As the curiosity surrounding spot-bitcoin ETFs grows, investors should brace themselves for potential disappointment as the intricate nature of the cryptocurrency market may pose unforeseen challenges for these new investment vehicles.
Narrowly-defined and specialty ETFs have historically struggled to outperform more broadly diversified ETFs, and this trend may also apply to spot bitcoin ETFs once they are launched. Recent research conducted by Itzhak Ben-David, Byungwook Kim, Francesco Franzoni, and Rabih Moussawi suggests that narrowly focused ETFs tend to underperform the broad stock market on a risk-adjusted basis for up to five years after their launch.
While no spot bitcoin ETFs have been approved yet, numerous firms, including BlackRock, have filed registration paperwork in anticipation of regulatory approval. However, the study does not specifically focus on bitcoin ETFs or make any predictions about their future performance. Instead, it highlights that narrowly focused ETFs often enter the market when investor enthusiasm for a particular investment theme is at its peak, leading to potentially overvalued securities within these ETFs.
Another factor contributing to the underperformance of narrowly focused ETFs is their high expense ratios. These ETFs often take advantage of investor enthusiasm by charging higher fees. In contrast, broader ETFs, such as the Vanguard Total Stock Market Index Fund ETF, have significantly lower expense ratios.
The study’s findings should be considered when evaluating the potential performance of spot bitcoin ETFs. While investor enthusiasm for these ETFs is currently high, historical data suggests that their performance may not meet expectations. Additionally, a separate bitcoin valuation model forecasts a mediocre long-term expected future return for bitcoin.
In conclusion, while the approval of a spot bitcoin ETF may initially drive up the price of bitcoin, it is important to temper expectations regarding its subsequent performance. Historical data and valuation models indicate that the odds are against spot bitcoin ETFs delivering exceptional long-term returns.
Disclaimer: This article was created by Mark Hulbert, a regular contributor to MarketWatch. MarketWatch operates independently from Dow Jones Newswires and The Wall Street Journal, both of which are operated by Dow Jones & Company, Inc.
