Endorsed but entirely unpredictable
On January 11th, the SEC approved 11 spot bitcoin ETFs, from providers ranging from traditional players, such as Fidelity and Invesco, to digitally focused newcomers, like Grayscale and ARK.
Was this, at last, the permission needed to bring crypto, truly, into the mainstream?
Fuel for the fire
The clearance was big news in the world of crypto and an almost complete reversal from a year ago when the SEC rejected the premise of bitcoin ETFs, only to have a judge overrule their decision in August of last year, who said that the decision was “arbitrary and capricious.” The regulatory back and forth has been quite a saga – as is so much in crypto-land.
Today, there are Bitcoin ETFs in other jurisdictions, but the approval of the product in the US has stoked anticipation that it will mark a new era of investor participation in digital assets, for both retail and institutional investors. Now, for example, the barriers to entry for regulated institutions have been significantly lowered and some believe a wave of US capital will be deployed.
With many predicting the regulatory approval before its announcement, BTC rallied c75% from October to its peak two weeks ago. The crypto winter was over. Optimists were buoyant once again.
Reasons to be cautious
Despite the endorsement, there are still lots of reasons for caution about the sector, especially if you assess the devil in the decision’s details. This isn’t quite the ringing endorsement that some would have you believe. As SEC Chair, Gary Gensler, said, “While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse BTC.”
It’s been interesting to see that, since its peak 2 weeks ago, BTC has fallen 15-20%. This could just be a classic “buy the rumour, sell the news” situation. But also, there are reports that, despite hopes for inflows into the new ETFs, most of the money isn’t new. How much new money has been attracted is debatable and it’s likely a lot smaller than some would have you believe.
The FT reports that while $4.7bn has landed in the new ETFs, $3.4bn exited the older Grayscale BTC Trust (not a pure ETF but a fund-like structure that allowed investors to own BTC). Grayscale’s fees are a lot higher (2%) than the ETF fees (0.12-0.25%) which explains the switch. Ultimately, the numbers suggest that the new products haven’t necessarily created demand where it didn’t already exist. A cynic might argue that it has merely created a new, lower-cost category of investment where the pro-crypto crowd can park their assets.
Long term outlook
Having said that, the approval is, relatively speaking, good news for crypto enthusiasts. But what does this mean for the price of BTC long term?
Firstly, it’s clear that BTC isn’t going anywhere. However, I still believe that BTC has no “fundamental” value to speak of, the creation of an ETF wrapper for this asset hasn’t changed this fact. So to me, Bitcoin continues to represent the purest form of the Keynesian beauty contest, meaning that only has value because other people think it has value.
In that regard, BTC remains very much like gold, (indeed many commentators call it “digital gold”). Gold’s industrial and fashionable uses are too minor to justify its market volatility. But gold does have a loose but persistent and historic reputation for being a “store of value”, which is enough to keep people investing in it, especially when crises hit. Enough people believe in it to convince others to believe in it when they need a “safe haven.” Price is price. You can’t argue with the market – even if you might struggle to justify value.
Useless advice alert
So, in my totally inexpert view, BTC is definitely (ok… almost certainly) not going to zero, but I’d also contend that it’s probably not going to $1,000,000 anytime soon either. And that’s nothing to worry about, or anything new. Much like gold, it will spontaneously rally and crash cyclically every now and again in reaction to some piece of geopolitical and/or financial news.
Is that useless investment advice? Almost certainly. But, regulated or not, for assets as esoteric and unpredictable as BTC and gold, it’s probably the best that anybody can do.