Beyond the Bluster on Bitcoin ETFs

You can now ride bitcoin’s returns without actually going through the hassle of mining or buying bitcoin thanks to the SEC’s recent approval—and some companies’ subsequent launch—of bitcoin exchange-traded funds (ETFs). This is getting a lot of interest, as shiny new objects usually do. But we don’t think it changes anything about bitcoin as an investment. ETF or no, it is still a speculative asset prone to big sentiment-fueled swings.

The new ETFs aren’t the first tied to bitcoin in any way. But the earlier ones tracked futures—contracts tied to expected bitcoin prices—which introduce skew. These are the first that give you exposure to bitcoin itself. In the process, they do solve the technical limitations standing between investors and bitcoin. They take cryptocurrency exchanges—which have had some, umm issues^[i]—out of the equation. Ditto for bitcoin wallets. You can now have something bitcoin-like in a normal investment account, with all the benefits and basic consumer protections against fraud and theft therein. So for sheer sanity, we guess this is an improvement.

But underneath it all, bitcoin is still bitcoin. Yes, it has had some remarkable booms, but don’t forget remarkable busts followed them. If you found yourself getting skittish during 2022’s stock bear market, which was one of the shallowest official bear markets on record, how might bitcoin’s crash of more than -70% from mid-October 2021 through December 2022 have felt?^[ii] Stocks have now erased their 2022 decline fully. Bitcoin is still about one-third below its prior high.^[iii] Stocks have a long history of marching up and to the right on a chart, despite setbacks along the way, because they grow with the economy and corporate earnings. The more time you have put in, the less precise timing tends to matter. But in its very limited history, bitcoin is all about timing, in an even more extreme way than gold.

Here, many argue that it isn’t about the volatility now, but about the likelihood that as bitcoin matures into its ultimate purpose as government-free money in the long run, the volatility will drop as normal users vastly outnumber speculators. That may be so. But it is a very long-run thesis, one looking decades out, and there is no guarantee that the lower volatility arrives at a price far higher than today’s. It could well be lower. There is just no way to know.

What we do know: Bitcoin doesn’t generate earnings. It doesn’t pay dividends. It doesn’t have demonstrable, repeated ties to the economic cycle. It didn’t hedge against inflation in 2022—it crashed epically. Sometimes it is highly correlated with stocks, making extreme moves in the same direction. Sometimes it isn’t.

The reality: Bitcoin is chiefly an asset some speculate in on the theory others will want to buy, potentially desperately buy, later. In that sense, the thesis to own it is something on the lines of a “greater fools” debate—that there will be a greater fool ready to bid bitcoin up more. We have seen versions of this argument swirling lately, noting that the bitcoin ETFs could encourage more investors to pile in, perhaps in some fear-of-missing-out buying. But in any such argument, there is always the open question of who, exactly, the fool is.

Now, on the other hand, we have seen some argue the new ETFs will make volatility worse by making bitcoin easier to trade. This presumes trades in the ETF will always and everywhere result in the ETFs’ managers trading the underlying asset, exacerbating volatility if liquidity is low. People have long made this argument about bond ETFs, but it hasn’t proven true in reality. After all, for every seller there is a buyer. That is, selling an ETF doesn’t automatically mean redeeming it. Mostly, it means selling to someone else who is buying. Maybe the ETFs’ higher liquidity means they swing a tad less than bitcoin itself, but this is the sort of thing to watch and discover as an intellectual curiosity, not a use case—at least, not in our view.

We know we risk sounding like anti-crypto fuddy duddies here, so if you want to call us that, well, it is a free country. As it happens, we aren’t inherently against bitcoin and its ilk. We just think investors benefit from taking a cold, hard look at anything they are considering buying and how that fits with their long-term goals. Bitcoin lacks the fundamentals and history to really understand any of that, rendering it a tool of pure speculation. That seems antithetical to a long-term growth agenda to us. If speculation is your thing, then crack on if you like. We just don’t think bitcoin has proven it has a role in a long-term portfolio.