Bitcoin is finally legit. Hooray! Time to load up. That’s the message, anyway, that crypto enthusiasts heard earlier this year when Wall Street’s regulator approved the issuance of bitcoin exchange-traded funds, or ETFs—investments that can be bought and sold like stocks. At last, the previously naysaying Securities and Exchange Commission had endorsed bitcoin, signaling a new beginning for the popular if much-maligned digital asset.
Its backers had good reason to believe bitcoin’s time had come and that the buzzy cryptocurrency could take its deserved place in the pantheon of worthy investment vehicles. No longer would the bitcoin-curious need to keep track of complicated passwords—made up of long strings of letters and numbers—for their coins or rely on the likes of Sam Bankman-Fried to oversee their trades.
While it’s true that investors can now bet on bitcoin in the same humdrum way they buy shares of Microsoft or the S&P 500, the reality is that bitcoin’s legitimacy remains a tenuous affair. That ought to scare anyone away from bitcoin ETFs for any considerable portion of their portfolio. If anything, the advent of bitcoin ETFs—the SEC initially sanctioned eleven of them—represents more acceptance than approval.
The SEC remains decidedly tepid on bitcoin. And the venerable fund manager Vanguard—a major player in retirement accounts that boasts more than $8 trillion in assets under management—refuses to offer its clients the new ETFs. At Bank of America’s wealth-management businesses, only clients with more than $10 million in assets are allowed to hold bitcoin ETFs in their accounts. Those, in other words, who can afford to lose a bundle.
This is because bitcoin, despite its recent total value in circulation of well more than $1 trillion, is no more a real investment today than it has been for its entire fifteen-year existence. It is, as JPMorgan Chase CEO Jamie Dimon said recently, the “pet rock” of the investment world, more curio than object of value. If you believe Dimon, that makes the newfangled ETFs little more than slickly packaged, easier-to-buy pet rocks, not suddenly mainstream investments.
For bitcoin investors, the past few years have been a wild, volatile ride. The price of a single coin rocketed above $64,000 in 2021 before plummeting to below $17,000 the following year. As recently as last October, the price was hovering below $30,000. More recently, though, the price of bitcoin has surged again—due in part to growing confidence that the ETFs would be approved and massively expand demand. The bitcoin bulls have been proven right in the short term. The price has spiked sharply this year. But there have been moments of dizzying volatility along the way. On March 13, bitcoin hit a new high of more than $73,000. The price then plummeted 15% in less than a week before rallying back above $70,000. Trying to peg that dollar figure to anything tangible in the real world is as elusive as ever.
Bitcoin was the creation of a shadowy Internet figure who went by the name of Satoshi Nakamoto but whose real identity has never been revealed. In theory, bitcoin and other digital currencies were supposed to be electronically generated stores of value, something gold had been in the real world for centuries. Like gold, bitcoin could be a hedge against inflation as well as a form of currency not overseen by any government, which adherents saw as a good thing.
What bitcoin and its fellow cryptocurrencies have amounted to, instead, isn’t much—unless, that is, you consider serving as tools for drug traffickers, extortionists, and pornographers to move money around an accomplishment. SEC chair Gary Gensler said as much on January 10, the day his agency approved the bitcoin ETFs: “I’d note that the underlying assets in [ETFs associated with precious] metals have consumer and industrial uses, while in contrast bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.”
This absence of what economists call “intrinsic value” is what continues to drive crypto skepticism and should worry potential investors. “It always comes back to valuation,” says Lee Reiners, a lecturer at Duke University and a former bank regulator with the Federal Reserve Bank of New York. “This is a question to which I’ve never received a satisfactory answer. There’s no understanding of bitcoin’s value. It trades entirely on sentiment.”
Reiners, who also hosts the podcast The FinReg Pod, says he tells his students that if they insist on investing in bitcoin, they should treat it like going to a casino. “Don’t bring more money than you’re willing to lose.”
There are some benefits to bitcoin ETFs, at least compared with buying bitcoin directly. As opposed to nearly all bitcoin traded on existing exchanges, the ETFs themselves are regulated. The fees to buy them are typically lower than those for buying bitcoin. Indeed, some of the new ETFs dropped fees altogether for the introductory period, a tactic not so different from how online gambling sites hook newbies with subsidized first wagers. Buying ETFs also offers better liquidity than owning individual bitcoins because the exchanges can slice and dice the coins for resale, and large numbers of investors can easily trade the resulting investment products. Finally, the committed bitcoin owner can hold the ETFs in tax-advantaged retirement accounts.
That said, at least one major financial institution won’t even offer the new ETFs. While money-fund biggies including Fidelity Investments and BlackRock have embraced bitcoin ETFs, Vanguard, one of the leaders of the industry, has not. Its reasoning is straightforward. “Our products and services are designed with the goal to help investors save more, trade less, and take a long-term approach—not chase trends and churn their portfolios,” said Andrew Kadjeski, Vanguard’s brokerage head, in a blog post.
His colleague Janel Jackson, who runs ETF capital markets for Vanguard, put a finer point on the matter. “While crypto has been classified as a commodity, it’s an immature asset class that has little history, no inherent economic value, no cash flow, and can create havoc within a portfolio,” she said. Vanguard recently took its antipathy to crypto a step further: Although it has allowed crypto products to be held in its brokerage accounts, it has disallowed new purchases.
Anyone seriously contemplating adding bitcoin ETFs to their portfolio—especially in a fund intended as a nest egg for a rainy day or retirement—also ought to consider the damning-with-faint-praise way the SEC allowed the investment vehicle at all.
Gensler, the crypto-skeptical SEC chair, noted on the day the ETFs received approval from his agency that the SEC had changed its stance and decided to allow Wall Street to roll out the investment products in response to an appeals-court ruling last year. It was as close as possible to the government holding its nose while authorizing an investing product. “Today’s action does not approve or endorse crypto trading platforms or intermediaries, which, for the most part, are noncompliant with the federal securities laws and often have conflicts of interest,” he wrote. “While we approved the listing and trading of certain spot bitcoin [ETF] shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”
The words “buyer beware” have perhaps never applied more.
