In an interview with CNBC last week, new SEC chair Gary Gensler threw a bucket of cold water on the potential for a Bitcoin ETF in the near future. Gensler stated, “What’s important at the SEC is to be technology neutral and still stay to our core principles of protecting investors’ capital formation.” He continued, “I don’t think there’s that investor protection for Bitcoin investing at this point in time.”
It’s understandable the SEC has been reluctant to approve a Bitcoin ETF. This is an entirely new asset class. Compared with traditional financial markets, the regulators have much less information, jurisdiction, and regulatory oversight of cryptocurrencies and their exchanges.
That needs to change. This is now a $2 trillion (and growing) asset class. The majority of people who own crypto are retail investors. Anytime there is a new and exciting innovation in the technology or finance space, people are bound to get taken advantage of. Crypto is no different.
One report estimates investors have lost more than $16.5 billion in crypto-related scams since 2012. The actual amount of lost money is certainly higher than that, since most people who are taken advantage of with their money are reluctant to admit when they’ve fallen prey to a fraud.
Ways to buy crypto
Since there is no ETF approved in the United States, investors have been forced into products or platforms that aren’t ideal from a portfolio management, tax, or regulatory perspective. Yes, you can buy crypto from an exchange such as Coinbase or Robinhood, but those platforms don’t allow for individual retirement accounts (IRAs). There are certain platforms that allow for crypto to be held in an IRA, but it’s impossible to sync those platforms with your current stock and bond holdings. And you could buy a Bitcoin trust from a company like Grayscale, but the fees are much higher, and that fund can trade at a premium or discount to the underlying price of the asset.
This is important because one of the most significant aspects of any successful investment plan is your asset allocation. Setting your asset mix between stocks, bonds, cash, and other investments allows investors to create a target risk and diversification profile. But asset allocation doesn’t work very well if you don’t or can’t rebalance easily.
There are a number of investors who are interested in putting their money into the crypto space, but either they don’t understand how to buy it, where to hold it, how the custody of the assets works, or how it fits in with the rest of their portfolio. For many investors, crypto is more like a stand-alone holding as opposed to an asset you can use strategically in a portfolio management context.
A Bitcoin ETF solves all of these problems. This would give investors a low-cost, tax-efficient vehicle where the crypto is held by a third party on your behalf. You could own it in a brokerage account or an IRA or at a fund company. You could rebalance it back to your target allocation with the push of a button. And you wouldn’t have to worry about choosing the wrong platform that potentially exposes you to fraud or the risk of being hacked.
Or what about those investors who don’t even want to hold an individual crypto fund? Why couldn’t Bitcoin be offered as part of a target date retirement fund? These all-in-one retirement funds now have upwards of $3 trillion in assets. It’s basically impossible to invest in crypto in your 401(k) plan at the moment. A Bitcoin ETF could help here.
And because of the volatile nature of crypto and the potential for extreme gains (and losses) it is the perfect asset class for tax-deferred accounts. You don’t need a large allocation to crypto in your portfolio to make a difference. Even a small allocation could improve your returns if you have a feature that could automatically rebalance for you over time. That way you’d be selling into the big gains and buying into the big losses, which is the entire goal of investing in the first place.
And we have proof crypto ETFs can work. Canada approved two Bitcoin ETFs earlier this year. They have also approved an Ethereum ETF. The inaugural Bitcoin ETF approved in Canada in February already has more than $1 billion in assets.
Canada’s financial markets are much smaller than America’s. You can bet if and when we have approval here the dollar amounts will be much larger. That is why the SEC needs to make this happen sooner than later. All of that money is currently going into suboptimal funds and exchanges. The longer they wait, the more risk to individual investors who don’t know what they’re doing in this space.
I understand why the SEC is taking its time on this issue. But the approval of a Bitcoin ETF would actually reduce more risks for investors than the potential it has to create them.
Ben Carlson is the director of institutional asset management at Ritholtz Wealth Management. He may own securities or assets discussed in this piece.
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