August 16, 2014

A Bitcoin ETF? But Why?

The way I see it, ETFs are great vehicles for investing in assets or strategies that would otherwise be difficult to invest in. Case-in-point: I love mid-caps, but I don't want to individually buy each of the 400 stocks that make up the S&P 400. I also don't want to pay commissions on 400 stocks every time I have new money to invest, and I don't want to buy and sell whenever companies are added or removed from the index. The iShares Core S&P Mid-Cap ETF (IJH) is a far more appealing option.

Pondering the value of Bitcoin as a currencyGold is another good example. If you're a gold bug (I'm not), the SPDR Gold Trust ETF (GLD) is a nice alternative to holding physical gold yourself and figuring out a safe place to store it, maybe paying for a safe deposit box or hiding it under your mattress. Instead, investors can sleep safe knowing their shares are backed by real gold stashed away in a vault with top-notch security measures.

Foreign currency ETFs make sense since it's not easy to hold foreign denominations in a typical U.S. bank account.

Then there's the proposed Bitcoin exchange-traded fund, brought to you (if it gets approval) by none other than Mark Zuckerburg's arch nemeses, the Winklevoss twins. Regardless of your opinion about Bitcoin, I don't get why anyone would want this in ETF form when they could just, I don't know, hold actual Bitcoins instead?

If the beauty of Bitcoin is its utility in instant online peer-to-peer transactions, then why would I want to add an extra step to the process? If someone holds Bitcoins, they can freely pay for goods and services with the currency, in addition to speculating on the currency increasing in value. With the ETF version, I can speculate but not much else. If anything, it seems this ETF removes some of the utility that can be had by simply holding Bitcoins. If you want to buy something in Bitcoin, you'd have to sell some shares, take your dollars and convert them to actual Bitcoins, and only then can you make your purchase. Hmmm...

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