After losing nearly 75% of its value between November 2021 and November 2022, bitcoin went on a tear,1 regaining all that lost ground—and then some—by March 2024. Meanwhile, the advent of cryptocurrency exchange-traded funds (ETFs) gave this volatile investment class an institutional seal of approval. However, popularity and suitability are not the same thing. Here, three Schwab experts discuss the potential risks and rewards of this relatively new class of investment.
Investing in crypto can be risky
"The price and value of cryptocurrencies, including bitcoin, have been volatile," says Rob Williams, managing director of financial planning and wealth management at the Schwab Center for Financial Research. "Unlike stock prices, which are tied to the underlying value of a company, cryptocurrency prices have been driven entirely by demand. While many people have made money in crypto, the wild price swings have caused plenty of losses, too. Currently, cryptocurrencies make the most sense as speculative investments that you own or trade outside your long-term savings or retirement portfolio."
Crypto isn't a hedge against inflation
"Bitcoin proponents often argue that it can insulate your assets against inflation, but there hasn't been much compelling evidence to back that up," says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. "The value of bitcoin isn't tied to anything that would intrinsically cause it to rise when inflation kicks up. In fact, bitcoin rallied in 2023 even as inflation started cooling—the opposite of how one would expect an inflation hedge to act."
Crypto ETFs offer greater regulation—for a price
"The Securities and Exchange Commission [SEC] approved 11 spot bitcoin ETFs in January 2024 and nine spot ether ETFs in May, which legitimized cryptocurrency in many investors' eyes," says Joe Barakat, managing director for trading services strategy, analytics, and client experience at Schwab. "These ETFs invest in bitcoin or ether and aim to track the underlying cryptocurrency's market price, which can be volatile. While this may be a more regulated way to invest in bitcoin's and ether's price movements, you also need to consider operating expense ratios, which vary by ETF and can eat into your profits or add to your losses."
Crypto is about more than just currencies
"Some clients are interested in cryptocurrencies because they see promise in the blockchain technology they're built on," Nathan says. "For them, a thematic ETF focused on the stocks of a wide variety of companies involved in the sector—not just the cryptocurrencies themselves—could be a consideration. That said, the holdings in these ETFs can vary widely. Some funds focus narrowly on companies that include bitcoin miners and exchanges, but these may be nearly as volatile as the cryptocurrencies themselves. Others are weighted toward large technology companies that dabble in blockchain-related services but concentrate on other activities, such as Microsoft or chipmaker Nvidia, thus diluting your blockchain or cryptocurrency exposure. Whether you go broad, narrow, or somewhere in between should ultimately depend on how comfortable you are concentrating an investment in crypto."
The future is unclear
"With the SEC approval of spot bitcoin ETFs, cryptocurrencies are clearly moving toward the mainstream, but much regulatory uncertainty remains," Rob says. "A proposed regulatory framework for cryptocurrencies is being considered in Congress. The IRS has been treating cryptocurrencies as property, which means that transactions are subject to capital gains taxes, and the agency has not fully clarified how it will treat spot bitcoin ETFs. Given all the unknowns surrounding crypto, it's best to proceed with caution."
1CoinDesk.com. Data from 11/08/2021 through 03/14/2024.
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