Bitcoin soared into record territory on Tuesday before falling back below the $64,000 level. It briefly surpassed the previous high of $68,789 set in November 2021. Demand for digital currency surged so much that it even led the crypto-trading platform Coinbase to crash last week.
After the brutal crypto winter that began in 2022, bitcoin could soon shatter its previous records as investors pour money into newly created bitcoin spot ETFs or exchange-traded funds.
The price of ether, the native token of the ethereum network, also soared to levels not seen since April 2022 — as investors speculated that ethereum ETFs will eventually win approval from the U.S. Securities and Exchange Commission (SEC), as well.
As billions of dollars pour into bitcoin ETFs daily, is it time to get in on the party? Proceed with caution.
What’s the big deal about the new bitcoin ETFs?
Less than a year ago, 75% of Americans who’d heard of cryptocurrency said they weren’t confident in its safety or reliability, according to a Pew Research Center survey.
But the price of the world’s largest cryptocurrency began climbing again in late 2023 after a federal appeals court ruled that the SEC wrongfully rejected an application from Grayscale Investments to convert its Grayscale Bitcoin Trust into a spot bitcoin ETF. The SEC said in October that it wouldn’t appeal the court ruling.
And in January, it gave the OK to nearly a dozen new exchange-traded funds called spot bitcoin ETFs. Spot ETFs own the underlying asset — like gold, silver, or now bitcoin — and closely track its price, minus trading costs or fees.
“There have not been any ETFs like this before,” said Ric Edelman, founder of the Digital Assets Council of Financial Professionals. “There are ETFs that invest in stocks of companies that do business in the crypto industry, such as exchanges and miners, and there are ETFs that trade futures in bitcoin, which is like buying equity options instead of stocks, but until now there have not been any ETFs that directly invest in and own bitcoin.”
The SEC’s decision allows investors to get direct exposure to bitcoin without going through a crypto exchange or dealing with the headache of storage or security issues. Instead, investors can easily gain bitcoin exposure by owning shares in their brokerage accounts, including individual retirement accounts (IRAs).
“The new spot bitcoin ETFs are widely viewed as the safest from a custody perspective because the ETFs are regulated by the SEC, and they handle the safeguarding of your bitcoin for you,” Edelman said.
Does bitcoin belong in an investment portfolio?
With all the hype surrounding bitcoin, it’s understandable if you’re tempted to buy in. But there’s a lot you need to know first before you try to profit off the skyrocketing price.
It’s still a speculative asset
Bitcoin and other cryptocurrencies are speculative investments, which are assets that people put money into, hoping the price will rise rapidly. Sometimes, speculative assets are called nonproductive assets because they don’t generate any income, like interest, dividends, or earnings. Investors who buy speculative assets are typically seeking to profit off short-term price fluctuations.
“Normally, the way you think about a financial asset is you’re providing capital to the company,” said Michael Finke, a professor of wealth management who holds the Frank M. Engle Distinguished Chair in Economic Security at The American College of Financial Services. “The company uses that capital to make something, and the people buy it. That creates profit. You can value the company based on the profitability you expect in the future.”
“With bitcoin, it’s not producing anything, so the valuation is entirely speculative,” he said.
That may not seem like a big deal if you’ve been watching the price of bitcoin tick higher and higher. Who needs dividends or interest when bitcoin’s price is up 40% in two months?
You might think that the price of bitcoin can keep going up forever. After all, the stock market has a solid track record of rising over long periods of time. But keep in mind that, unlike a company whose stock you might buy, bitcoin isn’t creating a product or service that people actually use. Even as a payment method, its usage is extremely limited.
Also, much of the wealth historically generated by the stock market has come from reinvestment rather than rising stock prices. As dividends get reinvested — which usually happens automatically in most 401(k)s and many automated brokerage accounts — you’re buying more shares, allowing your money to compound and earn even more over time.
About 69% of the S&P 500 index’s total return between 1960 and 2022 came from dividends rather than price gains, according to research by…
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