Bitcoin took a big step forward last month, with the Securities and Exchange Commission (SEC) in the US finally giving approval for 11 exchange traded funds (ETFs) to begin trading on the sharemarket.
BlackRock’s iShares Bitcoin Trust (IBIT) quickly emerged as one of the favourites, passing US$1 billion in investor inflows within just five days.
According to Bloomberg, the only ETF to reach that milestone more quickly was the SPDR Gold Trust (GLD) which got there in three days back in 2004.
This trend could well continue, and there could be a large pool of new money that’ll flow into these funds.
It probably won’t come from the diehard crypto crowd. They’re already invested, and they hold their Bitcoin via digital wallets, cold storage devices or accounts at exchanges like Coinbase or Binance.
If there is a steady flow of new funds approaching, it could well come from more traditional investors.
This group already has an investment portfolio with a wealth management firm or fund manager.
They like having all their wealth in one place with their trusted adviser, and they last thing they want is a separate account somewhere.
They’re also put off by the need to maintain a digital wallet, which has an air of vulnerability about it and doesn’t feel as secure, in the eyes of this group.
An ETF, however, is something very familiar that will offer much more peace of mind.
Most of us own a few of those already, they’re very easy to buy and sell, and they sit nicely alongside shares, bonds and other assets in a portfolio report.
Just to be clear, I don’t believe Bitcoin is an essential ingredient in a portfolio. Crypto isn’t for everyone, and many of us are more than happy to continue with our traditional approach and leave it out, me included.
However, there are many investors who will be interested in adding a small amount to their portfolio.
Some of them will genuinely believe in the concept, while other wealthy investors will simply want to cover their bases with a small allocation.
Even if a small fraction of the US$250 trillion in global financial assets finds its way into these new assets, the inflows could be significant.
While the ease and simplicity these new ETFs offer is likely to expand investor interest, it won’t necessarily ensure prices go consistently higher.
Those who got on the Bitcoin bandwagon early have done extremely well, but it’s been a rollercoaster along the way.
There have been several major corrections. Prices fell 83 per cent in 2018, 61 per cent in 2020, 53 per cent in 2021 and 77 per cent in 2022.
Bitcoin fell about 15 per cent after these ETFs were approved a month ago and at US$43,000, the current price is still more than 35 per cent below the all-time high of US$68,000 from November 2021.
Bitcoin/ US dollar over the past several years
It’s easy to see why many people remain sceptical.
You can’t use Bitcoin in most traditional shops, it doesn’t have any industrial use like a commodity, and it doesn’t generate any return or yield like a traditional investment.
This makes it difficult to put any sort of fundamental valuation on it.
Detractors would argue the greater fool theory applies, which means the only reason prices will go up is because there’s an even bigger fool who might buy it from you at some point.
But for many people the value is in the fact it is a form of self-custodial, liquid, portable money that can’t be debased or confiscated by the state.
Those attributes aren’t of huge importance in many countries, but savers in the likes of Argentina, Russia or Turkey might see some appeal after what they’ve experienced in recent decades.
Supporters also like the fact it has a fixed supply. We don’t know how many US or New Zealand dollars there will be in the world in a decade, but we know how many Bitcoins there will be.
The approval of Bitcoin ETFs is indeed an important milestone, and I expect them to succeed, in terms of funds flow at least.
For those looking to dip their toes into the world of crypto investing, these will hold much more appeal than previous options.
My advice would be to remember the usual investment guidelines and if you do choose to get involved, keep any allocations small and don’t go overboard.
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Mark Lister
Investment Director
Market Insights enewsletter
Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.