Late last week the ASX welcomed its first ever Bitcoin ETF – the VanEck Bitcoin ETF (ASX: VBTC). So, should you buy into the hype?
Australian Bitcoin ETFs
The VBTC exchange traded fund (or ETF for short) is not the first Bitcoin ETF to be listed in Australia. The Global X 21Shares Bitcoin ETF (EBTC) has been listed in Australia since 2022 but on rival exchange Cboe Australia, a lesser-known alternative to the ASX.
VBTC is significant because it marks the first time that the ASX has approved a cryptocurrency ETF listing, giving more investors easy access to the alternative asset class.
Bitcoin returned more than 140% over the past 12 months so it’s no wonder more ETF providers want to get in on the action.
How they work
Neither VBTC or EBTC actually hold Bitcoin directly. Both are getting exposure to Bitcoin pricing through holdings in third-parties that own the Bitcoin. This means an investment in one of these ETFs won’t generate exactly the same return as buying Bitcoin directly, as there are multiple parties taking fees.
VBTC charges a 0.59% per year management fee and EBTC will do the same from July 1st.
Because the underlying funds are US-based, it’s very important to note that both of these ETFs are exposed to exchange rate risks between USD and AUD.
That adds a layer of complexity to what is already a highly speculative investment.
So, is it a good idea to buy into the ASX’s newest ETF?
It’s risky… very risky
The fact sheet for the VBTC ETF (which you should always read, along with the Product Disclosure Statement) sums it up best:
“An investment in the fund involves extremely high risk and the potential for loss of all capital invested. Investors should actively monitor their investment as frequently as daily to ensure it continues to meet their investment objectives.”
Now, call me old school, but if an investment is so risky it requires daily monitoring I’m not sure it fits in with the long-term investing mindset.
Bitcoin’s returns over the last 12 months, and indeed over the last decade, have been astronomical. However, it’s also been one of the most volatile investments you could hold. The AUD Bitcoin price sits at around $95,000 today after sitting at $25,000 in 2022.
But in November 2021, the price hit $87,800. So, if you bought Bitcoin at that high-point and held all the way through a 70% drop and rode it back up, you’d only actually be up about 8% today over a 2.5 year period.
The S&P500 is up about 26% over the same period and the volatility has been orders of magnitude lower.
Sure, you could’ve bought it in 2022 or in 2020 and you would’ve done much better but my point is there’s a huge amount of luck involved in the timing. Get it right and it’s pay day, get it wrong and you lose most of your investment.
Bitcoin’s price is entirely unpredictable because it’s not tied a physical asset or earnings. Returns are largely driven by trends and sentiment, and that’s a hard thing to predict.
Where this could maybe fit in is as a very small holding in a larger diversified portfolio. If you’ve wanted to dip your toes into cryptocurrency for a while, this probably is the easiest way to do it.
Just don’t get caught up in the hype. The returns look great over the long-term but you always need to look at the volatility and ask yourself, honestly, if you can stomach the ride.
