocurrency, this particular conversation won't go into the details of the merits of cryptocurrency. Maybe we say that for a different conversation or you could do some reading on your own. But I think what companies like Grayscale, larger institutions that were fighting for legitimacy, and what I mean by that is actually approaching the Securities and Exchange Commission to say, “Hey, please, can you regulate an item, a security that we can actually put out there that investors can invest in?”

That challenge has taken a much longer time, I think, than they even anticipated. Saying that it's being regulated now or that it's been, I don't even think it's been “technically approved,” [which] is the language that the SEC would use. The SEC has begrudgingly said that, "Yes, we can't find fault in you actually utilizing these products. So yes, they can be issued." I think that's relatively fair?

Ryan Potts: I think it’s very fair. A lot of it has to do with the wide scale adoption of cryptocurrencies. As an asset class cryptocurrencies were extremely volatile and you saw this huge run up after COVID. During the COVID time period, but really like the fall of ‘21.

What's really interesting to me is the timing of all this. You saw the demand, and really there's a ton of speculation that goes into cryptocurrencies as a whole. There was a ton of demand form kind of in the back half of the bull market we saw after COVID and then they crashed really in ‘22 when all growth assets crashed.

I think it's really interesting that the SEC kind of went through a period of that extreme volatility, which we've seen through cryptos throughout the year, but really after that period, they've come out and said, “You know what? The adoption has been there for the industry. The adoption has been there in terms of clients really wanting something.” And that's why I think they had to put their hand to the fire a little bit and get something out because it's gotten to the point where there is so much demand and the wide scale adoption is there, finally. Where before I think there was just kind of a small little pocket within the market that was interested in this kind of asset.

Colin Day: Yeah, and I would probably say that a predecessor to the effort to do the ETF issuance of Bitcoin type securities would be Fidelity in their 401(k) plan. So for those of you that may or may not be familiar, Fidelity as a large 401(k) record keeper, the largest in the United States in terms of assets, they were the first ones to actually commit to putting a Bitcoin product within their 401(k)s.

So an employer could choose to offer this security to invest directly in Bitcoin because Fidelity had been mining Bitcoin for almost a decade at that point, somewhere around there. Now they're in a situation where they were offering this as a legitimate security to many folks. And some plan sponsors jumped all on there. Some participants were all about it and wanting it. And then November – I think it was ‘21 or ‘22 – when it dropped.

Ryan Potts: November of ‘21 was kind of like the peak price. The most recent high is obviously this week.

Colin Day: Right, right, right. And we're filming this the second week of March. It took a long time to just get this one thing in place. And was the timing great? No. Do I hear a lot about Fidelity offering Bitcoin as a security in their portfolios? No. But it was just another step before granting legitimacy to another security so that retail individuals outside of employer plans could invest. Maybe – I'm not going to say a safer way – but maybe in a more, a way that people felt more comfortable doing that.

Ryan Potts: A more regulated way.

Colin Day: A more regulated way, let's say – than trying to do their own mining, opening up a Wallet, of course. We hear about some cryptocurrency exchanges failing and putting a sour taste in the mouth. But yet we still see [that] there's still this interest. People are still demanding this kind of product, which, in a way it's pretty surprising.

Ryan Potts: To me personally, it's extremely surprising. For me right now, I feel like we can go back to when gold kind of got a fund, a spot price for gold. And we just saw what that did to the price of gold. There was so much excitement and demand for gold, if you recall, in the late ‘80s and all of a sudden they roll out a product that makes it extremely easy for investors to get their hands on it and you see the price just surge astronomically.

If you would have bought at that top, you would have never made money on it because it's down right now still. I think we're seeing that occur with cryptos in a way. And I'm not saying that Bitcoin and gold are the exact same assets. I think they're definitely similar and different in their own ways.

I think it's really interesting – I had said spot price earlier, you talked about Fidelity mining – I think it's important [that] we let the audience know the difference [between] these two. Um, so really when you think of, and I'll just use gold, cause it makes a lot of sense, there's a ton of correlation in this, in this regard, but, um, But when you think of mining, uh, obviously cryptocurrencies are something that are digital and found on the interweb, essentially, when you think of gold mining, you're going to actual caves and going underground and mining for gold, right?

Colin Day: Yeah, please.

Ryan Potts: When you think of – and I'll just use gold, because it makes a lot of sense, there's a ton of correlation in this regard – but when you think of mining, obviously cryptocurrencies are something that are digital and found on the interweb essentially. When you think of gold mining, you're going to actual caves and going underground and mining for gold, right?

Colin Day: Mines, maybe.

Ryan Potts: Exactly, yes. The reality though, is [with] mining you are actually going out and getting the physical asset. And again, Bitcoin and cryptocurrencies aren't physical assets, but you are owning the actual assets themselves. Where through ETFs and spot price funds, what is going on essentially is that these companies are using futures contracts to try to replicate the movement involved in price of a Bitcoin or Ethereum or other cryptocurrencies.

That's really important to know as an investor, because if you're someone who really believes in Bitcoin as Bitcoin itself, you might want to actually go out and invest in Bitcoin separately than owning it through a fund. Because if something were to happen and you feel like Bitcoin is the value at the end of the day, well your fund doesn't really own the Bitcoin itself. It's just trying to mimic the price and give you the action of owning the asset. With Fidelity mining their own Bitcoin and being able to provide a solution to 401(k) clients, for me, that would be more attractive because you actually are owning the underlying Bitcoin itself instead of having technical, paper trading of Bitcoin that tries to mimic the actual asset.

Colin Day: Yeah. And I think that brings up a good point, which is talking about understanding what you're putting your money into, right? We try to educate our clients on the reason that we diversify into different types of portfolios, market sectors. Different types of instruments in ETFs, individual stocks, bonds, whatever it might be. Getting underneath the hood and understanding exactly what you're in. That's why people trust us to be their financial advisor. But those people that are just going off on their own and just saying, “Hey, this is my opportunity to invest in Bitcoin.” Well, okay, timeout, hold on. Let's make sure that this is an appropriate option for you, that this is something you should consider. Understand the limitations of the securities that you're purchasing. Right now, Bitcoin's doing extremely well. If you have cryptocurrency in your Wallet, the rising tide generally lifts all boats. When the ETFs were announced and they were released, they didn't do so well for the first week, two weeks, and now suddenly we're seeing this additional surge.

So many people are asking us now. “Hey, where's the Bitcoin ETF? Why isn't it In the portfolio yet, Colin? Hey, I've got a 401k plan with you. Where's Bitcoin?” I got that one just the other day. Well, it's not appropriate for everybody. So Ryan being one of the portfolio managers on our team, what are we doing with this? We have this opportunity. What are we going to do with it?

Ryan Potts: It's a great question. Right now we are not allocating as a firm to Bitcoin. Now, would that change in the future? Potentially, I don't know. But the way that we think about investing, we think of it as an ultimate means to an end. For our clients, it's reaching a goal.

A lot of what we would consider the best investors in the world, they tend to own things that have high utility and are achieving some kind of cash on cash return. Which means that we're putting money to work and then that money is then being generated through the operations of a business or through debt security through fixed income.

With Bitcoin, we don't get that. And I'm going to use Bitcoin because of all of the cryptos, [it’s] probably the least utility one out there. When we think of Bitcoin as an asset, we think of it as a purely speculative asset, kind of in the way that we think of gold. Where the price of Bitcoin or gold is going to go up and down based on the demand and supply in the market at any given time.

We just saw the launch of ETFs. And so now there's the capability of billions of dollars to get dumped into this asset class, which would then correlate to the appreciation that we're seeing currently. But in terms of our overall client objectives and reaching their goals, we do feel like Bitcoin is maybe a little speculative for our likes, but that doesn't mean that we're restricting our clients from owning it. We're just not recommending it to our clients.

So what I have seen is some clients are interested in this asset class, either through their independent research or they're getting help from maybe from a younger generation within their family. So this is something that they feel like they want to own, but they don't know how much they should own in their portfolio.

That's the biggest question that we've been fielding is, "Hey, I want to own it." We're like, "Great. You can own it." How much do they own? Well, depending on who you talk to, you're going to get a ton of different metrics or answers to that question. What I would focus on for investors is understanding that if you take a passive approach to investing and you just want to own the market as a whole, well, cryptocurrencies as a whole are only about $2.5 trillion in market cap globally. If you look at the global stock market – so that's not just a U S stock market, but that's the global stock market, including Asia and Europe and all the emerging markets – that's $110 trillion. So essentially what we're saying is cryptocurrencies as a whole only represent about 2% of the global stock market. And because we know that cryptos are an extremely volatile asset class, I would lump them into equity exposure within a portfolio. So what clients need to know is that for us to feel comfortable about your exposure to cryptocurrency, it probably really only needs to be about 2% of any of your equity exposure.

Depending on if you're in a 60/40 asset allocation, then you're going to have obviously less than 2%. So, that's how we look at it. And I know some of our clients maybe are pushing 5% if that's a preference that they have. And we would just tell them, “As long as you understand you're doubling the global market cap weight of crypto within your portfolio and you understand it's super speculative and highly volatile, that's totally fine with us.” We just want to make sure that the education has been put into place before we allocate.

Colin Day: Right. And it's a conversation, right? It's a conversation to have. We are not pro-, we are not con-cryptocurrency. I would say we're bullish because, I'd like to think that glass is half full when I think about the world in general and yeah, I would love for most things to work out for us. Not everything will. So, it's taking pieces and parts, putting it together into a package, and saying, “Dear Mr. and Mrs. Client, this is what we think is appropriate for you.” We've run into clients that have very sizable cryptocurrency wallets or they are in a situation where they have interest but they're not really sure what they want to do with that quite yet. Their kid has told them something or their grandkids in some situation about doing something, or they just wanted to learn. So if we could be a resource for you, feel free to reach out. If you're a current client of ours, we can chat with you. If you're interested in working with an advisor, we can chat with you about your portfolios to see if that's of interest or something that we need to concern ourselves with if you were to work with us going forward. But it's all about balancing the need and the actual performance that we can balance to make sure that if retirement is on your mind or just getting to retirement is on your mind, then that this portfolio isn't going to put us in jeopardy. It's only going to accentuate, it's only going to encourage us to continue to consider diversification. So Ryan, any, any last thoughts?

Ryan Potts: No, I'll just piggyback really quickly. It's almost a capability thing. "Does your portfolio give you the capability to maybe allocate to crypto?" And if you're Colin’s and [my] age, I would say the absolute answer is yes. If you're on the “wiser” scale of that end of that spectrum, when you're maybe pushing 70 or 80, the conversation is more income focused and how do we get you to your goals and make sure that your portfolio doesn't go to zero before you pass away. I would say maybe your capability is a lot lower than Colin’s and [mine].

So I think the conversation is a lot more around, “Does your portfolio give you the flexibility to make this type of an allocation?”

Colin Day: Great. Wonderful.Thanks for joining me today.

Ryan Potts: Yes, of course. Always a good time.

Colin Day: All right. Thanks for joining us on Capital Conversations. Like, and subscribe until next time, have a great day.

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.

As always, please remember investing involves risk and possible loss of principal capital. Please seek advice from a licensed professional. Correct Capital Wealth Management is a registered investment advisor. Advisory services are only offered.

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