Bitcoin ETFs approved by SEC: What’s in it for you?

In a landmark decision, the US Securities and Exchange Commission (SEC) recently approved applications for exchange traded funds (ETFs) that are primarily based on bitcoin. This move, following applications from several US based fund management firms, marks a significant shift in the financial landscape.

It's been over a decade since the first proposal for a Bitcoin ETF was submitted. It marks the SEC's longstanding hesitancy and an implicit acknowledgment of cryptocurrencies as viable investment assets. So, what does this mean for individual investors? For those bullish on bitcoin, there's now an avenue to invest up to $250,000 (little more than 2 crore) annually through the Liberalized Remittance Scheme (LRS), encompassing all overseas expenditures, including travel, education, and investments.

Looking ahead, there's potential for Indian mutual funds to introduce products allowing investment in these US based ETFs. Such 'feeder funds' would facilitate investments in the Indian rupee, with the same currency used for redemptions, and wouldn't count against the LRS limit. It's worth noting that when comparing asset class returns year over year, bitcoin has often outperformed traditional options like equities, gold, and fixed income.

However, investing wisely requires understanding both the risks and rewards. The nature of cryptocurrencies adds a layer of complexity, especially in defining their role. While gaining acceptance as a potential currency, cryptocurrencies lack the sovereign backing that defines traditional fiat currencies.

Only a few countries, like El Salvador, have officially adopted bitcoin, and widespread acceptance remains uncertain. Traditional staple asset classes like equities and fixed income, along with diversifiers like gold, have well established investment foundations. Equities represent tangible business performance topline, bottom line, and earnings per share.

Fixed income offers fixed returns. Gold, while lacking these features, has a long standing reputation as a value store. Cryptocurrencies, by contrast, lack regulatory support, official exchanges, and legal frameworks, adding layers of risk. One key risk in cryptocurrency investments is the absence of a redressal mechanism in case of disputes, thefts, or technical failures.

ETFs managed by established firms would not face such risks. It's crucial for investors to thoroughly understand what they're investing in and why. Cryptocurrencies aren't traditional assets like stocks, bonds, or gold, and their investment logic differs significantly. While bitcoin's value may rise, investors must assess their risk appetite and understand the nuances of this unique asset class.

Remember Sam Bankman and the FTX debacle?.