The dangers of investing in Bitcoin ETFs and crypto-related products
It’s been a while since we wrote an article related to cryptocurrencies. We have always had a negative view on cryptocurrencies, and continue to hold this stance.
Recently, the US Securities and Exchange Commission (SEC) approved the listing of 11 Bitcoin ETFs. However, in spite of the SEC finally approving Bitcoin ETFs, Gary Gensler, chairman of the SEC, stated that the agency does not endorse Bitcoin, calling it a “speculative, volatile asset that’s also used for illicit activity” and that “investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto.”
With this article, we want to reiterate and emphasise that investors should stay clear from speculating in these newly listed Bitcoin ETFs, or any cryptorelated products.
Cryptocurrencies lack fundamentals and intrinsic value
Unlike conventional asset classes, a major fundamental shortcoming for cryptocurrencies is the absence of fundamentals and intrinsic value.
In a traditional sense, intrinsic value would refer to the ’true’ worth of an asset which takes into account fundamental factors and future expectations of the asset.
Using the example of a company for instance, its intrinsic “value” – or fair value – could be derived from the value of its future cash flow discounted to the present day or its book value.
This certainly would not be applicable for crypto as one of its biggest drawbacks would be its inability to generate any form of cashflow or income.
Cryptos such as Bitcoin do not enjoy a stream of earnings like a company nor does it offer coupon payments like a fixed income instrument. This makes it impossible to formulate a credible or reliable valuation framework let alone derive an intrinsic value.
Furthermore, there is no credible way to derive a proxy value for crypto as it is impossible to map the asset class to any physical asset.
This stems from its lack of real-life utility as the asset class is not substitutable as an input for a commercial product.
Take for example, it is infeasible for Bitcoin, or even other cryptos to be used as an in put (unlike commodities) for the production of a priced physical asset that may otherwise offer a proxy value for such input.
Aside from the lack of cashflow and income, crypto does not have a proven longterm relationship with economic fundamentals unlike equities, fixed income, commodities, and even currencies.
It is also challenging to establish any reliable relationship, particularly for cryptos like Bitcoin, given its speculative and volatile nature.
To sum things up, with no fundamentals, it is impossible to determine crypto’s intrinsic value, and hence its price is being fuelled by sentiment, making it highly speculative and risky.
Poor form of currency due to high volatility, low scalability
One often touted use for crypto, especially Bitcoin, is its use as a form of money transfer or currency. There are two aspects of Bitcoin that makes it decidedly unsuitable for such a purpose – namely its volatility and its transaction frequency.
Firstly, Bitcoin’s volatility makes it unsuitable as a medium for transactions. Without this stability, prices of daily goods can become incredibly volatile, which is a less than ideal environment for everyday citizens.
There is a reason why price stability is often a target for central banks and governments, and Bitcoin as a currency fails to meet that simple requirement.
In addition, due to the energy and computing power required to process a transaction, Bitcoin can only realistically process about up to 7 transactions globally per second, and takes about ten minutes for a transaction to be processed.
In comparison, a Visa payment takes seconds, and can process up to 24,000 transactions per second. Therefore, due to scalability issues, the transaction rate for Bitcoin is certainly not going to be sufficient to be used as a global currency.
A space filled with scandals and frauds
It seems as though investors may have already forgotten the crypto space is filled with scandals, as seen in the past few years.
From the demise of the Terra/ Luna algorithmic stablecoin, which in itself is basically a Ponzi scheme, to the collapse of Three Arrow Capital (3AC) or FTX which used investors’ assets to speculate in the markets, these incidents serve as huge warning signs that the crypto space is extremely dangerous.
Besides these real-life examples, the crypto space continues to serve as a platform for money laundering and theft, as criminals attempt to conceal their activities and feed these illicit funds into the economy, banks, financial institutions and lawful investments, among others. Until there is greater transparency and a proper regulatory framework, the crypto space remains a dangerous place.
Our stance: Avoid this ‘Greater Fool Theory’ asset class All in all, we liken investing in crypto to the Greater Fool Theory. Any investor (or gambler) who subscribes to this theory disregards fundamentals and knowingly buys into overvalued assets, assuming that there will be other greater fools out there who will take the “hot potato” off their hands. However, it’s all fun and games until you ended up the final fool, and so there is far too much risk to undertake for too little rewards.
In conclusion, our view remains unchanged, consistent with the stance we have established since years ago - stay away from these Bitcoin ETFs and crypto-related products, due to the list of reasons mentioned above. Instead, investors should look to invest in assets with proper fundamentals and real earnings.