What to know before buying the first bitcoin ETFs. FOMO ‘is a poor investment strategy,' expert says

What to know before buying the first bitcoin ETFs. FOMO ‘is a poor investment strategy,’ expert says
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  • The U.S. Securities and Exchange Commission on Wednesday approved the first U.S. spot bitcoin exchange-traded funds.
  • However, bitcoin can be volatile and it's important to consider your risk tolerance and goals before adding to your portfolio, experts say.

The U.S. Securities and Exchange Commission on Wednesday approved the first U.S. spot bitcoin exchange-traded funds. But experts urge caution before piling into the long-awaited ETFs.

The agency signed off on 11 bitcoin ETF applications, including funds from BlackRock, Fidelity, Ark Invest, WisdomTree and Grayscale. The new investment provides more access to everyday investors.

"It's a big step forward for bitcoin," said Bryan Armour, director of passive strategies research for North America at Morningstar, who has analyzed the new assets. But there are things to consider before rushing to purchase bitcoin ETFs.

"Fear of missing out is a poor investment strategy," he added.

The SEC decision was highly anticipated, and the price of bitcoin briefly topped $49,000, the highest level since December 2021, as the first bitcoin ETFs began trading Thursday.

Previously, U.S. investors could only buy bitcoin futures ETFs, which own bitcoin futures contracts, or agreements to buy or sell the asset later for an agreed-upon price. But the new spot bitcoin ETFs invest in the digital currency directly.

"A lot of investors have access to bitcoin today that may not have yesterday," Armour said.

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Bitcoin remains 'highly volatile'

While the bitcoin ETF approval is a landmark event, it's important to consider your goals and risk tolerance before purchasing, experts say.

"Bitcoin carries unique risks, and it's highly volatile," Armour said, noting its variability of returns has been significantly higher than the stock market over the past five years.

"When I started building a position, I bought at 1% [allocation] at a time and I'm maxing out at 3%," said certified financial planner Ivory Johnson, founder of Delancey Wealth Management in Washington, D.C. He is also a member of CNBC's Financial Advisor Council.

With a small bitcoin allocation in your portfolio, there's room for significant upside potential while minimizing downside risk, he said.

"While we approved the listing and trading of certain spot bitcoin ETP [exchange-traded product] shares today, we did not approve or endorse bitcoin," SEC Chair Gary Gensler said in a statement Wednesday. "Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto."

'Better than anything else on the market'

While bitcoin carries risk, if you want to add exposure, experts say the new bitcoin ETFs could be worth considering compared to owning bitcoin directly or bitcoin futures ETFs.

"These spot bitcoin ETFs are better than anything else on the market," said Armour, referring to other bitcoin investing options. Of course, you should also consider where to buy assets and any custodian risks.

The new ETFs may be cheaper than previous fund options, such as the ProShares Bitcoin Strategy ETF (BITO) — the first bitcoin futures ETF, with an expense ratio of 0.95%. The Grayscale Bitcoin Trust (GBTC) charged 2.0% before converting to a spot bitcoin ETF, and now has fees of 1.5%.

If you're unsure about purchasing bitcoin ETFs on the first day of trading, you can wait and see what happens, Armour said. The funds "gathering assets" are "more likely to stick around and have the cheapest trading costs," he said.

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