You can now invest in bitcoin ETFs. But should you?

By Jeanne Sahadi, CNN

New York (CNN) — It’s official. The Securities and Exchange Commission on Wednesday gave the green light to the listing and trading of 11 bitcoin Exchange-Traded Funds, or ETFs. And they will be coming online quickly, with several starting to trade Thursday.

That means if you have have been curious about investing in bitcoin, you can do so in an SEC-regulated product, with fewer of the technical and cybersecurity risks that come with investing in it directly.

But before you jump on the bitcoin bandwagon, here are some things to think about.

Understand what bitcoin is … and what it isn’t

It’s important to grasp what kind of asset bitcoin is.

Bitcoin is not tethered to anything tangible like the goods of a company or a natural resource.

And it is not legal tender in the United States or most other countries. The US Treasury’s Financial Crimes Enforcement Network characterizes it as “a medium of exchange that operates like a currency in some environments.”

But in the eyes of crypto advocates and some traditional money managers like Fidelity, it is a bet on the future of an increasingly digital world, and it’s a bet that it will hold its value over time more than any other crypto currency because it is limited in number. Its creator designed it so that there will only be a finite number of bitcoin ever available.

“Bitcoin is best understood as a monetary good… because bitcoin is the most (relative to other digital assets) secure, decentralized, sound digital money,” Fidelity said in a recent report. “Any other project or blockchain network that requires its users to believe they are transacting with a token that has real monetary value likely needs to be directly or indirectly connected to bitcoin as the ultimate monetary good.”

New wrapper, many of the same risks

Being able to invest in bitcoin through an SEC-regulated exchange-traded fund may be appealing to some, given the lack of protections, backup and regulatory oversight for wallets and custodial crypto exchange accounts.

For instance, blockchain data researcher Chainanalysis reported that in 2023 digital wallet holders were scammed out of millions of dollars through a phishing scam that tricked them into giving scammers permission to spend the digital tokens in their wallets. The New York Times in 2021 had a report showing how crypto investors lost access to their crypto holdings because they forgot the codes to their digital wallets. And investors learned the hard way about the lack of consumer protections when crypto exchanges get into trouble, like the demise of Sam Bankman-Fried’s FTX.

One of the advantages of investing in an ETF of any kind, bitcoin included, is that you can house it at a registered broker-dealer that is a member of the nonprofit Securities Investor Protection Corporation and is therefore SIPC-insured. That means you will receive up to $500,000 of protection should your brokerage firm ever go bankrupt.

In addition, “the newly approved products [are trading] on established and trustworthy exchanges (CBOE, NASDAQ, and NYSE), which are generally more stable and secure than crypto exchanges. … [And] being able to access Bitcoin in an ETF format means investors can easily add it to a diversified portfolio and monitor it without needing a separate account,” Alex Michalka, vice president of investment research at robo-advisory firm Wealthfront, said in an email.

Plus, bitcoin ETFs will make it easier for financial advisers to access the cryptocurrency for their clients who can afford to invest in alternative asset classes.

But make no mistake, the price of a bitcoin will be just as volatile whether you invest in it directly yourself or through an ETF.

“Over the past 5 years, the volatility (in bitcoin) has been four times that of [the] stock market,” said Bryan Armour, director of passive strategies research at Morningstar. “The exposure is the same. … It’s still bitcoin.”

The price of bitcoin has fluctuated wildly over the years. For example, it hit an all-time high of nearly $69,000 in November 2021, then fell below $17,000 during the “crypto winter” of 2022 and has mostly been trading north of $45,000 in the run-up to the SEC’s decision. On Thursday, it was around $46,000 at midday.

What’s more, cryptocurrency markets notoriously have been subject to price manipulation and criminal activities.

Better Markets, a nonprofit that advocates for, among other things, greater investor protections, strongly opposes the SEC’s approval of bitcoin ETFs. Among its objections is the bitcoin market’s history of artificially inflated trading volumes known as “wash” trading, which can make it appear that there is more investor interest than there actually is. And it remains unconvinced that the SEC’s efforts to ensure more transparency in the bitcoin trading market, which it does not regulate, will provide adequate protection for ordinary investors.

Deciding if a bitcoin ETF makes sense for you

The investment firms that have gotten approval to offer bitcoin ETFs are competing fiercely for investor dollars. All but one have proposed very low management and administrative fees and say they will waive their fees for several months.

But none of that should influence your decision about whether to invest in the first place. Your financial goals, risk tolerance and time horizon will be key factors in assessing whether it is worth it for you to put money in a bitcoin ETF.

Put bluntly, “It’s not for the faint of heart,” Armour said. “There is no way to fundamentally value where it should be priced at. It’s at the whim of supply and demand.”

One certified financial planner, Alex Lozano, believes clients should only take as much risk as necessary on any investment to achieve their goals.

Given that a bitcoin ETF is likely to be considered a speculative investment, Lozano said, “I would not recommend [it], unless [investors] had the ability to lose their investment or hold it for long periods of time.”

If you do decide to invest in a bitcoin ETF, certified financial planner Trent D. Porter recommends making it no more than 3% of your overall portfolio. And if you normally invest on a platform that automatically rebalances your portfolio for you, make sure the system does not rebalance your holdings based on your bitcoin investment.

“Even a very small percentage in a bitcoin fund can cause a large amount of volatility in the overall portfolio,” Porter said. “As an extreme example, if bitcoin were to fall to zero, an automated system would continue to rebalance into the fund until the entire portfolio was gone.”

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CNN’s Allison Morrow contributed to this report