Q: What happened and why is a Bitcoin (BTC) ETF now available?
By way of background, Bitcoin (BTC) was the first major cryptocurrency, token, or coin. Without getting too off course, BTC was unique from other traditional assets in that it relies on a public, computer-based ledger (aka the Blockchain) to track coin ownership and transactions. No custodian is needed, only computer code. Since BTC's inception in 2009, thousands of other cryptocurrencies have emerged, but realistically, two dominate in terms of trading volumes and market capitalization: BTC and Ethereum (ETH). BTC futures now exist on the CME and on many other crypto exchanges like Binance. However, until recently, US regulations and laws made it difficult for retail investors to gain BTC exposure at a reasonable price. Aware of the demand, many asset managers approached the SEC to allow them to offer a BTC-based ETF to investors. In the last week, the SEC finally gave its approval.
Q: How will this change affect the price of BTC and other cryptocurrencies?
Since the start of 2022, almost all cryptocurrencies have experienced a significant decline in prices (in some cases more than 90%) after a huge bull market run-up. Events like the implosion of FTX have even made headline news. Professionals in the space have described this as a “crypto winter” and have been wondering when it would end. Market volumes and valuations have seen massive declines, and retail participation has waned. In this context, the belief that the SEC would approve BTC ETFs for American investors has been gradually driving BTC's price higher over the last few months. And that day has finally arrived. We cannot predict how this change will affect BTC's price if you were to buy an ETF. Much of the positive news is already factored into BTC’s price due to anticipation of this regulatory change. It's quite possible that pent-up demand will help push BTC's price up in the near future. However, we don't see this necessarily affecting ETH or other coins in the crypto universe, though we could be wrong. Currently, all interest in the crypto space is centered on BTC alone.
Q: Should I allocate to Bitcoin?
While we have no definitive answer on what will happen to BTC’s price after the ETFs become available, we can offer some insights about BTC. On the positive side, it is a diversifying asset class with little to no long-term correlation to traditional asset classes. There have been periods when it has shown higher correlations to other risky assets like tech stocks, but there is no underlying reason for this correlation. On the negative side, BTC has little inherent value (there are no cash flows), and prices are mostly driven by speculation. There has also been a significant run-up in the price (almost 3x from its lows) in anticipation of the SEC approving a BTC ETF. Hence, it’s possible that all the good news is already reflected in the price. An important factor to consider is BTC's volatility, which is substantial. Stocks have a long-term volatility of around 17-18%, while Bitcoin’s has been between 45-100%, making it 3-6 times more volatile.
Q: How should I discuss it with clients and how much weight should I give it?
Given all the information above, we think it's important to treat BTC like a highly speculative stock and explain it as such. It’s akin to a biotech startup with no revenues or cash flow, significant volatility, potential for large gains or losses, and is driven almost entirely by speculation about its future. In our opinion, if someone wants to allocate to it, it should occupy a very small space in a portfolio, considering its volatility, and only when the person has a high risk tolerance and an already well-diversified portfolio. The ideal investor is probably young, can afford to take on more risk, and may have a small pre-existing risky asset or speculative bucket in their portfolio where the impact of the decisions won’t have a material impact on their long-term returns.
Q: What funds are available and which one should I select?
As of Thursday, January 11, 2024, the market has seen the debut of 11 spot Bitcoin ETFs, featuring offerings from major ETF providers such as BlackRock, Invesco, VanEck, and WisdomTree. In addition, well-known boutique firms like Grayscale and ARK have also entered the space with their options. To make an informed choice among these funds, it's advisable to observe how they perform in the first few weeks of trading, paying special attention to which ones gain the largest market share. While considering the expense ratio of these funds is important, factors like tradability, liquidity, and their ability to accurately track the spot price of Bitcoin are even more crucial. Many funds have initially waived their fees to attract assets. We expect that two to three funds will dominate, holding about 80% of the ETF assets within a few months. For investors, it would be most prudent to focus on these.
