The new Bitcoin ETFs (Exchange Traded Funds) now make it possible to get exposure to the cryptocurrency by proxy through funds that are traded like stocks on various US Stock Exchanges. Previously, if you wanted to buy and sell Bitcoin, you had to do it through one of the cryptocurrency exchanges.
But just because Bitcoin is now easier to own (no need for a complicated digital wallet or risk of losing the drive where your cryptocurrency is stored), and the related ETFs are being managed by large Wall Street firms, does it make any sense to invest in this “currency”?
First of all, a quick reminder of what it is. Bitcoin was created about 15 years ago as a virtual currency that wouldn’t be backed by any bank and could be used to make small payments.1
Individual Bitcoins are created through a process called mining, where a user’s computer goes through a processor-intensive process to validate previous transactions. Each Bitcoin transaction is recorded in a distributed, public ledger, where the parties involved are kept anonymous. There is a finite number of Bitcoins that can be mined, which in theory should keep their value rising.
Because it’s not tied to a fiat (national) currency, Bitcoin has been touted as a safe harbor in times of crisis. And because you can own and exchange Bitcoin anonymously, it supposedly offers protection from government interference in free trade, such as taxes and tariffs.
Unfortunately for Bitcoin owners, none of these purported benefits have materialized in the real world. Rather than being an asset that maintains its value despite economic turmoil, the price of Bitcoin has proved to be extremely volatile.2 And people hoping to avoid detection by law enforcement, among them criminals, have found that its anonymity is not water-tight.
According to the Wall Street Journal, the pitch being made for newly-approved Bitcoin ETFs is that they will miraculously work like digital gold, holding their value in a crisis. But there’s zero evidence this will be the case.
James Mackintosh writes, “In both bank runs of March 2023 and the pandemic panic of March 2020, Bitcoin proved to be digital fool’s gold, plunging at the first sign of trouble.” From its February 2020 high to the low a month later it lost half its value, while the S&P 500 lost a third. “Far from being a store of value,” adds Mackintosh, “Bitcoin’s been a store of volatility.”
And it is likely that the new ETFs are going to make this instability worse because they will bring in more speculators to what’s already mostly a speculative asset.
While Bitcoin ETFs will surely continue to garner headlines and draw in investors motivated by a fear of missing out, it does not look like this new-found financial instrument for speculating in the cryptocurrency will be a good choice for someone looking to grow their portfolio over the long-term.
Unlike stocks, bonds, and funds comprising them, Bitcoin does not derive its perceived value from profits, dividends and/or interest. It holds no intrinsic value outside demand from short-term speculators. It appears to be mostly a clever currency solution looking for a problem to solve.