First US Bitcoin-linked ETF raises concerns for advisers

The ProShares launch on Tuesday of the first U.S. Bitcoin-linked ETF is widely expected to take the financial planning industry by storm if for no other reason than it will require a lot of reluctant members of the financial planning community to quickly get up to speed on cryptocurrency investing.

While the ProShares Bitcoin Strategy ETF (BITO) is the first, there are a host of other versions coming right behind it, which could make it difficult for advisers to ignore the swelling crypto movement.

“This is a pretty important innovation because lots of people who were interested in crypto weren’t ready to go find an exchange, or a cryptocurrency wallet, or any other legacy version of access,” said Simeon Hyman, global investment strategist at ProShares.

The ETF employs a strategy like the Bitcoin Strategy ProFund Investor mutual fund (BTCFX) that ProShares’ affiliate company launched in July, which invests in Bitcoin futures contracts as opposed to the actual cryptocurrency, which is not yet allowed by U.S. regulators.

While the mutual fund represents a foot in the door of regulatory scrutiny, the ETF version essentially means wide-open access for any investor or financial adviser with access to a brokerage platform.

“A Bitcoin ETF that can easily fit inside a portfolio with traditional equity and fixed-income funds should have some appeal as an alternative investment for an adviser,” said Todd Rosenbluth, director of mutual fund and ETF research at CFRA. “However, they will need to be prepared to explain what makes a futures-based product different, particularly roll costs and that the ETF price will not be in line with the spot market.”

Steve Larsen, president of Columbia Advisory Partners and co-founder of cryptocurrency education community PlannerDAO, is enthusiastic about the new ETF, but also concerned that it could give some investors and financial advisers the wrong impression of crypto investing.

“The key difference with a futures fund is they are not investing in the price of Bitcoin, they are investing in what people think the price of Bitcoin will be, and it can veer off short- and medium-term to a significant degree,” he said. “If people get bullish on Bitcoin, the futures will rise even further, and the same slingshot effect will happen if investors sour on Bitcoin.”

While ETF providers and cryptocurrency fans might be fervent about Bitcoin ETFs, Larsen warns that the potential volatility of a futures-based product could turn off some investors and create headaches for financial advisers.

“The futures could be more volatile than Bitcoin itself,” he said. “We had to explain to clients, this is different, it’s new, and it will put the volatility of tech stocks in the '90s to shame. But we’re here to learn and to get more comfortable with the volatility.”

Hyman of ProShares downplayed the futures effect as “basis points,” and pointed out that the futures-based mutual fund has been closely tracking the performance of Bitcoin in the short time since it was launched July 28.

From the mutual fund’s launch through Friday, Oct. 15, the amalgamated price of Bitcoin from multiple exchanges is up 51%, which compares to a 52% gain by the mutual fund over the same period.

For financial advisers, ease of access to cryptocurrencies through ETFs will certainly mean new challenges and opportunities.

“The appetite looks pretty large based upon some personal vignettes,” said Dennis Nolte, vice president of Seacoast Investment Services.

“My 24-year-old intern asked me last week if she should put all her savings into crypto because her 25-year-old boyfriend told her the banks are all going to crash in the next few years,” he added. “Don't laugh. Many younger investors are very pessimistic about the future of the U.S. dollar as a reserve currency, and this plays right into their thought process. Once these products are more plentiful, they'll be embraced like any other ETF.”

Anthony Watson, founder of Thrive Retirement Specialists, is sticking to his message that “cryptocurrencies are not investments, they are speculation vehicles.”

“Sure, they are noncorrelated assets with tons of volatility, but they do not have an expected real rate of return,” he added. “For an asset to be considered an investment, the asset must have an expected real return. A real return is the portion of return that exceeds the rate of inflation. If an asset class cannot contribute to the real return of a portfolio over time, it makes no sense to add that asset class.”