Bitcoin-tracking ETFs: watershed moment or damp squib?
It’s off to the moon for bitcoin’s price, then? That, at least, was the tone of advance opinion among the crypto crew if the US financial regulator approved the creation of exchange traded funds (ETFs) that track the value of the cryptocurrency. Now the Securities and Exchange Commission, grudgingly and with a heavy warning that it is not endorsing bitcoin itself, has given a thumbs up.
Cue a fresh whoosh of demand, we are told, from US institutions and private punters who will be able to hitch themselves to the bitcoin wagon without having to go to the bother of opening a digital wallet or dealing with a crypto trading platform. The word “watershed” has been used widely to describe the moment. Giant investment names such as BlackRock will be offering these new ETFs. Ease of access and mainstream respectability have arrived as a package.
The thesis of a boom in demand, and thus substantially higher prices, is plausible – if only because the history of bitcoin for the past eight years has involved the price either soaring or plunging. The cryptocurrency has no intrinsic value and, as a means of exchange, its volatility makes it nextto-useless unless you’re a fraudster or criminal, but there’s no accounting for people’s appetite to speculate. As with casinos and slot machines, people will tend to use them if you make it easy for them to do so.
But the off-to-the-moon idea also feels a little simplistic at this point. First, confidence that the SEC would approve ETFs has been high and rising for months. Indeed, in the never-ending search for explanations for bitcoin’s price movements, the likelihood of a green light from the SEC has been offered as a reason for the rise from $17,000 (£13,370) at Christmas 2022 to the current $47,000-ish. To some degree, the hype value from SEC approval must already be exhausted.
Second, a new set of investors actually has to turn up in large numbers to satisfy expectations. And some forecasts for the wave of new money are enormous. Standard Chartered analysts this week said the ETFs could attract $50bn to $100bn this year, which they reckoned would take the price of bitcoin as high as $100,000.
Anything can happen, but even the lower end of that range for predicted flow of cash could not possibly be met by retail speculators alone. Are institutional firms really itching to make allocations to an instrument that can double or halve in value in the space of six months for no clear reason? Perhaps they are, but there are plenty of other ways to inject risk into a portfolio. There is still (let’s hope) a degree of career-risk to professional money managers in being caught on the wrong side of a crypto price plunge.
On day one of trading of the new ETFs, the volume of trading in bitcoin did indeed increase and volatility in the price was up to usual standards (almost $49,000 one minute, then $46,000 within the hour). Come back in a few months to discover if the launch of ETFs really marked a new era. But, for the hype merchants, there must be a danger of it being better to travel than arrive. In the real world of everyday transactions for goods and services, bitcoin is irrelevant – still.