The first exchange-traded funds tracking the spot price of Bitcoin (BTC -2.23%) began trading last week after the U.S. Securities and Exchange Commission gave the go-ahead. Investors will no longer need to pay sky-high transaction fees at a cryptocurrency exchange like Coinbase. Instead, numerous low-fee Bitcoin ETFs now provide no-fuss access to the digital asset.
The SEC approved 11 separate Bitcoin ETFs, many of which are waiving fees for some time as they battle for market share. One of those ETFs is Grayscale Bitcoin Trust, which operated under a more complex structure with high fees before it converted to an ETF following SEC approval. Fees on these new Bitcoin ETFs will range from 0.2% to 1.5% excluding waivers.
A speculative asset
With Bitcoin now available in ETF format backed by well-known players including Fidelity and BlackRock, the digital currency gains some much-needed legitimacy. The cryptocurrency industry has been rocked by fraud and scandal over the past few years. Trusting a cryptocurrency exchange after FTX was revealed to be a fraud and Binance pleaded guilty to Federal money laundering charges is likely a tough sell for many investors.
While it's now much easier and cheaper to invest in Bitcoin, that doesn't mean the pioneer cryptocurrency is a good investment. After nearly 16 years of existence, Bitcoin has yet to find a wide-scale, real-world use outside of criminal enterprises. And as a gold-like asset meant to protect investors against inflation, it suffers the same shortcomings as the shiny yellow metal.
"...the one thing I'm pretty sure of is that it doesn't produce anything," said billionaire investor Warren Buffett in 2022 regarding Bitcoin. "Assets, to have value, have to deliver something to somebody," Buffett continued.
An ETF alternative
Investors can use these new Bitcoin ETFs to speculate on the price of Bitcoin, but as long-term investments, they carry incredibly high risks. Sticking a speculative asset backed by nothing but the Greater Fool Theory in a different type of investment vehicle doesn't reduce risk.
For investors who want to own assets that produce something, an ETF that tracks the S&P 500 is a great option. There are plenty available, but the Vanguard S&P 500 ETF (VOO 1.00%) is one of the most popular.
The Vanguard S&P 500 ETF aims to replicate the performance of the S&P 500 index, which contains 500 of the largest U.S.-listed companies. Buying a share of the ETF buys you a small stake in each of those companies. Unlike Bitcoin, which does nothing, a company generates cash flow by selling products and services, then uses that cash flow to invest in assets that will generate even more cash flow. Some companies pay investors a dividend, giving them a direct share of its profits.
The Vanguard S&P 500 ETF gives investors a highly diversified mix of stocks for a rock-bottom expense ratio of 0.03%, nearly seven times lower than the cheapest Bitcoin ETF. Since inception in 2010, the Vanguard S&P 500 ETF has delivered an annualized return of just under 14%. That's historically high, so returns going forward may not be quite as lucrative. But as U.S. companies grow sales and expand profits in the years ahead, this ETF allows investors to share in that success.
The cryptocurrency industry has entered a new era with the approval of the first Bitcoin ETFs. While investors can now buy Bitcoin with the same ease with which they buy stocks, and without the excessive fees, Bitcoin is no better as an investment than before the ETF approval. I agree with Buffett: Bitcoin is a purely speculative asset with no intrinsic value. Long-term investors would do well to choose the Vanguard S&P 500 ETF instead.
