Bitcoin ETF is a mixed blessing

One can be forgiven for thinking that US regulators are confused about cryptocurrencies. The US Securities and Exchange Commission (SEC) established in 1929, with the purpose of enforcing laws against manipulation of markets, has just approved 11 spot Bitcoin exchange traded products (ETPs), which to all intents and purposes are ETFs. The SEC had previously been a staunch opponent of spot Bitcoin ETFs, on the basis that cryptocurrencies trade largely on unregulated markets and thus prices are prone to manipulation. But given that Bitcoin Future ETFs have existed since October 2021, regulated by the Commodity Futures Trading Commission (CFTC), another US government agency, which oversees US derivatives markets, it was perhaps inevitable that a spot Bitcoin ETF would soon come along. A spot price is the immediately available price; a futures price represents the price at a future specified date.

We have now truly entered an Alice in Wonderland world, in which something that does not have a physical existence apart from as a series of computer code can be owned, traded and even used as means of payment. You now have a choice of paying (in fiat currency, naturally) the fees associated with the future or spot price of a ghost-like entity whose volatility has been enormous and the manipulation and fraud of which has been shocking. Bitcoin prices, like all cryptocurrency prices, are untethered from anything fundamental. On most rational investment bases it's not a compelling prospect. That will not, however, deter investors who are seduced by Bitcoin's wild swings, hoping to time their Bitcoin ETF forays to buy at the bottom of this speculative asset and sell at or near a market top. Gary Gensler, chairman of the SEC, was clearly reluctant to approve the Bitcoin spot ETF. He said on 10 January "bitcoin is primarily a speculative, volatile asset that's also used for illicit activity...while we approved the listing and trading of certains pot bitcoin ETP shares today, we did not approve or endorse bitcoin." Dennis Kelleher, CEO of the investor advocacy think tank Better Markets, said cryptocurrency was a "worthless financial product" and that approval of Bitcoin ETFs was a "historic mistake...the SEC's action has changed nothing...bitcoin and crypto stilll have no legitimate use."

Store of volatility

Originally Bitcoin was designed as a substitute for fiat currency. Paper money issued backed by government promises has historically been a poor bet, with several major ones losing almost all their purchasing power in a fairly short term thanks to inflation. Its fans hoped that Bitcoin would displace fiat money but that experiment has been an empirical failure - the high costs and cumbersome payment processes associated with Bitcoin have killed that hope. Even in El Salvador, which in 2021 became the first country in the world to put Bitcoin into legal circulation alongdside the US Dollar, use of Bitcoin has remained low. The private Central American University has reported that in 2023 88% of Salvadorans didn't use Bitcoin in any transactions.

If it's not used as money - barring criminal activities - then Bitcoin is an asset, something that represents value of ownership that can be converted into fiat money. Yet the volatility of Bitcoin is such that it's not for the wary. In the March 2023 bank run its price dropped like a stone at the first sign of trouble, losing almost 20% from its February high to its March low, four times as much as the losses on the S & P while gold lost just 1%. Bitcoin is not a store of value; it's a store of volatility. The price of Bitcoin rose sharply in anticipation of the launch of the spot ETF; it was approved by the SEC on 10 January and two days later had dropped 8%.

Gold 2.0?

Larry Fink, chairman and CEO of the world's biggest asset manager (and the world's biggest provider of ETFs), BlackRock, has changed his previous tune. He once referred to Bitcoin as an "index of money laundering" and today says it's "digitalizing gold". BlackRock is one of the firms hoping to make trillions from its spot Bitcoin ETF. The idea that this ETF might come to displace gold as a hedge against inflation doesn't really stack up. The US financial services firm Morningstar published last August a report stating that gold provides "an established hedge against" equities and inflation but cryptocurrencies have shown "no such benefits."

With guns as big as BlackRock behind it, the spot Bitcoin ETFs will no doubt do well and attract big interest - but how much of this will be fresh investment, how much money that's already inside the crypto world and is looking for a cheaper home, one that is easier to dip into and out of?

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.