Cryptocurrency is one of the most polarizing assets in the capital markets. Apparently investors love it or hate it, there is virtually no difference between them.
Crypto is undoubtedly a speculative asset class and many tokens trade with pronounced volatility, but in January the Securities and Exchange Commission (SEC) approved a new way to participate in crypto investing that could attract those wary of investing in the tokens himself.
Several institutional asset managers have been granted approval to sell Bitcoin exchange-traded funds (ETFs) locally. Essentially, these vehicles are designed to track price Bitcoin (BTC 0.75%) without investors having to fully own the coin themselves.
Although these passive funds are still emerging, there are some interesting reasons why they could be worthwhile in the long run.
What is Bitcoin?
Bitcoin is considered the first cryptocurrency. It is decentralized – meaning it is neither traded on a major exchange nor is it regulated to the same extent as other vehicles such as stocks.
One of the more interesting features of Bitcoin is that there is a limited amount of the token in circulation. This aspect gives the cryptocurrency a certain fascination – so much so that some refer to Bitcoin as digital gold.
Image source: Getty Images.
Investors look beyond stocks when things get tough
Alternative assets such as real estate or even art can serve as a hedge against traditional investments in stocks or bonds when the macroeconomic situation is bleak. Commodities such as precious metals – including gold – can also fall into this category and, in general, the asset tends to receive more attention and price movements during times of increased economic instability. Some investors turn to gold because it represents a safe haven during times of market instability compared to stocks or bonds.
Two of the most popular gold ETFs are SPDR Gold shares And iShares Gold Trust. Each of these funds offers investors direct access to gold.
The chart below illustrates the growth of a hypothetical $10,000 investment in each of these ETFs compared to the same amount in Vanguard S&P 500 ETF.
IAU total return level data from YCharts
The graphic above paints an interesting picture. Over the last decade, gold ETFs have delivered fairly stable and respectable returns. However, investing in a fund that… S&P 500 was clearly the better option. Perhaps even more intriguing is the pronounced growth that gold ETFs have seen since 2020.
IAU data from YCharts
The chart above shows an initial decline in the S&P 500 fund at the start of 2020 – coinciding with the start of the COVID-19 pandemic. And while the stock market has clearly performed well in recent years, returns have been far less consistent than those of gold ETFs. This dynamic can be seen in the S&P 500 fund's sustained rise from 2020 to 2021, which was followed by a steep decline in 2022. While gold ETFs saw similar moves, they were far less dramatic than those of the broader markets. This stability is attractive to some investors.
Different than gold, but worth a look
I see the spot Bitcoin ETFs as a similar mechanism to the gold ETFs. However, I would argue that Bitcoin is far more speculative than gold and that ETFs tracking it could therefore experience more dramatic ups and downs.
Additionally, gold ETFs have been around for a long time and have many years of historical trading data. While past performance is no guarantee of future results, it is at least worth analyzing historical trends to get a feel for where certain funds and assets might be heading. Spot Bitcoin ETFs are extremely new and it is still unclear whether these products will provide investors with stable returns over a long time horizon.
I think cryptocurrencies will eventually become more mainstream as Bitcoin and other tokens become more widely accepted as payment. If this is the case, it is possible that cryptocurrencies will attract greater interest from a broader investor base.
Although the investment prospects for gold and Bitcoin are very different, the overlap between the two assets, due to their limited supply and the fact that they are considered a safe haven during economically turbulent times, could make investing in these Bitcoin spot ETFs an interesting option for those who want to expand their portfolio.
Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and the Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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