This is an opinion piece 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 submitted an application for authorization to offer spot Bitcoin exchange-traded funds (ETFs).
Although the United States Securities and Exchange Commission (SEC) declared that these initial deposits were insufficient, forcing firms to file again, many investors believe that they will finally be approved, creating the first products of this type on the market. These new financial instruments would allow institutional and retail investors to gain exposure to the price of bitcoin without having to purchase actual bitcoin.
On the surface, this would be a major win for bitcoin adoption as it will become easier for financial advisors, previously hesitant or unable to enter this market, to help clients with some form of bitcoin allocation.
Banks and other traditional financial players will also use the spot ETF to increase their exposures, which could increase the exchange rate of bitcoin with the dollar. For families and individuals, however, shares of a bitcoin product through spot ETFs are no substitute for owning bitcoin in self-custody.
Ultimately, Bitcoin ETF products still exist in the traditional financial system and do not offer complete protection against market, government, or compliance risk. Thus, market forces can affect ETF issuers, and governments can enact and enforce regulations by decree that devalue or devalue the consumer’s assets.
In contrast, holding real bitcoins allows individuals to access a digital bearer asset beyond the control of governments and traditional financial institutions. While introducing new risks associated with private key management, every diversified portfolio should have a true bitcoin allocation, independent of any additional allocation to a bitcoin ETF.
As investors seek to diversify to spread risk and protect themselves from geopolitical and market shocks, there is no substitute for bitcoin in self-custody.
Advice outside the financial system
For years, financial advisors have dutifully allocated clients’ wealth among a variety of traditional financial assets (stocks, bonds, real estate, insurance). Overall, they got pretty good results. Cutting-edge analysts having calculated that advisors can increase the value of client portfolios by up to 3% simply by ensuring they follow best practices, rather than chasing returns. Advisors benefit from a typical annual fee of 1% on assets under management (AUM).
Yet good financial advisors are more than outsourced portfolio matchers who recommend the right “mix” of assets to match a client’s goals and risk profile. They work with clients to provide protection against a wide range of outcomes and ensure wealth preservation through retirement and for future generations.
Some advisors ignore the reality that allocations entirely within the traditional financial system are exposed to risk arising from the “boom and crash” financial market cycle. As a result, clients sometimes have to risk not being able to retire or change jobs until the market recovers, putting them in a lifestyle setback situation.
Good diversification requires liquid assets outside the traditional financial system. For generations, the best asset to do so was physical gold. In 2009, however, Satoshi Nakamoto released the next best bearer asset, bitcoin, and with it a new system with a monetary policy set in a credible manner. Now anyone can use bitcoin to free up cash during a crisis.
A spot ETF against. real bitcoin
The potential spot Bitcoin ETF would provide benefits, such as exposure to bitcoin price movements, some diversification from traditional financial markets, and ease of purchase. Despite these advantages, he hesitates to marketabilitykey component of a diversified portfolio.
Bitcoin operates on a monetary network that operates 24 hours a day, 365 days a year. Individuals and institutions can use it to instantly transfer value without third-party approval. They can also sell bitcoins for fiat currencies at any time through centralized exchanges or peer to peer.
In contrast, individuals and institutions can only exchange shares of a bitcoin ETF for cash for fiat cash only when financial markets are open, which for retail investors is 9:30 a.m. to 4:00 p.m. Eastern Standard Time, weekdays, excluding holidays. Exchanges can also interrupt exchanges at will or because they receive a regulatory orderfurther limiting the ability to sell ETF shares.
In another scenario, if a government tries to restrict the acquisition of bitcoin, it might be able to 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 opportunity to exit a system with strong capital controls, rather than suffer the consequences of an unpredictable future.
Essential protection, significant diversification
Owning shares of a bitcoin product is not the same as owning bitcoin directly. Cash Bitcoin ETFs would remain tied to the conventional financial system. This has slight advantages, but it ultimately limits bitcoin’s ability to be used as a shield against the risk inherent in the traditional financial system.
Including real bitcoin is essential for a diversified portfolio, even if that portfolio already has a spot bitcoin ETF position.
This is a guest post by David Waugh. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
