Why Vanguard doesn’t offer crypto products

With Bitcoin ETFs now available, a institution offers a glimpse inside its product development process, and smacks down crypto in the process.

I like Vanguard. They are a low-cost brokerage—they invented the index fund—and they offer simple products that work really well. I’ve put my money in with them for over 20 years, and wholeheartedly recommend them to anyone who is looking to open a Roth IRA or rollover a 401(k).

They’re not exciting. They won’t make the news often for anything they do. But they currently hold around $8 trillion of people’s assets, so they must be doing something right.

I follow financial news so you don’t have to, and was struck by an interview that Vanguard held with two of their senior leadership recently. It was in response to some recent crypto legislation that has the markets excited, with all the good and bad that that implies.

In short, they were asked if they were going to create a Bitcoin fund. They said no, and in the process gave an incredible smack down to an ever-frothy part of the speculative marketplace.

It’s worth a read.

Bitcoin ETFs

It used to be, if you wanted to buy Bitcoin, you had to, well, buy Bitcoin.

But that’s a pretty cumbersome process, even today, so many have been interested in finding ways to get access to that market without, you know, actually having to buy cryptocurrency.

One company, Grayscale, launched something called Grayscale Bitcoin Trust, which attempted to mimic buying and selling Bitcoin, but this was by no means a perfect system.

Fast forward to this year, when the Securities and Exchange Commission (SEC) “reluctantly” approved the creation of exchange-traded funds (ETFs) that hold Bitcoin, something that wasn’t allowed up until then.

(ETFs are basically mutual funds, as far as we’re concerned, so if you haven’t done much with ETFs, just read them as funds you can buy and sell.)

In the press release, you can tell that this was a reluctant, we-had-to-do-this announcement. Just look at this statement (and for ETPs, think ETFs):

Though we’re merit neutral, I’d note that the underlying assets in the metals ETPs have consumer and industrial uses, while in contrast bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.

Not exactly a glowing recommendation.

Now, I’m reserving my opinion, but I think the technologist Molly White had the absolute best response to this:

Finally, people will be able to turn their money into an anonymous peer-to peer asset outside of government control, to which they own their own keys and thus control completely, without having to involve powerful financial institutions like BlackRock.

It takes a minute to get, but it’s worth it.

Vanguard is focused on buy-and-hold

People are clearly excited about the opportunity to buy Bitcoin without having to buy Bitcoin, and so, apparently, many have been reaching out to Vanguard, asking if they too will add a Bitcoin ETF to their portfolio.

In response, they published a Q&A on their website, and it’s a great read, and not a long one either.

The headline makes it clear that they aren’t mincing words. “No bitcoin ETFs at Vanguard? Here’s why”.

First, they note that their focus is on long-term, buy-and-hold strategies:

Investors have a lot of choices these days when it comes to where to save for their retirement, invest for their kids’ education, and hold their emergency savings…The easy step for us would have been just to allow full access to crypto-related products. But as a firm and a brokerage platform, we’re purposely structured to meet the needs of our investor-owners, most of whom are long-term, buy-and-hold investors.

And as we all know from all those would-be day traders on Robinhood at the beginning of the pandemic, a great deal of the interest in crypto is not exactly of the buy-and-hold variety.

(Michael Saylor, you crazy outlier, we tip our hat to you.)

Vanguard doesn’t want volatility

They continue with a quick lesson about the problem with volatility:

Over just the past three years, the price of bitcoin has increased by as much as 150% and declined by as much as 77%. Double-digit percent price drops are routine among cryptocurrencies. Remember that you need a 100% return just to make up for a 50% decline.

That last point bears repeating. The bigger the loss, the more disproportionately large the recovery has to be.

When you have a 5% price drop, you need a 5.2% gain to recover. When you have a 10% price drop, you need an 11% gain to recover. Those are more or less at parity, but when you lose big, like in the example a 50% decline, you need to double the asset’s price to make a recovery.

It’s possible, but boy would that hurt if it were in your 401(k).

Vanguard smacks down crypto

But the most eye-catching quote was when the normally buttoned-up Vanguard crew lets loose when comparing crypto to equities (stocks), bonds, and commodities. (Emphasis is mine.)

With equities, you own a share of a company that produces goods or services, and many also pay dividends. With bonds, you get a stream of interest payments. Commodities are real assets that meet consumption needs, have inflation-hedging properties, and can play a role in certain portfolios. While crypto has been classified as a commodity, it’s an immature asset class that has little history, no inherent economic value, no cash flow, and can create havoc within a portfolio.

That’s about as much of a sick burn as you’re going to get from Vanguard.

No Bitcoin ETFs here

Now, lest you think that I’m anti-crypto, here are my bullet points:

• You can’t invest in crypto, because it’s basically pure speculation
• Crypto’s appeal is rooted in late stage-capitalism, where people feel like it’s their only way to a better financial position, all other avenues feeling closed off to them.
• You can buy crypto if you want, but you should never put any money in that you wouldn’t be okay with losing.

Because of all of the above, I don’t think crypto has any place in your investment strategies. So Vanguard not offering a crypto fund shouldn’t affect you.

You’ll just have to content yourself with boring products like index funds.

Like this one, which returned almost 29% in the past year.

Oh wait.