It's been less than two weeks since the new spot Bitcoin (BTC 1.83%) exchange-traded funds (ETFs) started trading, but they already appear to be a resounding success. In fact, at least two of the new spot Bitcoin ETFs have attracted more than $1 billion in new investor money, and assets under management of these new ETFs are growing at a rapid rate.
The big question, though, is whether investors fully intend to make these new ETFs part of a long-term buy-and-hold strategy. Initial data appears to indicate higher-than-expected trading volume in these ETFs, and that could be a signal that investors are moving rapidly in and out of them in response to the changing price of Bitcoin.
To avoid falling into the trading trap, here are three things to keep in mind.
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1. Focus on Bitcoin's long-term performance
While the new spot Bitcoin ETFs are often described as a way of buying Bitcoin, a more precise way of thinking about them is that they are a way of gaining exposure to the price performance of Bitcoin. If the price of Bitcoin goes up by 150% (as it did last year), then your ETF should also go up by 150%. That's what makes the new ETFs so attractive to many investors -- they make it easy to gain access to Bitcoin's potentially jaw-dropping returns without any previous knowledge or experience with crypto.
If you review the historical evidence, it's easy to understand Bitcoin's allure. In the decade from 2011-2021, Bitcoin was the best-performing asset in the world. And the same story was true in 2023, when Bitcoin outperformed every other asset class. Thus, while past performance is no guarantee of future performance, there's reason to think that the total return from your new Bitcoin ETF will be quite impressive a decade from now.
2. Don't overreact to Bitcoin's volatility
But there's just one problem here: Bitcoin has not delivered reliable gains, year in and year out. In fact, there have been several years (including 2018 and 2022) when the price of Bitcoin absolutely cratered. Bitcoin remains a highly volatile asset, with wide price swings almost daily. So you really can't expect a nice, orderly upward march in the value of Bitcoin.
CRYPTO: BTC
Key Data Points
And that's what has me concerned about the new Bitcoin ETFs. How will investors react to any plunge in Bitcoin's price, such as we're seeing now? In just the week after the new Bitcoin ETFs were available, the price of Bitcoin was down 12%.
So what happens if the price goes down (or stays down) for a prolonged period of time? Even longtime buy-and-hold investors might start feeling a sense of buyer's remorse.
If that leads to them to sell their ETFs, they could easily miss out on Bitcoin's long-term performance. Study after study has shown how hard it is to time the market consistently. Missing out on even a few days of Bitcoin's peak gains could doom your portfolio's returns to mediocrity. If you are selling every time there's a rough patch in the market, you will always be buying high and selling low, instead of buying low and selling high.
3. Minimize your cost of owning Bitcoin
The new ETFs are designed to be the lowest-cost, most-efficient way of buying Bitcoin today. It's now cheaper to buy and hold a spot Bitcoin ETF for a year than it is to make a single trade on, say, Coinbase Global (COIN 0.69%), the world's second-largest cryptocurrency exchange. The expense ratios of the new Bitcoin ETFs are minimal -- as low as 0.20% of the assets in the fund.
So if you are trading your Bitcoin ETF, you are doing it all wrong. From a total cost of ownership perspective, all of those trading commissions and losses on bid-ask spreads are going to add up, and you will potentially be turning your low-cost asset into a high-cost asset. In the process, you will be losing out on the cost-efficient nature of the new Bitcoin ETFs.
Buy and hold for the long haul
Just keep in mind: The whole point of the new Bitcoin ETFs is to do all the hard work for you. For a minimal cost, you can now get exposure to Bitcoin. If you then hold onto that Bitcoin, you should be able to capture Bitcoin's long-term returns nearly 1:1. So if you are thinking about buying the new Bitcoin ETFs to build wealth, plan to buy and hold for the long haul.
