Spot Bitcoin ETFs Are Coming. Beware the Risk.

Last month, BlackRock Inc., the world’s biggest money manager, asked the Securities and Exchange Commission to approve a spot Bitcoin exchange-traded fund — a fund that would invest in the digital currency directly rather than through futures markets. BlackRock joins tens of other smaller ETF providers with the same request, so far without success. But with BlackRock’s heft behind growing demands for a spot Bitcoin fund, it’s only a matter of time before the SEC relents.

And it should. A spot ETF would allow investors to buy, sell and hold Bitcoin more easily, cheaply and securely than they can today. In a crypto industry awash with scams, regulatory oversight would also give investors and money managers confidence that they’re buying a bona fide financial product, particularly if it has BlackRock’s name on it.

When available, spot Bitcoin ETFs will become a fixture in many portfolios, and deservedly or not, the conversation will be less about whether Bitcoin is a fraud and more about its merit relative to traditional investments such as stocks and bonds. Crypto cheerleader and founder of Galaxy Digital Holdings Ltd., Mike Novogratz, gave investors a preview of that conversation recently, asserting that Bitcoin has produced a higher Sharpe Ratio — a popular measure of risk-adjusted return — than any other investment over the past three years and inviting others to run the numbers for themselves.

So I did. The first thing that pops out, of course, is Bitcoin’s incredible growth, owing mostly to the fact that investors had access early in its life cycle. Unlike stocks, which are offered to the public well after companies’ founding and early growth, anyone could have bought Bitcoin from the start, or close to it. Those who did and hung onto their coins pocketed an unheard-of return of 176% a year since July 2010, which is as far back as the record I’m using goes.

After accounting for risk, though, Bitcoin doesn’t seem so exceptional. The Sharpe Ratio that Novogratz refers to compares an investment’s excess return over cash with its volatility, a higher ratio indicating a better risk-return trade-off. While Bitcoin has far outpaced the S&P 500 Index, for example, it has also been 13 times more volatile, as measured by annualized standard deviation, so its Sharpe Ratio isn’t much better. Bitcoin has generated a ratio of 0.92 since 2010, barely higher than the S&P 500’s ratio of 0.89.

Time's Up | Bitcoin's early, explosive growth didn't last long