Cryptocurrencies, and Bitcoin in particular, have provided absolutely incredible returns for investors in recent years. These digital assets have not only beaten equity market returns but eclipsed them.
With Horizons set to release Canada’s first-ever Bitcoin ETF for retail investors, there’s more excitement brewing in the Great White North. The company recently filed a preliminary prospectus with the Ontario Securities Commission. At the time of writing, this is the second such filing of its kind. As of yet, these ETFs has not been approved but are already being greeted with a significant amount of hype domestically.
Is playing Bitcoin a feasible long-term investment or a get-rich-quick scheme that could turn sour in a heartbeat?
Capital flows into Bitcoin could result in continued outperformance
As with any hyped-up asset class that has been on a tear, more capital flowing into a given sector forces prices up. The near-term price support for Bitcoin and its cryptocurrency peers could indeed spark an even more impressive run in these digital coins.
As we’ve seen with the rise of the “wallstreetbets” Reddit group that has driven underperforming stocks higher in very short periods of time, a coordinated shift of massive amounts of capital can unnaturally move prices in the near term. However, over the long term, prices tend to find an equilibrium.
That said, this ETF will also provide investors with means of playing the other side of the trade. I think it will be interesting to see how this ETF performs, and if short-sellers enter this sector in a big way. Of course, with the vitriol retail investors have shown toward short-sellers of late, this could turn out to be yet another catalyst for cryptocurrencies moving forward.
For those so inclined to invest in cryptocurrencies like Bitcoin, I’d recommend investors buy the digital coins themselves. I think this is an extremely complex asset, with a very questionable inherent value. Accordingly, only those with deep technical sophistication of how the blockchain technology and peer-to-peer cryptography underpinning Bitcoin works should invest in these highly speculative assets. Those with this level of sophistication won’t have trouble setting up their own wallet and buying Bitcoin directly.
Indeed, buying Bitcoin on an ETF only invites retail investors to this speculative party. Whether it’s an ETF or other means of trading Bitcoin I’ve discussed in the past, such as The Bitcoin Fund (TSX:QBTC), I think these assets are far too speculative and volatile for the average long-term investor.
Chasing returns at the expense of portfolio safety increases risk and limits the capital-preservation goals investors ought to have as primary reasons for owning equities.