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Is this cryptocurrency ETF a discount buy?
The ability to track the price of Bitcoin is so important because, for more than a decade, Bitcoin has been the best-performing asset in the world. From 2011 to 2021, for example, Bitcoin produced annualized returns of 230%. No other asset class even came close. The next best asset class (technology stocks) has produced annualized returns of just 20%. After a down year in 2022, Bitcoin returned to producing triple-digit percentage returns in 2023.
Of course, there is no guarantee that Bitcoin will be able to replicate this kind of performance in the next decade. In fact, it is unlikely. But, if you think of Bitcoin as a unique asset class with its own risk-return profile, then the extra risk of investing in cryptocurrencies should (theoretically) be offset by improved returns.
Easy and cost-effective portfolio diversification
Given Bitcoin’s historical performance, you may want to include at least a small allocation in your portfolio for diversification purposes. As a general rule, a 1% allocation to Bitcoin is a good starting point for investors new to cryptocurrencies. But a slightly higher allocation of 2% to 5% might make sense for more experienced cryptocurrency investors. Because the iShares Bitcoin Trust is bought and sold like any other ETF, it’s incredibly easy to get the exact allocation you want.
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More importantly, this ETF’s management fees (0.25%) are low. If you do the math, it is cheaper to buy and hold Bitcoin through this ETF than it is to buy the same amount of Bitcoin through a cryptocurrency exchange. This is bad news for people like Global Coinbasebut it’s fantastic news for the average investor.
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Consider this ETF a loss leader for BlackRock. The company may not make a profit on this ETF, but it will likely help attract new customers and sell other investment products. This is especially true since the iShares Bitcoin Trust is part of the company’s iShares ETF family.
Compromises
At this point you’re probably wondering: so what’s the problem? A trade-off for this ETF is that you don’t actually hold Bitcoin. You are getting exposure to the price of Bitcoin, but you do not directly own the underlying asset. This is true of any ETF, of course, but it has significant implications. This is because Bitcoin is both a financial asset and a digital currency.
Therefore, you will not be able to use Bitcoin as you would if you purchased Bitcoin through a cryptocurrency exchange. If you plan to use Bitcoin for transactions, for example, or to send Bitcoin to other people, you won’t be able to do so if you don’t own Bitcoin directly. Furthermore, if you delve into the fundamental values of Bitcoin, you will quickly realize that many investors are philosophically opposed to anyone, and especially a large Wall Street institution like BlackRock, holding onto their Bitcoin.
Buy and Hold Strategy
In theory, you could use this ETF as part of an actively managed portfolio. And there are plenty of hedge funds that are doing just that. But it makes more sense to think of this ETF as a long-term buy-and-hold investment. You shouldn’t use this ETF to make short-term directional bets on the price of Bitcoin.
Instead, your investment goal should be to gain exposure to the price of Bitcoin, as cheaply as possible, for as long as possible. And iShares Bitcoin Trust lets you do just that. For that reason, this ETF might be an obvious buy right now, as long as you’re willing to put up with the daily price volatility that comes with investing in cryptocurrencies.
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Domenico Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and Coinbase Global. The Motley Fool has a disclosure policy.
Is this cryptocurrency ETF a discount buy? was originally published by The Motley Fool