On January 10, the SEC finally approved the first-ever spot Bitcoin (BTC -0.06%) Exchange Traded Funds (ETFs). There's a reason they're called the most important new product Wall Street has created in nearly 30 years. That's because these ETFs make buying and selling Bitcoin so easy that virtually anyone can do it.
As a result, the new Bitcoin ETFs could change the world of crypto investing forever. But one thing they won't change is the need for a long-term buy-and-hold strategy when investing in Bitcoin.
Capture the long-term price movement of Bitcoin
While there are undoubtedly some investors who actively trade these ETFs or use them as part of sophisticated portfolio hedging strategies, they are primarily designed for one purpose: to passively participate in Bitcoin's long-term price potential.
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Since the new ETFs are backed by Bitcoin itself (and not derivative contracts that attempt to replicate Bitcoin's performance), they should provide a near 1:1 match to Bitcoin's performance. Unlike most other ETFs, which typically contain a very diversified basket of stocks, these new ETFs only contain Bitcoin. So if Bitcoin goes up 150% in a year (like in 2023), then your new ETF should also go up 150% in the same year.
This ability to capture Bitcoin's long-term price history is very attractive because almost everyone agrees that Bitcoin's price has the potential to skyrocket. Bitcoin could soon surpass its all-time high of $69,000 before breaking $100,000 by the end of 2024. And you can easily find Bitcoin price predictions well above $100,000. Cathie Wood of Ark Invest, for example, believes that the price of Bitcoin could exceed $1.5 million by 2030.
But only by buying and holding can you achieve the full long-term price performance. If you constantly enter and exit the market, you will likely end up losing some of Bitcoin's profits.
Minimize your total cost of ownership
This brings us to another important aspect of the new Bitcoin ETFs: They are designed to minimize your total cost of ownership. In the race to get as much investor money as possible as quickly as possible, new Bitcoin ETF offerings often have exceptionally low expense ratios.
In some cases fees are as low as 0.20% per year. The fees are so low, in fact, that some analysts have speculated that major Wall Street firms might not make any money at all from them. (But don't worry, they will find other ways to get the money back from you!)
If you're thinking about getting involved in Bitcoin, all you need to do is do one calculation. Simply add up the total cost of purchasing Bitcoin directly from a cryptocurrency exchange such as Coinbase Global (COIN 3.46%), and then compare it to the super cheap acquisition costs of the new ETFs. Unless Coinbase decides to lower its trading fees, it almost always makes sense to go with the cheaper ETFs. You can add Bitcoin to your portfolio at almost zero cost.
For this reason, there seems to be no point in pursuing a short-term trading strategy for Bitcoin. You miss out on the cost advantages of the new Bitcoin ETFs and unnecessarily increase your total cost of ownership. Not to mention the fact that you are likely missing out on the inherent tax benefits of the ETF investment product.
Take the emotion out of crypto investing
In conclusion, it's all about taking the emotions out of investing. Crypto investments in particular are known for their sharp upswings and downswings. Daily volatility can be worrying for crypto newbies. And it can be very confusing to figure out why a particular cryptocurrency is trending up or down at a given time.
This is why a buy-and-hold strategy can be so useful. You can sit back and ignore daily volatility, confident that your ETF will ultimately trend upward over a long enough time horizon. This is why many experienced Bitcoin investors have always preached a HODL (crypto slang for “hold”) strategy: it is the best way to capture the long-term uptrend in Bitcoin price.
Bitcoin in the long term
For most investors, the new Bitcoin ETFs are likely to be the most efficient way to exploit Bitcoin's long-term price potential. They are a low-cost investment tool that eliminates the need to monitor Bitcoin's performance on a daily basis. So if you plan to buy one of the new Bitcoin ETFs, you should plan on buying and holding for the long term.
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