They expect the bitcoin ETF to pave the way for similar funds for other cryptocurrencies, and there are already applications for regulatory ETFs tied to ethereum.
But it’s likely that bitcoin’s decline also reflected doubts about how quickly it could shake off its reputation as a fringe asset.
Bitcoin has come a long way since its inventor, Satoshi Nakamoto – whose true identity has never been revealed – wrote a paper in 2008 outlining his vision for a peer-to-peer version of electronic cash that would allow payments to be sent directly from one party to another without going through a financial institution.
I don’t believe it’s ever going to be a currency. I believe it’s an asset class.
— Larry Fink, BlackRock
But the cryptocurrency has failed to gain much traction as a payments system because it is expensive and cumbersome to use, a defect conceded by even its most influential supporters, such as Larry Fink, the US billionaire who runs BlackRock, the world’s largest asset manager.
“I’m a believer in it because I do believe it is an alternative source for wealth holding,” he said in an interview earlier this month.
“I don’t believe it’s ever going to be a currency. I believe it’s an asset class.”
But if bitcoin has no practical utility, what does that mean for its price?
“I believe it goes up if the world is more frightened, if people are fearful of geopolitical risk, or fearful of their own risk,” Fink said. “It’s no different to what gold represented over thousands of years.
“It is an asset class that protects you. But unlike gold, where we manufacture new gold, we’re almost at the ceiling of the amount of bitcoin that can be created.”
However, Fink predicted the blockchain technology that underpins bitcoin would eventually revolutionise finance.
“I think we’re going to create digital currencies. We’re going to use the technology for it. We’re going to use the blockchain,” he said.
“ETFs are step one in the technological revolution in the financial markets. Step two is going to be the tokenisation of every financial asset.”
BlackRock’s application for a bitcoin ETF last June – when it was trading around the $US25,000 level – helped spur a huge rally in the digital currency’s price as investors began to hope that the support of the giant asset manager would help allay regulators’ concerns.
The crypto industry has been pushing for bitcoin ETFs for years, arguing that they would reduce transaction costs, opening the sector to more investors.
Inclusion in portfolios
Bitcoin enthusiasts say the ETFs will clear the way for the digital currency to be included in the $US100 trillion ($151.5 trillion) in investment portfolios managed by big institutions, such as banks and super funds.
Even if a tiny fraction of these funds were allocated to bitcoin, it could lead to a substantial increase in the digital currency’s price, given that bitcoin’s total market value is about $US820 billion.
In the first few days of trading last week, spot bitcoin ETFs attracted about $US2 billion; the BlackRock ETF hit the $US1 billion mark in one week.
All the same, it is likely to take years for big institutional investors, and financial advisers, to embrace cryptocurrencies – if at all they do.
As a relatively new asset class, cryptocurrency ETFs will have to undergo rigorous due diligence and compliance reviews before big financial firms allow their advisers to recommend the products to clients.
What’s more, although some of Wall Street’s initial scepticism of cryptocurrency has waned, pockets of hostility remain.
Even the US regulator, the Securities and Exchange Commission, made it clear that it gave its approval reluctantly.
Gary Gensler, the SEC chairman, said that although the regulator had approved several spot bitcoin ETFs, “we did not approve or endorse bitcoin”.
Investors, he added, “should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”
Meanwhile, index fund giant Vanguard has also indicated that it won’t be offering spot bitcoin ETFs, saying they don’t align with its traditional offerings of shares, bonds and cash, “which Vanguard views as the building blocks of a well-balanced, long-term investment portfolio”.
‘More like roulette’
And a senior Goldman Sachs executive has warned that digital currencies are still more like roulette, rather than an asset that should be held in a retirement savings account.
“If you want to go to Las Vegas, great,” Sharmin Mossavar-Rahmani, who leads the investment strategy group at Goldman Sachs Private Wealth Management, told The Wall Street Journal.
“People can use it if they want for total speculation, but it is not an investment and people should not be investing in cryptocurrencies, in bitcoin, in the ETF, as part of an investment portfolio.”
Crypto critics say bitcoin’s tendency for wilder price swings than other assets makes it an unsuitable financial product to hold wealth.
For instance, as financial markets panicked in the early stages of the global coronavirus pandemic, the price of bitcoin more than halved from its February 2020 high to its low a month later. During that time, the US blue-chip S&P 500 shed a third of its value, and gold fell 6 per cent.
What’s more, the critics fear bitcoin ETFs will only exacerbate its price volatility by attracting more money and making it easier and cheaper for speculators to buy and sell the digital currency.
Even some early crypto believers who were drawn to Nakamoto’s vision of a payments system independent of governments, central banks and mainstream banks are unhappy at Wall Street’s adoption of the digital currency.
They say the big financial institutions are corrupting the original vision that allowed individuals to escape from the power of the state, and have instead turned the digital currency into a speculative plaything.
And they’re none too pleased that the new bitcoin ETFs will be heavily dependent on Wall Street banks and electronic-trading giants to act as “authorised participants”, which help to make sure the quantity of shares expands and contracts in line with investor demand.
