This is an opinion editorial by David Waugh, a business development and communications specialist at the bitcoin investment platform Coinbits.
A few weeks ago, BlackRock and other major financial companies filed for permission to offer spot bitcoin exchange-traded funds (ETFs).
Although the US Securities And Exchange Commission (SEC) said these initial filings were insufficient, forcing companies to refile, many investors believe they will eventually be approved, making the first such products on the market. These new financial instruments will allow institutional and retail investors to access bitcoin price exposure without having to purchase actual bitcoin.
On the surface, this is a great victory for the adoption of Bitcoin because it will be easier for financial advisors, who previously hesitated or could not enter this market, to help clients in a form of bitcoin allocation.
Banks and other traditional financial players will also use spot ETFs to increase their exposures, potentially increasing the exchange rate of bitcoin to the dollar. For families and individuals, however, shares of a bitcoin product through spot ETFs are no substitute for keeping bitcoin in one’s own custody.
Finally, Bitcoin ETF products still exist within the traditional financial system and do not provide complete protection from market, government or compliance risk. As such, market forces can affect ETF issuers, and governments can create and enforce regulations by decree that lower or lower consumer assets.
In contrast, holding real bitcoin allows individuals to access a digital bearer asset that is not controlled by governments and traditional financial institutions. Although this introduces new risks related to private key management, each diversified portfolio must have a real allocation of bitcoin, regardless of the additional allocation of a bitcoin ETF.
As investors seek to diversify the spread of risk and protect themselves from geopolitical and market shocks, there is no substitute for bitcoin in self custody.
Advice Outside the Financial System
For many years, financial advisors have faithfully allocated clients’ wealth in a variety of traditional financial assets (stocks, bonds, real estate, insurance). Overall, they did well. Vanguard analysts have calculated that advisors can increase the value of client portfolios by up to 3% simply by ensuring they follow best practices, rather than trying to chase returns. Advisors benefit from an average 1% annual fee on assets under management (AUM).
Yet good financial advisors are more than outsourced portfolio allocators who recommend the right “mix” of assets to match the client’s goals and risk profile. They work with clients to ensure protection from multiple consequences and ensure wealth preservation through retirement and for future generations.
Some advisors ignore the fact that allocations in general within the traditional financial system are exposed to risk arising from the “boom and bust” cycle of the financial market. As a result, sometimes clients have to risk not being able to retire or change jobs until the market picks up again, putting them at a significant life setback.
Proper diversification requires liquid assets outside of the traditional financial system. For generations, the best asset for doing so has been physical gold. In 2009, however, Satoshi Nakamoto released the next best asset carrier, bitcoin, and with it a novel system with a reliably fixed monetary policy. Now, anyone can use bitcoin to free up liquidity during a crisis.
A Spot ETF Vs. Real Bitcoin
The potential spot bitcoin ETF will provide benefits, such as exposure to bitcoin price movements, some diversification from traditional financial markets and ease of purchase. Despite these advantages, it has failed to sell, an important part of a diversified portfolio.
Bitcoin operates on a monetary network that runs 24 hours a day, 365 days per year. Individuals and institutions can use it to transfer money instantly without third-party consent. They can also trade bitcoin for fiat currencies at any time through a centralized exchange or peer to peer.
In contrast, individuals and institutions can only exchange shares of a spot bitcoin ETF for fiat liquidity when the financial markets are open, which, for retail investors, is 9:30 a.m. to 4 p.m. :00 pm, Eastern Standard Time on weekdays, excluding holidays. Exchanges can also stop trading at will or because they receive a regulatory order, further limiting the marketability of ETF shares.
In another scenario, if a government tries to prevent the takeover of bitcoin, it could seize the asset manager’s bitcoin or order it to liquidate the ETF. Holding real bitcoin yourself by managing your own private keys offers the exit ability from a system with strong capital controls, rather than suffering the consequences of a unpredictable future.
Essential Protection, Meaningful Diversification
Owning shares in a bitcoin product is not the same as directly holding bitcoin. Spot bitcoin ETFs remain tied to the conventional financial system. This has some mild advantages, but ultimately it limits bitcoin’s ability to be used as a shield against the risk inherent in the traditional financial system.
Including actual bitcoin is essential to a diversified portfolio, even if that portfolio contains a spot bitcoin ETF position.
This is a guest post by David Waugh. The opinions expressed are their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.