Bitcoin is all the rage in global finance once again, as another wave of infatuation with the controversial asset class washes over the investing masses.
The long winter that followed the collapse of the crypto sector starting in 2021 appears to be over. The price of bitcoin returned to record territory this week, spurred on by the introduction of a suite of new U.S. funds that brings bitcoin further into the fold of mainstream investing.
These exchange-traded funds give access to bitcoin ownership through listings that trade on major U.S. stock exchanges, rather than cryptocurrency platforms. While spot bitcoin ETFs have already been trading in Canada for three years, their U.S. debut opens up the bitcoin market to the immensity of the U.S. retail-investor base.
In just two months of trading, more than US$8-billion has poured into the 10 U.S. spot bitcoin funds. This past Tuesday alone, BlackRock’s iShares Bitcoin Trust took in an incredible US$788-million, and its total assets have already eclipsed US$10-billion – the fastest of any new ETF to hit that mark.
This swell of retail adoption again brings the question of suitability to the fore. Now that everyday investors can easily access bitcoin, should they?
Greg Taylor, chief investment officer at Purpose Investments, argues that bitcoin can serve a role as a diversifying asset in traditional portfolios.
“This is probably something that investors can no longer ignore,” he said, noting that rather than fading into obscurity, bitcoin has proved its staying power.
Since bottoming out in November, 2022, the price of bitcoin has shot up by more than 300 per cent. Its record high in excess of US$69,000 set on Tuesday caps a monumental comeback from the depths of the bitcoin selloff.
With rising institutional acceptance of bitcoin, crypto bulls are now imagining near-limitless potential, as they scramble to raise their target prices. Six figures now seems to be table stakes, while the upper end of bitcoin projections have hit US$1-million.
Investors have seen this movie before, of course. Bitcoin is being hailed as the future, much as it was in 2021, when it last became a cultural phenomenon.
If you’re a little behind, that ended quite poorly. Crypto prices crashed, culminating in the collapse of FTX, a crypto exchange once valued at US$32-billion. Investors big and small got burned. More than three-quarters of those who bought bitcoin between 2015 and 2022 lost money, according to estimates by the Bank for International Settlements.
Bitcoin’s previous act doesn’t exactly inspire confidence in its revival. What’s different now?
For starters, bitcoin wasn’t the only asset to face a painful reckoning in 2021. Financial markets were awash in speculative excess, inflating bubbles in all manner of assets from stocks to fine art.
There have also been some key improvements to regulation and oversight as a result of the FTX debacle, Mr. Taylor said.
Furthermore, the ETF structure will likely comfort many investors who have no inclination to set up a digital wallet.
ETFs are acclaimed for democratizing investing, and giving everyday investors access to asset classes and strategies that were once the purview of the pros.
Anything that’s listed on a major U.S. exchange also enjoys the full weight of the U.S. legal and regulatory infrastructure. That could help legitimize bitcoin in the eyes of the skeptic.
“But it says nothing whatsoever on the validity and legitimacy of the actual underlying asset class itself,” said Daniel Straus, director of ETFs and financial products research at National Bank Financial. “I’m worried that investors may make that mistake.”
Bitcoin’s step into the financial establishment doesn’t mean it will be any less volatile.
But in small weightings, bitcoin could help round out a portfolio. Over the past few years, traditional models of portfolio construction have come into question. The 60/40 split between stocks and bonds, for example, is predicated on the idea that the two asset classes tend to counterbalance one another.
The problem is that stocks and bonds are moving in the same direction more often than they used to. This has fuelled an appetite for real assets, like commodities and real estate, to act as diversifiers. Bitcoin can be lumped into the same group, Mr. Taylor said.
“I think crypto will probably start to make up a portion of that portion of the portfolio.”
Tim Shufelt