CIO Thoughts: Should You Buy a Bitcoin ETF?

Bitcoin ETF

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Should You Buy a Bitcoin ETF?

Astoria has followed Bitcoin, doing research since 2018.

On January 9, 2018, when Bitcoin traded at $14.6k,* Astoria wrote a 12-page research report explaining the asset class and how it might fit in a portfolio. Read, “Is Bitcoin a Legit Currency or a Mere Tulip?

Bitcoin valuation has increased more than 300%* since our report. Bitcoin ETFs have been one of the most covered stories in the ETF space for some time now, especially recently, as we approach the imminent approval of several Bitcoin ETF products from different issuers. Among these products, expense ratios vary from 24 bps to 150 bps. There are fee waivers for varying time periods.  The ETF issuer community has become overly aggressive (and will continue to be) to win market share.  Net, net this is a good outcome for investors who want exchange traded access with the benefits of the ETF structure and overall ecosystem.

Don’t be so sure that the most inexpensively priced product will win investors’ favor, though; there are other costs to owning an ETF (bid/offer, premium/discount to NAV, etc). Reggie Browne, Principal of GTS, said on Bloomberg yesterday that he anticipates Bitcoin ETFs could potentially trade at a premium. Watch the clip: https://www.bloomberg.com/news/videos/2024-01-08/could-see-spot-bitcoin-etf-8-above-fair-value-browne-video

As always, it’s unwise to blindly buy an ETF; we recommend working with a subadvisor with access to institutional caliber trading tools, RFQ platforms, etc.

Investors shouldn’t buy into the hype without doing their due diligence. If you’re considering investing, do your own research and determine how a Bitcoin ETF might fit into your/your client’s portfolio.

Bitcoin has historically been highly volatile and controversial, but it’s not uncommon for new investment strategies and technologies to experience resistance in their early stages. For instance,

  • Investing in index funds was claimed to be “Un-American” when John Bogel launched Vanguard’s first S&P index fund.
  • Gold was previously illegal to own in the US.  In the 1930s, President Franklin D. Roosevelt mandated anyone who owned gold coins and certificates to tender them to the Fed Reserve. https://www.huffpost.com/entry/when-owning-gold-was-ille_b_10708196
  • In the late 1990s/early 2000s, the idea of putting your bank account and credit card on the “internet” seemed unfathomable.  This new technology received immense pushback. Nowadays, nobody thinks twice when buying items online. These days you can order Chic-Fil-A and have an Uber driver deliver it to your house all via your mobile payment system.

As Bitcoin ETFs have approached approval status, volatility has continued to increase.

At Astoria, we are at the intersection of macro + quant with a dynamic liquid alt. overlay.  We find our specific discipline to be quite rare.  Most of our peers are pure quant or pure macro, and we don’t know of anyone maintaining a systematic liquid alt overlay.  Our liquid alts have made a meaningful contribution to our goal of higher risk-adjusted returns, as they help minimize left tail risk. Notably, past performance is not indicative of future results.  Bitcoin appears attractive to us because it can provide unique sources of risk and return, the goal of a diversified portfolio at the end of the day.

The ETF structure brings a lot of credibility to Bitcoin, hence all the news coverage.  At Astoria, we come from a place open to using Bitcoin at the right price.  We have owned gold for many years as a static alternative allocation despite the lack of cash flow and the ability to analyze discounted cash flow.  We own gold because of its historically low correlation to stocks.  Bitcoin is more correlated to stocks but will help diversify portfolio risk if sized and risk-managed appropriately.

Will we add Bitcoin to our portfolios?  Not to every one of our models, but those with 80% or more equity exposure that carry a risk-managed mandate and need unique sources of risk and return would be eligible.  That said, we acknowledge that prices are up 321%* over the past five years. As they say, Rome wasn’t built in a day.

Best,

Astoria Portfolio Advisors.

*Bitcoin prices marked as of close on the dates mentioned.

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