We have all heard about cryptocurrencies and bitcoin. The emergence of this “digital asset” has reached a new plateau of legitimacy given the approval of exchange-traded funds (ETFs) of spot bitcoins in January 2024; to date, about $10 billion has already flowed into these new ETFs! Though bitcoin ETFs have been around since late 2021, those ETFs, were on bitcoin futures not on actual spot bitcoins.
Does this new development change the landscape for investors? What can we expect going forward?
First, a quick description of bitcoins. Bitcoins are digital assets created by digital miners using block chain technology and they only exist in cyberspace. Bitcoins are scarce in that only a specified total volume of bitcoins are created. Bitcoins can be thought of as an asset class that is traded amongst willing market participants, and even used as currency. History has shown that bitcoin has a very high volatility making it a very risky asset class, but also with relatively low correlation to other asset classes.
You can’t hold a bitcoin in your hand. Instead, you own it as an entry on your digital bitcoin account. Owning bitcoin requires careful control of your account and passwords. Though bitcoin adoption has been tremendous, some observers have felt that its growth has been limited by the perceived difficulty in holding it as an asset. This is where the spot bitcoin ETF comes in!
Many market participants have likened bitcoin to gold as an asset class; “If you like gold, you will love bitcoin!” Just like gold, bitcoin is a store of value and is a scarce commodity with limited supply. However, unlike gold, bitcoin is easily divisible and tremendously portable. Gold is difficult to cut into smaller pieces and certainly too heavy and difficult to transport.
Many market participants, including Mark Yusko of Morgan Creek Capital, have been huge proponents of bitcoin as an asset class. His current market thesis is that the emergence of spot bitcoin ETFs have created a new and huge increase in demand for bitcoin as an asset class for market participants wanting some exposure by eliminating the difficulty in holding bitcoin. Everything else being equal, the perceived increased demand given the limited supply leads him to a bullish view.
D&A has not bought bitcoin for any client accounts. However, the advent of spot bitcoin ETFs may make it an acceptable diversifier for some aggressive accounts. We will be following this market closely and report on it as our views crystalize.