"WE KNOW BETTER!" (Vanguard blocks Bitcoin)

In a surprising turn of events, Vanguard, Northwestern Mutual, and Edward Jones have all decided that they must protect clients from themselves.

In a move that seems to counteract the goal of structuring a well-balanced portfolio, all three of these firms have decided that they will not allow their clients to invest in spot bitcoin ETFs.

The irony of this decision is that Bitcoin has been the highest performing asset by a large margin since it was launched back in 2011. While past performance has zero impact on future returns, to ignore the potential diversification and potential performance benefits of this asset class in 2024 is like a blacksmith in 1903 telling everyone to ignore Henry Ford. “There is nothing to see over there! Come back here so I can replace the horseshoes on Ol’ Besse”

The irony in this story is these are the same financial firms that were jumping on the alternative investment bandwagon fifteen years ago. With all the risk, and all the fees, and the lack of liquidity that enshrouded most of those products… why say “no” to a spot Bitcoin ETF? “Oh, that’s right… there’s no structuring fees, no trailing fees and very little commission to generate when offering an ETF!”

To be crystal clear, this is not a recommendation that our clients invest in digital currencies. It’s simply an observation that large companies run the risk of becoming arrogant, to the point of telling the world that they know what’s best for their clients. According to Vanguard: “Spot bitcoin ETFs will not be available for purchase on the Vanguard platform. We also have no plans to offer Vanguard bitcoin ETFs or other crypto-related products. Our perspective is that these products do not align with our offer focused on asset classes such as equities, bonds, and cash, which Vanguard views as the building blocks of a well-balanced, long-term investment portfolio.”

Invest or Not… It's a Complex Decision

The SEC dragged its feet on a spot bitcoin ETF approval for good reason. There are a lot of moving parts, and crypto assets are incredibly risky. Spot bitcoin ETFs should track their net asset value better than the past closed-end fund options, but that does nothing to eliminate the risk of the asset class.

Spot Bitcoin ETS are likely to have a significant impact on traditional financial markets. They will provide direct access for institutional and retail investors to capture exposure to bitcoin without the challenges of self-custody. They also continue to legitimize bitcoin as an institutional asset and increase its acceptance and integration into the global financial system.

Spot bitcoin ETFs should increase demand, and potentially increase liquidity, but all of these factors combined do not eliminate the risk of owning bitcoin. 

If you were to call me and ask if you should invest in bitcoin my answer would be “it depends.” It depends on your individual situation. It depends on your ability to absorb losses. It depends on your emotional capacity to stay the course, even when your investment drops by 70 or 80 percent. It depends on what the rest of your portfolio is invested in, relative to your age, the income demand from your portfolio and your risk tolerance.

Spot Bitcoin ETFs Are Less Efficient than Most ETFs

Spot bitcoin ETFs may be a better option for investors than direct investment with a wallet or cold storage, but they are less efficient than traditional ETFs.  

ETFs have become known for their low costs because the way they are structured allows them to limit trading and transaction costs. Spot bitcoin ETFs will not be the beneficiary of all these benefits, so their costs are likely to be higher than more-traditional ETFs.

Bitcoin Will Continue to Be Incredibly Risky

The average ETF investor is unlikely to have experienced the volatility that Bitcoin has experienced. In the past five years, bitcoin’s volatility was nearly 4 times that of the U.S. stock market. With that said, the only kind of volatility that hurts is downside volatility. Bitcoin’s volatility has been both to the upside and to the downside.

Bitcoin prices have had massive drawdowns in the past five years, and this downside risk remains going forward.

Bitcoin also faces a multitude of risks not poised by other asset classes. There is the potential for market manipulation, counterparty risk, fraud, unregulated exchanges and even theft. These risks are all beyond the control of most investors. While spot bitcoin ETFs may reduce some of those risks, it does not eliminate them, because the price of bitcoin will be linked to the other potentially affected entities.

Conclusion

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