The path approving the first exchange-traded bitcoin funds (etcs) was long and heavy. Applications appeared to regulators in 2013, when the price of a bitcoin was just under $100 and no one had heard of Sam Bankman-Fried or the phrase “to the moon.” After a decade of rejection, the promoters finally succeeded on January 10, when the Securities and Exchange Commission (SEC) approved 11 applications for ETFs that track the spot price of bitcoin, which was above $46,000 at the time.
The arrival of bitcoin ETFIt should be a pivotal moment for the digital asset class. For years, devotees had hoped such funds would attract cash-strapped institutional investors, increase liquidity and demonstrate crypto’s credibility and professionalism. They had also hoped that their approval could support demand for bitcoin, pointing to the precedent of a much older speculative asset. When State Street Global Advisors launched America’s first gold ETF in 2004 the metal fetched less than $500 an ounce, less than the price in the early 1980s. In the years that followed, its value rose, reaching almost $1,900 per ounce in 2011.
Could the SEC‘s blessing fuels a similar long-term rally in bitcoin? So far the signs are not encouraging. After a steep climb last year, partly pending regulatory approval etcSince 2008, the price has fallen by 7% sec gave the starting signal. Inflow in ETFThe initiatives launched by companies like BlackRock, Fidelity and VanEck have been almost completely offset by the outflow from the Grayscale Bitcoin Trust, an investment vehicle that is also a ETF on January 11.
Other factors contributed to the rise in gold growth in the late 2000s. 2004 also saw the lifting of permanent bans on precious metal ownership in China. As a result, the country’s demand for physical gold rose from 7% of the world’s total in 2003 to 26% a decade later. The decline in global interest rates over the same period also helped. An asset without returns becomes more attractive in a world where little else offers meaningful returns.
Despite the metal’s reputation as a store of value, then the first gold ETFWhen the market was launched, the market was still dominated by jewelry and not investments. The new funds have therefore helped transform a largely physical asset into a liquid financial asset. Bitcoin, on the other hand, is already a financial asset. Unlike gold, there is no use of digital currency in the physical world. While it may now become a little easier to gain exposure to bitcoin, it is already more readily available to investors than gold was in 2004. While gamblers buying the metal have had to think about delivery and storage options, bitcoin is available through mainstream brokers like Robinhood and interactive brokers.
Another couple ETFs provide a less optimistic precedent for bitcoin. In 2022, Itzhak Ben-David, Francesco Franzoni, Byungwook Kim and Rabih Moussawi, four academics, published research showing that thematic similarity ETFs, which try to follow a narrow sector or trend, perform worse in a broader sense ETFs by about a third in the five years after their launch. That’s because of a simple problem: when it’s thematic ETFOnce we get started, the buzz around the investment is already high and the underlying assets are already pricey.
For issuers, such hype is a feature, not a bug. etcCompanies that track broad market indices are the supermarkets of the investment world. Issuers compete with each other on fees, compressing margins to virtually nothing in the pursuit of massive volumes. Some of the largest ETFCompanies that track major stock indexes earn just 30 cents per year for every $1,000 invested. In contrast, more unusual offers give providers the opportunity to charge higher fees. The more hype surrounding a particular sector, the greater the influx – and the greater the compensation available.
Research published by Purpose Investments, an asset manager, shows that the lion’s share of inflows goes to thematic investments ETFs usually come when assets are most expensive. When the underlying stocks are relatively cheap, investors tend to withdraw their money. As Purpose’s Craig Basinger puts it, a buy-high, sell-low strategy is unlikely to be a winning strategy for investors.
etcs are therefore not a magic trick that increases the price of the asset. In many cases, the funds turn out to be just the opposite: a way to generate hype and underperformance over the long term. Crypto bulls who had hoped for the arrival of bitcoin ETFs that would offer the asset a longer lift may actually face longer disappointments. ■
Read more from Buttonwood, our financial markets columnist:
Investors May Be Getting the Federal Reserve Wrong Again (Jan. 24)
Wall Street prays for companies to go public again (January 18)
Bill Ackman teaches a class in activist investing (January 11)
Also: how the Buttonwood column got its name