Here’s what you need to know before investing in bitcoin ETFs

It has been a banner year for spot bitcoin exchange-traded funds, with some of the biggest asset managers introducing ETFs that hold the flagship digital currency. But there are things to consider before adding these ETFs to your portfolio, experts say.  

The U.S. Securities and Exchange Commission approved the first spot bitcoin ETFs in January. Earlier this month, the 12 spot bitcoin ETFs collectively surpassed $100 billion in assets under management, marking one of the most successful ETF launches in history.

Bitcoin ETFs give investors a “traditional way to buy an untraditional asset,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York.

Despite recent volatility, the price of bitcoin was still up nearly 120% year to date, as of Dec. 20, fueled in part by the pro-crypto policy proposed by President-elect Donald Trump.  

There is a lot of upside potential, said Boneparth, who is also a member of CNBC’s Financial Advisor Council. But there is typically a “tremendous amount of volatility” compared to traditional asset classes.

If you are still ready to buy bitcoin ETFs, here’s what to consider.

“Most advisors are still relatively cautious about using these [bitcoin ETFs] with their clients,” said Amy Arnott, a portfolio strategist with Morningstar Research Services.

To that point, some 59% of financial advisors are not currently using or discussing cryptocurrency with their clients, according to a survey released in June from Cerulli Associates. The survey polled 271 advisors during the first quarter of 2024, when the price of bitcoin was lower.  

If you are eager to add bitcoin ETFs to your portfolio, Arnott suggests keeping your allocation small — around 2% to 3%, maximum — and rebalancing regularly.

Your allocation should be based on your goals, risk tolerance and timeline. Without rebalancing, a ballooning bitcoin ETF position could have a “drastic impact on the overall portfolio’s risk profile,” she said.

You can follow a “rebalancing policy” by trimming profits whenever your bitcoin ETF allocation exceeds a predetermined percent of your portfolio, Arnott said. That requires regular monitoring.

“It’s good to rebalance on a regular schedule, quarterly at a minimum, or even monthly” for volatile assets such as bitcoin, she said.

Like other investments, it is important to consider your goals and timeline before adding bitcoin ETFs to your portfolio, Arnott said.

Similar to stocks, Morningstar’s portfolio framework recommends holding bitcoin and other cryptocurrencies for at least 10 years due to volatility, periodic drawdowns and crypto winters.

“It’s not a good place to be if you’re saving for a down payment on the house in a few years,” Arnott said.