Wall Street Rolls Out the Red Carpet for Bitcoin ETFs… but Should You Invest?
Dear Reader,
Today was a pretty big day for cryptocurrency investors. But it was an even bigger day for Wall Street.
The first exchange-traded funds (ETFs) that directly hold Bitcoin began trading this morning. They’re off to a strong start, too – over $3.5 billion worth of shares traded hands by mid-day on the NYSE.
But how we got here was something of a rollercoaster ride.
Over the weekend, rumors began to spread that the Securities and Exchange Commission’s approval of the ETFs was imminent.
Then, on Tuesday, someone “compromised” the SEC’s official account on X (formerly known as Twitter) and posted a fake message saying they had approved the ETFs a day early. Then, on Wednesday, a statement briefly appeared on the SEC webpage saying they had approved the Bitcoin ETFs, but it was taken down and then re-posted several minutes later.
 
It was chaos, folks.
But then we finally learned that the approvals were real, and everyone from BlackRock to Fidelity to Cathie Wood could get in on the action (11 spot Bitcoin ETFs were approved in total).
Whether you’re a fan or not, it’s a major milestone for cryptocurrencies, and it will be interesting to see if Bitcoin begins to attract more interest from individual and institutional investors.
Now, I get asked about cryptocurrencies often. And to be honest, while I invest solely in stocks, I don’t have a big problem with them. I understand why people like cryptocurrencies. My real issue is with the ETF industry.
So, in today’s Market 360 , I’ll explain why I don’t like the ETF industry, my thoughts on the Bitcoin ETFs and share if I view the Bitcoin ETFs as a good investment… or if you should put your hard-earned money elsewhere.
My Problems With ETFs
My first beef with ETFs is that, all too often, they trade at a big discount to their underlying stocks.
What do I mean by this?
The spread is the difference between the bid and the ask. The bid is what the buyer is willing to pay for the ETF, while the ask is what the seller is willing to accept.
Ideally, the tighter the spread, the better. This means the ETF is more liquid and easier for an investor to buy and sell. The wider the spread, the less liquid it is and the harder it is to buy or sell the ETF at the price an investor wants. And this fuels panic selling pressure.
The dirty little secret about Wall Street is that they make more money on spreads than they do on fees.
In other words, they fleece you.
Here’s the reality: An ETF may sound enticing because there are no commission fees, but the big catch is the spread.
Think about it… ETFs have a bid/ask, and the underlying securities have a spread. This effectively allows broker-dealers to “double dip” and make even more money.
So, of course, Wall Street loves ETFs! They want you to put all of your money into them.
Most investors don’t think about this, but here’s one reason why you should care.
One thing that I have learned in the past 40-plus years is that, in general, you will always get a better price and tighter bid/ask spread by selling into strength. There is typically better trading volume in the first hours and the last 90 minutes of the trading day.
The folks over at Bespoke Investment Group did a study on this a couple of years ago. They compared what would happen if you bought the SPDR S&P 500 ETF Trust (SPY) at the market close and sold at the open vs the opposite.
They found that if you only bought at the open and sold at the close, you would have lost 10.3% during a three-decade period through 2021. After-hours trading, meanwhile, returned 853%!
One reason this happens is because important economic and earnings news tends to get released after-hours. (Get ready to see that a lot of that after the fourth-quarter earnings season kicks off tomorrow.) But another reason is because bid/ask spreads are wider outside of regular market hours! This magnifies any big moves in a stock or ETF.
Another Reason I Don’t Mess With ETFs
Another example of market manipulation is what happens if an investor places a stop-loss on an ETF. Simply put, the firms will see that stop, run the investor down and clean them out – buying the ETF at a steep discount from unsuspecting investors. Then, when the ETF returns to its underlying value, the firm can cash out for a profit.
This is why Wall Street pushes ETFs so hard now. By creating a basket of stocks, they can profit from the volatility of one or two bad actors and gain access to other solid companies for a discount in the process.
I know this because I used to have my managed accounts approved by these firms. They all take kickbacks from high-frequency trading firms like Citadel so they can see the order flow. That’s one of the reasons I sold that business 10 years ago, because the firms wanted to go to ETFs so they could all fleece people.
Don’t Risk Being Burned by Bitcoin ETFs
The bottom line is that ETFs can be dangerous. You need to know how to use them responsibly.
So, if you’re thinking of investing in the Bitcoin ETFs, make sure to watch the spreads.
Also, keep this question in mind: Will there be a time of day for BTC ETF when spreads are minimized? It will be interesting to see how this works for the Bitcoin ETFs, since cryptocurrencies trade 24/7, while the ETFs just trade during market hours.
Another thing is that I wouldn’t pay too much attention to the hype around these products in the financial media. Many in the financial media are unduly influenced by Wall Street, who use them as a pawn to manipulate and spark trading volume. It’s just another way for Wall Street to fleece naïve investors.
Personally, I don’t want to see you get fleeced by Wall Street. So, instead of risk being burned by one of these Bitcoin ETFs, I recommend investing in fundamentally superior stocks to make money instead.
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Sincerely,
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