Crypto funds have arrived. But who needs them?

Exchange-traded funds come in many shapes and sizes. Some are simple, diversified index funds that allow you to invest across the stock and bond markets, and are excellent core investments for the vast majority of people.

Then there are the quirky, narrowly focused ETFs like the Inverse Cramer Tracker, which lets you bet against the stock picks of CNBC television host Jim Cramer. The fund is legal, approved by the Securities and Exchange Commission – and a money loser since its inception last year. Betting against Jim Cramer is simply not a good investment strategy.

There is also no fear of missing out. Yet FOMO is the main reason for putting money into Bitcoin, which remains highly speculative, difficult to categorize and without an immediately identifiable economic function.

The SEC this month approved 11 new ETFs that track the price of Bitcoin, and the decision has been heralded by promoters of Bitcoin – and the new funds – as a major event that legitimizes Bitcoin as an asset class.

I do not think so.

The SEC's action in itself does not give Bitcoin any new status. It just adds Bitcoin funds to a long list of ETFs that are perfectly legal and easy to buy, but aren't part of anyone's core portfolio. I would put the Inverse Cramer Tracker in this category, as well as ETFs that track a single stock, such as Tesla, PayPal or Nvidia, or that use leverage to triple a bet on energy prices or quadruple one on the S&P 500. I could go on.

Simply being legal doesn't make a strategy sensible for most investors. In fact, while approving Bitcoin ETFs, the agency explicitly warned against FOMO investing in so-called digital assets – as it has done many times before.

“Just because others around you may take advantage of these types of opportunities doesn't mean you should too,” said Lori Schock, director of the SEC's Office of Investor Education and Advocacy.

However, the agency's approval of the new Bitcoin funds changes things in one important respect. Until now, I could easily avoid discussing Bitcoin in the context of investing. Why draw attention to something that is not good for most people? But now that major financial service providers Just as BlackRock, Fidelity, Franklin Templeton, Invesco and Wisdom Tree are starting to operate Bitcoin ETFs and make them available to their clients, silence seems unnatural and perhaps irresponsible.

So here goes.

Understanding Bitcoin

I don't want to completely dismiss Bitcoin.

Granted, it is possible to make (and lose) a lot of money buying and selling it. And Bitcoin is a serious proposition, in terms of its underlying structure. The use of blockchain, its decentralized, peer-to-peer structure and its complex mathematical code demand respect. Concepts embedded in Bitcoin and other so-called cryptocurrencies may at some point, and in some way, matter in the real world, although perhaps not as Bitcoin.

As Bryan Armour, who researches index fund strategies at Morningstar, told me, “Just because we don't believe Bitcoin ETFs are a good investment doesn't mean blockchain isn't a good or useful technology.”

But Bitcoin itself? He said it politely. “I would say Bitcoin is still in the price discovery phase. We're still trying to figure out what it might be worth.”

For large companies or other large institutional investors interested in some exposure to Bitcoin, the new ETFs could be a better and more convenient option, said Samara Cohen, chief investment officer of ETF and index investing at BlackRock. “It's the beginning of a journey,” she said.

But for ordinary people investing in important things like their pension, a house or a child's education, I would be very careful. The to collapse of the FTX trading platform in 2022 and the fraud and conspiracy conviction of Sam Bankman-Fried just a few months ago remind us that Bitcoin is extremely risky. Its future is uncertain, and so is its definition.

Defining terms

To begin with, I think the term cryptocurrency is a misnomer. These things are not currencies because they cannot be widely exchanged for products and services in the real world. But even if they were currencies, it would make no sense for ordinary people to invest in them. Large companies hedge against fluctuations in currency values, but most of us invest in assets that at least have the potential to generate income and cash flow – assets that can be purchased of currency.

Then we come to the central claim of the new ETFs – that they help create 'an asset class', a category that 'protects you' in times of uncertainty, just as gold did 'for thousands of years', in the words from Laurence D. Fink, the chairman of Black rock. In my opinion, this comparison is flawed.

Gold has historical cachet, has actually served as money, is still owned by central banks, has commercial applications in the jewelry and industrial sectors and plays an important cultural role in countries like India. Bitcoin has none of these characteristics.

But in a way I agree with the comparison. Gold is not an important part of a modern diversified investment portfolio, which includes stocks, bonds and cash.

Small amounts of gold may not hurt you much, but they won't help you much either, as numerous studies have shown. The stock market has outperformed gold as an inflation hedge over the long term. Nobody needs gold as an investment now.

That includes Bitcoin, which has not been an effective inflation hedge in its short life since its inception during the 2008-2009 financial crisis.

But it is different from gold. Bitcoin has added significant risk to the portfolios of those who have owned it.

A Morningstar study last year by Madeline Hume found that owning just 2 percent of Bitcoin can transform a conservative stock bond portfolio into a much riskier one. Investors may be tempted by Bitcoin if its price rises, but beware: “Compared to other assets, however, Bitcoin's volatility is more kerosene than kindling,” the report said.

Already exposed

To a very small extent, even without the new ETFs, there's a good chance you already have Bitcoin exposure in your portfolio.

Most new ETFs rely on Coinbase, which calls itself a “trusted and easy-to-use platform for accessing the broader crypto economy,” for key functions: converting cash to Bitcoin and Bitcoin to cash, Bitcoin storage and custody, assistance in monitoring the fund's activities and sometimes all of these activities.

Coin base is a publicly traded company, and the largest holders of most such companies are mutual funds and ETFs managed by giants like Vanguard, BlackRock, State Street and Fidelity. I checked: my Vanguard workplace retirement accounts include broad, diversified stock index funds with Coinbase.

And that's not all. They also include small shares of companies such as MicroStrategy, which owns a lot of Bitcoin. Then there are companies like Riot platforms And Clean spark who call themselves 'Bitcoin miners' – entities that run the computers that generate new Bitcoin and keep the Bitcoin universe running.

I don't see a big social purpose for Bitcoin mining. a According to the 2022 White House report global electricity consumption for “crypto assets” was greater than “the total annual electricity consumption of many individual countries, such as Argentina or Australia.” That's hard to justify in an era of global warming.

I'm not happy about this, but I have a part in it, and you probably do too. That's the way investing in index funds works. You own part of the entire universe of publicly traded companies. On the plus side, if it turns out that I'm wrong about Bitcoin, and that it really is the next big thing – and is somehow needed to save the planet – then these companies will grow in size, and my wallet will also swell. That would be a win-win situation, although I don't count on it.

I should point out that Vanguard has taken a principled stand against Bitcoin. The broad index funds own the companies involved in crypto because these funds own all the companies. But if you want to buy the new Bitcoin ETFs — or, as of Jan. 12, the older ones that tracked the Bitcoin futures markets — you can't do that at Vanguard.

In an email, Karyn Baldwin, a spokeswoman, said: “We also have no plans to offer Vanguard Bitcoin ETFs or other crypto-related products.” Instead, she said, Vanguard is “focused on asset classes such as stocks, bonds and cash, which Vanguard views as the building blocks of a balanced, long-term investment portfolio.”

That makes sense to me. Bitcoin and other cryptocurrencies are not a legitimate asset class, at least not yet. Publicly traded Bitcoin companies are. I can live with that oddity.

In short, while the new ETFs can help the companies involved and grow interest in Bitcoin, Bitcoin is still not important for serious individual investors.

Nothing the SEC has done this month has changed that.

That doesn't mean you should avoid Bitcoin. Owning one can be fun and profitable. But I'd make the same statement about buying lottery tickets, spending evenings at a casino, placing online bets on your favorite sports team – or buying shares of the Inverse Cramer Tracker.

If you can afford to spend your money on this type of entertainment, enjoy it. But don't fool yourself that you are making a solid long-term investment.

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