Bitcoin Again: This Time Bigger and Better - Vested

Vested’s ever-valuable Intelligence email reminds us that Bitcoin again occupies the headlines. It seems the Securities and Exchange Commission (SEC) has grudgingly permitted financial firms to offer the public Bitcoin-based exchange traded funds (ETFs). Considerable amounts of money changed hands on the debut of these funds. Clearly a segment of the investing public wants in on the fascinating world of crypto currencies, whatever their volatility and questionable investment value to anyone other than speculators. Even in the hard-bitten world of finance, it seems, people feel the tug of a seat at the cool-kids lunch table.

The interest is undeniable. Some $4.6 billion flowed on the first day these funds became available. Not every offering did well, but not surprisingly, BlackRock, Fidelity, and Grayscale led. Those close to this area of finance see more such flows. Bernstein, for instance, anticipates flows of up to $10 billion for the rest of this year. Standard Chartered is even more excited about the prospects. It sees flows of between $50 and $100 billion in 2024. However, the nation’s largest manager of mutual funds and ETFs, Vanguard, showed skepticism. Its spokesperson announced that the firm has no intention of offering Bitcoin ETFs on its brokerage platform, adding that such investments have no place in a “well-balanced, long-term investment portfolio.” Goldman Sachs feels similarly, stating: “We don’t think it is an asset class to invest in.” Even the SEC, as it gave the go-ahead, showed reserve. Chairman Gary Gensler made clear that the approval carried no endorsement. He referred to Bitcoin as “speculative.”

Whatever the fate of these ETFs, they promise to give investors a wild ride. The last four years alone offer a sample of what people can expect. Between late 2020 and late 2021, Bitcoin rose some 600 percent from about $10,000 a coin to $70,000 a coin only to fall some 75 percent back to $18,000 a coin by late 2022. By late 2023, the price was up again, over 200 percent to some $40,000 a coin. Then in anticipation of SEC approval, the price rose some 20 percent in late 2023 and early 2024. This kind of behavior certainly raises questions about Grayscale’s plans to launch a Bitcoin-based fund that will offer investors income by writing covered calls. Given this kind of volatility, such an approach will only guarantee that investors will see their assets called away at the beginning of any up movement and consequently lose out on most of the gains of Bitcoin’s many impressive upswings. There are other options strategies applicable to such a volatile asset, but they, too, are considered speculative.

There is of course a chance that the ETFs, by drawing in a broader class of investors, will acquire greater stability. That is possible. It is equally likely, however, that the smaller investors brought in through the ETFs will be more prone to panic in the face of troubling economic or financial news than are the seasoned investors who previously dominated this space. Such panics could mean even greater price volatility than in the past, if that is possible. It is noteworthy in this regard that Bitcoin, though it bills itself as a kind of gold-like hedge for trouble in dollar-based markets, lost dramatically in the face of past economic troubles – the pandemic, for instance, or even in the face of threats to the dollar-based banking system when several banks failed last spring.  

Bitcoin enthusiast Neil Jacobs of Swan Bitcoin, has dismissed volatility concerns. In response to the warnings issued by Vanguard and Goldman, he demanded to be “treated like an adult,” by which he presumably meant that it is his decision to take the risk. He is correct, which no doubt is why the SEC approved the issues. His objections, of course, do not erase the risks. One can only hope that he and his fellow “adults” have the stomach for it.

Since Bitcoin broke onto the investment scene in 2009, people have claimed great stature for it. They billed it as an alternative currency to the dollar and other fiat currencies issued by governments and a hedge against inflation and other trouble in these currencies. Unlike one of the key attributes of money, however, Bitcoin has failed as a widespread medium of exchange, except of course, with those who, given the special nature of their business, prefer anonymity. Its extreme volatility also disqualifies it as the other key attribute of money – a reliable store of value.  

If Bitcoin fails as money, it also cannot claim to be a security, for it offers no income either from interest payments or dividends. Nor can it claim a link to real-world profits, as all equities implicitly do. It is more like a commodity – copper, for instance, or tin or zinc or pork bellies, where the only potential for gain comes from price movements. Even there, it cannot claim a link to anything real or intrinsically useful. There are, after all, fewer things more real than pork bellies. It might then best be described as a kind of synthetic commodity. Those rushing into the ETFs might well keep that in mind.

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