The road to approval for the first bitcoin exchange-traded funds (ETFs) was long and arduous. Applications appeared before regulators in 2013, when the price of bitcoin was just shy of $100 and no one had heard of Sam Bankman-Fried or the phrase “to the moon.” After a decade of rejection, 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 at the time above $46,000.
The emergence of bitcoin ETFs is thought to have been a pivotal moment for the digital asset class. For years, devotees hoped that such funds would attract narrow institutional investors, increase liquidity and demonstrate the credibility and professionalism of crypto. They also hoped their approval could support demand for bitcoin, showing the precedent of a much older speculative asset. When State Street Global Advisors launched the first US gold ETF in 2004, the metal fetched less than $500 an ounce, below its price in the early 1980s. Over the years that followed, it soared in value, reaching nearly $1,900 per ounce in 2011.
Could the SEC’s blessing fuel a similar long-term rally in bitcoin? So far, the signs are not encouraging. After a steep climb last year, partly in anticipation of regulatory approval for etfs, the price has fallen 7% since the SEC gave the go-ahead. Inflows into ETFs launched by firms such as BlackRock, Fidelity and VanEck were almost entirely offset by outflows from the Grayscale Bitcoin Trust, an investment vehicle that also became an ETF on January 11.
Other factors helped drive gold’s rise in the late 2000s. The final bans on bullion ownership in China were also lifted in 2004. As a result, the country’s demand for physical gold rose from 7% of the world total in 2003 to 26% a decade later. The slide in global interest rates over the same period also helped. A no-yield asset becomes more attractive in a world where little else offers a meaningful yield either.
Despite the metal’s reputation as a store of value, when the first gold ETFs were launched the market was still dominated by jewellery, rather than investment. The new funds thus helped turn a mostly physical asset into a liquid financial one. In contrast bitcoin is already a financial asset. Unlike gold, there is no use for digital currencies in the physical world. Although it will now become somewhat easier to gain exposure to bitcoin, it is already more readily available to investors than gold was in 2004. While applicants buying the metal had to consider options for delivery and storage, bitcoin is available through major brokers such as. Robinhood and Interactive Brokers.
A different set of ETFs provides a less optimistic precedent for bitcoin. In 2022 Itzhak Ben-David, Francesco Franzoni, Byungwook Kim and Rabih Moussawi, four academics, published research suggesting that thematic stock ETFs, which attempt to track a narrow industry or trend, underperform broader ETFs by about a third over the five years after theirs. launch That’s because of a simple problem: when thematic ETFs take off, the buzz around the investment is already extensive and the underlying assets are already expensive.
To broadcasters, such hype is a feature not a bug. ETFs that track broad market indexes are the super markets of the investing world. Publishers compete with each other for fees, squeezing margins to next to nothing in pursuit of enormous volumes. Some of the largest ETFs that track large equity indexes make just 30 cents a year for every $1,000 invested. In contrast, more unusual offers give providers an opportunity to charge higher fees. The more hype surrounding a given sector, the greater the inflows—and the greater the fees available.
Research published by Purpose Investments, an asset manager, finds that most inflows to thematic ETFs tend to come when the assets are most expensive. When the underlying stock is relatively cheap, investors tend to pull their money out. As Target’s Craig Basinger says, a buy-high, sell-low strategy is unlikely to be profitable for investors.
ETFs are not, therefore, a magic trick that increases the price of the assets. Indeed, in many cases the finance turns out to be just the opposite: a way to generate hype and long-term underperformance. Crypto bulls who hoped that the emergence of bitcoin ETFs would offer the asset an extended lift may, in fact, face extended disappointment.
Read more from Buttonwood, our financial markets columnist:
Investors may be looking for the Federal Reserve again (January 24)
Wall Street is praying that companies will go public again (January 18)
Bill Ackman provides a lesson in activist investing (January 11)
Also: Like the Buttonwood column got his name
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