Cryptocurrencies: Should You Invest in Them?
Bitcoin and other cryptocurrencies have been growing in popularity, but if you’re considering investing in them, there are some key things you should know first.
Beyond learning the basics of cryptocurrencies, investors should keep the myriad risks in mind, including that the value of even the most popular cryptocurrencies have been volatile, the market isn’t very transparent, transactions are irreversible, consumer protections are minimal or nonexistent, and regulators haven’t clarified their approach to regulating them. We suggest that investors who want to invest in cryptocurrencies treat them as a speculative asset using funds outside a traditional long-term portfolio.
What is the SEC’s take on cryptocurrencies?
The Securities and Exchange Commission generally has been skeptical of cryptocurrencies, with chairs expressing concern that the product is too volatile, that investor protections are inadequate, and that regulations are insufficient. The agency has rejected multiple applications for exchange-traded funds (ETFs) that invest directly in Bitcoin over the last several years.
In August 2021, SEC Chair Gary Gensler said that he was open to the idea of ETFs that invested in cryptocurrency futures, but not those that invested in the spot markets, because the futures markets are already regulated by the Commodity Futures Trading Commission. In October 2021 the first two Bitcoin futures ETFs—the ProShares Bitcoin Strategy ETF (BITO) and the Valkyrie Bitcoin Strategy ETF (BTF)—were approved and launched. While it’s likely that more will soon follow, initially they will be limited to Bitcoin and Ethereum, as those are the only two cryptocurrencies for which an active futures market is currently established.
Will Bitcoin or other cryptocurrencies become the new global currency?
Until there is appropriate regulation and consumer protections, we don’t think so, but time will tell. To be viable, a currency usually requires three characteristics:
- It can be used as an inexpensive, reliable medium of exchange;
- It can be a unit of account;
- It can be a store of value and legal tender honored as a means of payment.