Hiltzik: Vanguard takes a firm stance against cryptocurrencies

Starting on January 10, when the Securities and Exchange Commission approves the first Bitcoin exchange-traded investment product, the largest investment firms will jump into the pool with both feet and offer access to Bitcoin funds to clients large and small. competed with each other.

All except Vanguard Group, the second largest private investment management fund on the planet.

In a Jan. 24 message to customers, the company said it has no plans to offer Bitcoin exchange-traded funds (ETFs) or other crypto-related products. It also does not allow such products from other companies to be offered through the company's intermediary division.

Vanguard detailed exactly why it is avoiding cryptocurrencies despite the “headlines and buzz” this asset class generates. Simply put, the company does not believe that cryptocurrencies belong in individual investors' portfolios.

This is a wise and responsible policy that puts the interests of Vanguard customers ahead of the interests of greedy promoters and scammers that pervade the crypto space.

Investing in Bitcoin and other cryptocurrencies is usually a financial disaster for retail investors. Stories of people losing their savings on supposedly safe crypto investments are tragically common.

Vanguard executives know they are swimming against the tide of pro-cryptocurrency propaganda from entertainment and sports stars and prominent authors. It doesn't upset them.

“In Vanguard’s view, cryptocurrencies are more speculation than investments,” Janelle Jackson, the company’s global head of ETF capital markets, wrote in a recent message headlined “No Bitcoin ETF at Vanguard?” Stated. Here's why: ”

Contrasting cryptocurrencies with traditional asset classes, she writes: “With stocks, you own shares in a company that produces goods or services and often also pays dividends. With bonds, you earn a series of interest payments. Goods are real assets that satisfy consumption needs. , [and] Possesses inflation-hedging properties…Cryptocurrency is classified as a commodity, but it is an immature asset with a short history and no inherent economic value or cash flows, which can cause havoc within a portfolio. It's a class. ”

These words are important for several reasons. One is Vanguard's size. As of 2023, his assets under management exceed $7 trillion, ranking the firm as the second-largest investment management firm in the U.S. behind BlackRock (more than $9 trillion). Also, more than many other similar companies, Vanguard's target market is individual investors pursuing long-term buy-and-hold strategies.

Additionally, Vanguard has a history of being skeptical of this month's trending investment boom and distancing itself from its platform.

Before we dive deeper into Vanguard's decision and history, let's briefly touch on the SEC's decision to give the green light to a Bitcoin ETF.

Under Chairman Gary Gensler, the agency has consistently resisted approving cryptocurrency-based investment schemes.in Tweet from January 9th, Gensler advised investors to be “cautious” in everything related to crypto assets. “There are significant risks involved,” he wrote.

However, the next day, the SEC approved Bitcoin ETF proposals from multiple investment companies, after rejecting 20 applications dating back to 2018. What changed after the vote was that the SEC's hands were tied by the ruling, Gensler said. From the Federal Court of Appeals in Washington, D.C. The court found that the Commission had no case for denying the latest application.

Gensler emphasized that the SEC vote does not mean that the general aversion to crypto investing has changed. The ETFs approved by the commission are limited to holdings in a single cryptocurrency, Bitcoin, and should not be taken as a signal that the commission will look favorably on other crypto-based investment products. he warned.

Commissioner Caroline A. Crenshaw, like Mr. Gensler, is a member of the SEC Democratic majority and was even more outspoken in her opposition to confirmation. Is the cryptocurrency market safe? she asked rhetorically. “Substantial evidence shows the answer is no.”

He said spot bitcoin trading, the basis of the new ETF, is “vulnerable to manipulation, rife with fraud, extremely volatile, and with very limited oversight, without adequate investor protection in place.” “We cannot say with confidence that it is,” he added. ”

The SEC's approval of applications for 11 Bitcoin ETFs developed by companies including BlackRock, Fidelity, and Invesco has sparked a storm of hyperventilation from crypto enthusiasts, who say they are considering this as an asset. He described it as a “game changer” for the class. But other investment watchdogs, including Dennis Kelleher, co-founder and chief executive of Better Markets, remain concerned that “serious and historical risks” that lure unwary investors into “worthless products” remain. “It was a mistake,” he said.

Almost all of Japan's top investment management companies offer their clients the opportunity to invest in Bitcoin and other cryptocurrencies. Some companies market these assets more aggressively than others.

Fidelity, which ranks third in assets under management behind BlackRock and Vanguard, began offering Bitcoin investment options in 2022 to employers who sponsor 401(k) plans for employees, a move that Sam. This was just a few months before Bankman Freed's FTX cryptocurrency scam became a major scam. To fraud. (As you may recall, a federal jury found Bankman Freed guilty of seven counts of fraud in November.)

Fidelity's business prompted pushback from Democratic Sens. Richard Durbin of Illinois and Elizabeth Warren of Massachusetts, who called on the company to withdraw from 401(k) options. Fidelity clearly didn't, because on its website he still promotes Bitcoin in his 401(k) plan.

So back to Vanguard. (I invest in some of the funds. It's a mutual company owned by the fund's shareholders, so technically I'm an owner of that company, albeit a small one.)

To be fair, Vanguard never promised to never offer Bitcoin investments. “We continually evaluate brokerage offers and evaluate new product entries to the market,” Vanguard spokeswoman Karyn Baldwin told me in an email.

But she notes that there is a mountain to climb to demonstrate that Bitcoin ETFs belong to “asset classes such as stocks, bonds, and cash that Vanguard considers to be components of a balanced long-term investment portfolio.” I made it clear. ”

Every investment firm emphasizes putting the best interests of its clients first, but few were as grounded in that principle as Vanguard.

The company was founded in 1975 by the esteemed John C. “Jack” Bogle. He founded the company based on the concept of passive investing through index funds. These funds, which replicate the holdings of major stock indexes, trade relatively infrequently because the components of the index change little.

This reduces transaction costs such as fees and taxes that eat into customer revenue. More importantly, such passive investing consistently outperforms “active” fund managers who frequently trade and select investments for the upside in a particular stock or market category. That's what I'm doing.

Until the end of his life in 2019, Mr. Bogle was hostile to speculation, not investment. In his 2012 book, “Clash of Cultures,” he contrasted it with “the culture of long-term investing, the rock of intellectuals.” It is the tool of philosophers, historians, and mathematicians, engineers, and alchemists with a culture of short-term investing. ”

He said the latter has come to dominate a financial system “infused with self-interest and greed,” which is “characterized by frenzied activity in financial markets, complex and exotic financial instruments,” and “a gradual but inexorable rise. ” he lamented.

If you think that would make him extremely wary of Bitcoin, you're not kidding. At a 2017 investment conference, he answered a question about Bitcoin: Do I make myself clear?

“Bitcoin has no fundamental rate of return. There's nothing to support it other than the hope that someone will sell it to you for more than you paid for it,” he explained. In other words, the “Great Fool” theory.

It is worth noting that such skepticism does not necessarily lead to business decisions to avoid cursed investments. After all, JPMorgan Chase Chairman and CEO Jamie Dimon also expressed similar doubts about Bitcoin around the same time, calling it a “scam…worse than a tulip bulb.” ” he called it.

But unlike Vanguard, JPMorgan doesn't follow its leaders' instincts. The company has been offering customers access to cryptocurrency funds since at least 2021.

There is a long list of trendy investments that Vanguard has almost universally denied to its customers for their own benefit. A recent list compiled by Morningstar's John Rekenthaler includes government plus funds from the 1980s, Internet funds from the late 1990s (“What is artificial intelligence investing today? Internet funds were 25 years ago”). Kenthaler writes – fair warning) and “130/ The 2009 vintage “30 Fund'' holds a hedge fund-like portfolio with a mix of long and short positions, adding risk. It was said that you could get the benefit of the goose without having to pay for it.

All of these ideas eventually “crash and burn,” as Rekenthaler noted. Vanguard accepted none. The main reason is that all of these are against the interests of long-term investors.

Vanguard's policies clearly seem to resonate with crypto believers. One claimed in a tweet A Vanguard representative he contacted said they “deeply apologize for the lack of vision on the part of management, acknowledge that they personally own Bitcoin, and have received literally thousands of calls from customers asking to move their accounts.” “I am receiving the same,” he said.

All we can say to that is, “Oh, sure.” However, here's a prediction. Vanguard, which has been around for nearly half a century, will continue to be around long after cryptocurrencies are left in the graveyard of the investment boom.