Bitcoin Funds Are Here. But You Probably Don’t Need Them.

Exchange-traded funds come in many shapes and sizes. Some are plain vanilla, diversified index funds that let you invest in the entire stock and bond markets, and are excellent core holdings for the great majority of people.

Then there are the quirky, narrowly focused E.T.F.s like the Inverse Cramer Tracker, which enables you to bet against the stock picks of the 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 just isn’t a great investing strategy.

Neither is 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 S.E.C. this month approved 11 new E.T.F.s that track the price of Bitcoin, and the decision has been heralded by promoters of Bitcoin — and of the new funds — as an important event, legitimizing Bitcoin as an asset class.

I don’t think so.

The S.E.C.’s action, in itself, doesn’t give Bitcoin any new stature. It merely adds Bitcoin funds to a long list of E.T.F.s that are perfectly legal and simple to buy, but that don’t belong in anybody’s core portfolio. I’d put the Inverse Cramer Tracker in this category, as well as E.T.F.s that track a single stock like 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 and on.

Simply being legal doesn’t make a strategy sensible for most investors. In fact, while approving the Bitcoin E.T.F.s, the agency also issued an explicit warning against FOMO investing in so-called digital assets — as it has done many times before.

“Just because others around you might be buying into these kinds of opportunities, it doesn’t mean you have to,” said Lori Schock, director of the S.E.C.’s Office of Investor Education and Advocacy.

The agency’s approval of the new Bitcoin funds does change things in one important sense, though. Until now, it was easy for me to avoid discussing Bitcoin in the context of investing. Why bring attention to something that isn’t right for most people? But now that major financial services companies like BlackRock, Fidelity, Franklin Templeton, Invesco and Wisdom Tree are beginning to operate Bitcoin E.T.F.s, and make them available to their clients, silence seems unnatural and, maybe, irresponsible.

So here goes.

I don’t want to dismiss Bitcoin entirely.

Granted, it’s possible to make — and lose — a great deal of money buying and selling it. And Bitcoin is a serious proposition, in terms of its underlying structure. The use of blockchain, the decentralized, peer-to-peer structure and the complex mathematical code demand respect. Concepts embedded in Bitcoin and other so-called cryptocurrencies could have real-world importance at some point, and in some way, though perhaps not as Bitcoin.

As Bryan Armour, who directs research into strategies based on index funds at Morningstar, told me, “Not believing that Bitcoin E.T.F.s are a good investment doesn’t mean that blockchain isn’t a good or useful technology.”

But Bitcoin itself? He put it politely. “I’d say Bitcoin is still in the price discovery stage. We’re still trying to figure out what it might be worth.”

For large corporations or other big institutional investors interested in getting some Bitcoin exposure, the new E.T.F.s may be a better and more convenient option, said Samara Cohen, chief investment officer of E.T.F. and index investments at BlackRock. “It’s the start of a journey,” she said.

But for ordinary people investing for important things like retirement or a house or a child’s education, I’d be very careful. The collapse of the FTX trading platform in 2022 and the fraud and conspiracy conviction of Sam Bankman-Fried only a few months ago are reminders that Bitcoin is extremely risky. Its future is uncertain, and so is its very definition.

Just to start, I find the term cryptocurrency to be a misnomer. These things aren’t currencies because they can’t be widely exchanged for products and services in the real world. But even if they were currencies, it wouldn’t make sense for ordinary people to invest in them. Major corporations hedge against fluctuations in currency values, but most of us invest in assets that at least have the potential of producing income and cash flow — assets that can be purchased with currency.

Then we get to the central claim for the new E.T.F.s — that they are helping to create “an asset class,” one that “protects you” in times of uncertainty, much as gold did “for thousands of years,” in the words of Laurence D. Fink, the chairman of BlackRock. This comparison, I think, is strained.

Gold has a historical cachet, has actually served as money, is still held by central banks, has commercial uses in jewelry and industry and has an important cultural role in countries like India. Bitcoin has none of those attributes.

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

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

That’s true of Bitcoin, too, which, in its brief life since its inception during the financial crisis of 2008-9, has not been an effective inflation hedge.

But it’s different from gold. Bitcoin has added considerable risk to the portfolios of those who have held it.

A Morningstar study last year by Madeline Hume found that as little as a 2 percent holding of Bitcoin can transform a conservative stock-bond portfolio into a far riskier one. Investors may be tempted by Bitcoin when its price is rising, but beware: “Compared with other assets, though, Bitcoin’s volatility is more kerosene than kindling,” the report said.

In a very small way, even without the new E.T.F.s, there’s a good chance that you already have exposure to Bitcoin in your portfolio.

Most of the new E.T.F.s rely on Coinbase, which calls itself “a trusted and easy-to-use platform for accessing the broader cryptoeconomy,” for important functions: converting cash into Bitcoin and Bitcoin into cash, storage and safekeeping of Bitcoin, assistance in monitoring the fund’s operations and sometimes all of these.

Coinbase is a publicly traded company, and the largest holders of most such companies are mutual funds and E.T.F.s run by giants like Vanguard, BlackRock, State Street and Fidelity. I checked: My Vanguard workplace retirement accounts include broad, diversified stock index funds that hold Coinbase.

And that’s not all. They also include small shares of companies like MicroStrategy, which owns a lot of Bitcoin. Then there are firms like Riot Platforms and CleanSpark that call themselves “Bitcoin miners” — entities that run the computers that generate new Bitcoin and keep the Bitcoin universe spinning.

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

I’m not happy about this, but I have a stake in them, and you probably do, too. That’s the way index fund investing goes. You hold part of the entire universe of publicly traded companies. On the positive side, if it turns out that I’m wrong about Bitcoin, and that it really is the next big thing — and, somehow, is needed to save the planet — well, these companies will grow in size, and my portfolio will swell, too. That would be a win-win, though I’m not counting on it.

Vanguard, I should point out, has taken a principled stand against Bitcoin. Its broad index funds own the companies involved with crypto because those funds own all companies. But if you want to buy the new Bitcoin E.T.F.s — or, as of Jan. 12, older ones that tracked Bitcoin futures markets — you can’t do it at Vanguard.

In an email, Karyn Baldwin, a spokeswoman, said: “We also have no plans to offer Vanguard Bitcoin E.T.F.s or other crypto-related products.” Instead, she said, Vanguard is “focused on asset classes such as equities, bonds, and cash, which Vanguard views as the building blocks of a well-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, although the new E.T.F.s may help the companies involved with them and may well cause interest in Bitcoin to grow, Bitcoin still isn’t important for serious individual investors.

Nothing the S.E.C. has done this month has changed that.

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

If you can afford to spend your money on entertainments like these, by all means, enjoy yourself. But don’t kid yourself that you’re making a solid long-term investment.

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