You are going to be hearing a lot more about bitcoin ETFs this year
There’s no fundamental reason for bitcoin to rise other than it is becoming more popular. But as we all know, a shift in sentiment, while usually unpredictable, can have a meaningful impact on the listed price of an asset.
In January, U.S. regulators approved exchange-traded funds that invest directly in bitcoin for the first time. For the roughly U.S.$1.7 trillion digital asset, the move will broaden access to the largest cryptocurrency on Wall Street and beyond.
Subsequently, ten exchange traded funds (ETFs) have launched, backed by spot bitcoin, which is distinct from the previous crop of bitcoin ETFs that were backed by bitcoin futures. The biggest of the new crop is Blackrock’s iShares bitcoin ETF, which trades on the Nasdaq under the code IBIT.
These recent events could have a meaningful impact on the popularity of, and therefore sentiment towards, bitcoin. Nothing fundamentally changes but popularity. It could quickly become one of those self-fulfilling events.
As money flows into the ETF, those ETFs are forced to buy bitcoin. bitcoin then rises from institutional buying. As bitcoin rises, more people want exposure, throwing more money into the ETFs and forcing the institutions to buy more bitcoin. Pretty soon, FOMO (fear of missing out) kicks in, and a boom turns into a bubble.
I have long argued that there is no fundamental reason for bitcoin to be more valuable. It won’t become a reserve currency, it isn’t a store of value, and it doesn’t have an industrial use. But it will rise and fall due to changes in its popularity. The above scenario is a simple one that explains how, right now, bitcoin could become a lot more popular. And as you will see in a moment, despite doubling in price recently, it is a long way from peak popularity.
Bitcoin broke USD $50,000 on 13th February 2024, the highest price since December 2021. It has now risen 96 per cent since its most recent lows in September. The move reflects the fact that there really is demand for a way to invest in cryptocurrency using a familiar investment vehicle like an exchange-traded fund (ETF).
CoinShares circulated data this week, revealing inflows to bitcoin ETFs, which are well ahead of outflows. On a net basis, U.S.$2.8 billion has flowed into these instruments since launch, with $1.1 billion raised just last week.
Of course, when an asset rises in value, it’s ultimately supported by the same factor every time: more buyers than sellers. The price could, of course, rise a lot more as we journey towards peak popularity. We may be nowhere near it yet.
I say that because, according to many reports, U.S. advisers aren’t currently willing to recommend bitcoin ETFs to their clients.
According to various reports, when journalists asked advisers at VettaFi’s exchange ETF conference in Miami, which concluded today, whether they would recommend bitcoin ETFs, many suddenly became mute.
Indeed, according to reports, they exhibited a distinct reluctance to engage in discussions regarding cryptocurrency and were resolutely unwilling to provide any official commentary.
While financial advisors are bound by regulations that may prohibit them from discussing or investing their clients’ funds in bitcoin, the chorus of client requests will eventually become too deafening and too valuable to pass up, and the proverbial dam will break.
Remember that many of these advisers are from the same firms that previously asserted approval for a bitcoin ETF was unlikely.
The advisers’ reluctance today can be attributed to regulatory obligations such as the know your client rule, which requires a comprehensive understanding of both the product and the client before making any recommendations. Some advisers will seek to express expertise and experience by dismissing the whole thing as a fad. But if the boom continues and the price of bitcoin rises, eventually, the currently reluctant advisers will fold.
Blackrock’s bitcoin ETF raised a billion U.S. dollars in one week. Other advisers will eventually challenge their employers’ reticence and demand that they earn brokerage income from trading these bitcoin ETFs.
In any case, these ETFs could be poised to become part of the alternative investment landscape. Advisers will begin by familiarising themselves and their investors with the digital asset, with the initial aim of encouraging a modest allocation. As that activity pushes bitcoin prices higher, advisors may find it increasingly challenging to evade client inquiries about cryptocurrencies in the future.
Remember, I am not saying there is a fundamental basis for the boom, but rising popularity is how all bubbles begin.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
