Page 8 - Advice Matters - FWP May 24

Are the new bitcoin ETFs the

gamechanger you’ve been waiting for?

Follow the time-tested investment approaches The cryptocurrency industry is largely unregulated and
based on positive real returns and enduring accompanied by considerable risks including high rates of
economic rationale. fraud and extreme volatility.
The recent regulatory approval and introduction of nearly Over just the past three years, the price of bitcoin has
a dozen spot bitcoin exchange-traded funds (ETFs) in the increased by as much as 150% and declined by as much
United States has been generating lots of noise in the as 75%. But what is really interesting is that no one can
global investment industry. explain why. And it’s important to remember that to make
Until recently, US investors who wanted to buy and sell up for a big percentage fall investors need an even bigger
bitcoin had to either trade on cumbersome and costly percentage gain just to break even. As an example, if you
cryptocurrency exchanges or purchase products that track start with a $100 position and it drops by 75% to $25, it
bitcoin in less direct ways. will take a 300% gain to get back to break even at $100.

While spot bitcoin ETFs have been available in Australia It’s also worth remembering that, depending on the
since 2021, many in the cryptocurrency industry claim source, there are somewhere between 8000 and 10,000
that the US Securities and Exchange Commission’s long- active cryptocurrencies. A similar number are regarded as
awaited approval signals legitimacy and the arrival of inactive, which is really just a polite word for failed.
crypto as a mainstream asset class that can now be more For most investors, adding cryptocurrency exposure to a
easily recommended by financial advisers. portfolio would mean reducing allocations to traditional
Even though the ETF format is undoubtedly a more efficient asset classes with demonstrated long-term investment
method of accessing almost any asset, before rushing into credentials.
these new bitcoin ETFs investors should follow time-tested Investors who can’t ignore their craving to speculate in
best practices of assessing an asset’s enduring investment cryptocurrencies would be well served viewing it as a
merit and ability to generate positive real returns. satellite exposure only, leaving their core holdings invested

First, consider that when you invest in the share market or in broad-based, diversified funds.
in bonds, you are essentially investing in the future earnings There is no doubt that some speculators have benefited
of a company or, in the case of bonds, a borrower’s ability from bitcoin’s rise, but on the other side of the ledger,
to pay back a debt obligation with interest. many investors have lost significant amounts of money.
On the other hand, most cryptocurrencies – unlike shares, Over time, given the risk characteristics of cryptocurrency
bonds or even property – do not produce any cash flows for assets, it’s likely many investors will fall into the latter
investors (dividends, interest payments or rent payments). category.

A second key factor is around valuations. To evaluate the Any investment strategy based on catching lightning in
investment case for any asset, one needs to assess its fair a bottle is very high risk. For that reason, it’s better for
market value. This is often done by analysing its discounted investors to shrug off the fear of missing out and not stray
future cash flows. too far from the time-tested investment approaches based
on positive real returns and enduring economic rationale.
But cryptocurrencies don’t generate any cash flow, so they
cannot be objectively valued and therefore their trading Often the hardest part of creating wealth is not figuring
prices are purely speculative. out the most exciting investment portfolio, it’s about

When it comes to valuing, the best one can do is hazard a remaining committed to a sound investment portfolio.
guess. And, as exciting as crypto may be, guessing is never An iteration of this article was published in the Australian
good enough when it comes to long-term nest eggs. Financial Review.

A third consideration is that cryptos lack any proven Source: https://www.vanguard.com.au/personal/learn/smart-
industrial usage. In other words, unlike currencies issued by investing/etfs/investing-in-bitcoin-crypto-etfs
central banks and backed by governments, cryptocurrencies
are not widely used for everyday commercial transactions,
let alone for personal financial transactions.

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MAY 2024