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Still on the Fence About Cryptocurrency? This Exchange-Traded Fund Could Be Perfect for You

Source The Motley Fool

Even with Bitcoin (CRYPTO: BTC) soaring to a new all-time high above $100,000, it's easy to understand why many people are still on the fence about cryptocurrency. The crypto market is notorious for its volatility, and the price of Bitcoin can gyrate wildly on a day-to-day basis.

However, if you are willing to accept the inherent volatility of crypto, the iShares Bitcoin Trust (NASDAQ: IBIT) might be perfect for your portfolio. In a very short time, it has become the most popular way for investors to get exposure to Bitcoin and now ranks among the top 1% of all exchange-traded funds (ETFs) in terms of assets under management.

What is the iShares Bitcoin Trust?

The iShares Bitcoin Trust is one of the nearly dozen spot Bitcoin ETFs that were launched at the beginning of the year. Since it is part of the iShares family of ETFs from BlackRock, you can buy and sell it just like any other iShares ETF.

The iShares fund invests exclusively in the cryptocurrency. Unlike other ETFs you might have in your portfolio, it does not invest in a basket of diversified assets. It does one thing, and it does that very well: investing in Bitcoin directly via the spot cryptocurrency market.

That's a big deal. It means you don't have to worry about creating a blockchain wallet, remembering a set of cryptographic keys, or opening up an account with a cryptocurrency exchange. The iShares Bitcoin Trust is designed to abstract away all the complexities of investing in crypto, and it does so with minimal expense. As such, it is perfect for someone just starting out in crypto.

Why Bitcoin and not a basket of cryptocurrencies?

At this point, you might be thinking: "Yes, it's great to get exposure to Bitcoin, but what if I want exposure to a broad cross-section of cryptocurrencies?" The answer is very simple: Bitcoin accounts for such a large percentage of the overall market cap of the crypto market that trying to get exposure to a wider basket of cryptocurrencies is probably not worth your time or money.

Right now, for example, Bitcoin accounts for a whopping 55% of the total market cap of the crypto market. So, even though there are literally thousands of different cryptocurrencies, all you really need is exposure to Bitcoin, which makes up more than one-half of the market cap of the entire crypto market.

Image source: Getty Images.

Moreover, Bitcoin is one of only two cryptocurrencies -- the other being Ethereum -- that ETFs can purchase in the spot cryptocurrency market. Thus, if an ETF is looking to track the performance of any other cryptocurrency, it is going to need to deploy a mix of different financial derivatives. And that introduces tracking errors, as well as significantly higher costs.

That might change in the future as crypto goes increasingly mainstream. Coinbase Global (NASDAQ: COIN), for example, recently created the Coinbase 50 Index, which is designed to track the performance of the top 50 cryptocurrencies, with plans to offer investment products based on that index. But right now, U.S. regulators have not signed off on the specific financial products required to track that index.

1:1 tracking of Bitcoin's performance

You're probably aware that Bitcoin has been one of the best-performing assets in the world over the past decade. While it can be volatile, and is prone to severe downturns every few years, you need to keep your eye on the long term. The leading crypto has a track record of outperforming every other asset class over the long haul.

In the period from 2011 to 2021, for example, it delivered annualized returns of 230% to investors. In contrast, the next-best asset class (tech stocks) delivered returns of just 20%. Based on that track record of performance, you should be looking for an investment product that offers nearly 1:1 tracking of Bitcoin's price.

Bitcoin/U.S. dollar chart by TradingView.

And as you can see in the chart above, that's just about exactly what the iShares Bitcoin Trust delivers. The blue line above represents Bitcoin's price movements, while the red line represents the ETF's share-price changes. While any ETF is prone to a certain degree of tracking errors, the iShares Trust has been remarkably good at tracking the performance of Bitcoin. You could say that this spot ETF's tracking since January has been, well, spot on.

Is the iShares Bitcoin Trust right for you?

From my perspective, the low cost, efficiency, and transparency of the iShares Bitcoin Trust make it a fantastic way to get exposure to Bitcoin. It's as easy to buy and sell as any other ETF, and it gives you 1:1 exposure to the crypto's long-run price performance. As long as that price continues to soar higher, I can't think of a better product for first-time crypto investors.

Should you invest $1,000 in iShares Bitcoin Trust right now?

Before you buy stock in iShares Bitcoin Trust, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and iShares Bitcoin Trust wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $841,692!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of December 9, 2024

Dominic Basulto has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, and Ethereum. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.

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