For the last decade and a half, the majority of individual investors have held some confusion and uncertainty regarding the cryptocurrency, Bitcoin (BTC). Most didn’t understand what cryptocurrency actually was, the blockchain technology behind it, or even how to purchase it. In the early years, if you wanted to invest in the coin, it was difficult to purchase it directly. There seemed to be a myriad of hoops to jump through that only acted as a deterrent. Personally, I thought it was only an investment for those with a huge appetite for risk and significant computer technology acumen. Most people that held bitcoin obtained it by mining it themselves or by peer-to-peer transactions. In the years that followed, it became easier. Crypto exchanges emerged, BTC ATMs started showing up, and Bitcoin futures funds were established. In a huge development, the SEC finally approved a Bitcoin Spot ETF on January 10th.
This is probably not news to you. If you follow the markets, you’ve likely seen the headline countless times since its approval. You’ve heard how big of a deal it is, but perhaps you don’t understand exactly what a BTC spot ETF is. To summarize, a Bitcoin spot ETF is a type of investment fund that tracks the current ("spot") price of Bitcoin and can be bought and sold on regular stock exchanges just like shares of a company. The ETFs track the price by holding a large quantity of the coin, similar to how a trust works. For example, if you have gold as an investment in your portfolio, it is most likely in the form of a gold trust. Instead of owning the asset directly, you can have partial ownership of the ETF which does directly hold the asset. This allows investors to invest in Bitcoin without the complexity of buying and storing the digital currency themselves. This development removes a cloud of uncertainty, making it a catalyst for broader investment.
The introduction of the Spot Bitcoin ETF is more than a new investment vehicle—it's a symbol of cryptocurrency's increasing integration into mainstream finance. This move signifies a broader acceptance of digital assets and may influence future regulatory policies, investment strategies, and the market's perception of cryptocurrencies. For the broader investment landscape, the ETF offers a bridge between traditional financial markets and the digital economy, potentially attracting a new wave of investors. Some compare BTC’s journey to gold’s. In the early 2000’s, gold wasn’t an institutional asset. Now, many people have gold included in their portfolio in the form of a gold trust. These 2 assets are extremely different in nature, and there’s no way to know if BTC will stand the test of time. In theory, greater accessibility leads to greater exposure, causing more demand across traditional markets, and bolstering the coin’s value.
As the father of the atomic bomb says in the movie “Oppenheimer”, “Theory will only take us so far.” Abstractly, the establishment of a BTC spot ETF should lower volatility. It hasn’t, and likely will not have a significant effect on volatility for several years. Since the historic approval on January 10th, the BTC price is down more than 15%. For another type of investment such as the S&P 500, a drop this steep in such a short time could be considered a “correction” and be cause for concern. For BTC, this is normal. Of course, the performance in the first couple of weeks is not indicative of future performance, but this just goes to highlight that the investment is still in its infancy and still should only be for those with significant risk tolerance and risk capacity, and for only a small portion of their portfolio (1-5%).
To further demonstrate this point, there are still several large financial institutions that are not offering the BTC spot ETFs on their platform. Vanguard, perhaps most prominent, has not only refused to offer the spot ETF, but they’ve also removed the BTC futures funds. Many believe they will eventually give in. In fact, the hashtag #BoycottVanguard was trending on X (Twitter) in the days following the news. Whether it be several months or several years, advocates believe they will continue to face pressure from investors who are threatening to pull their funds from the asset management giant until they give in. Important to note is that our custodian, Charles Schwab, has embraced the spot ETF and offers them on their platform.
In addition to concerns about the volatility of BTC, there are also concerns about its viability. Several days after the SEC’s approval, Deutsche Bank Research conducted a study on the topic. About 1/3 of respondents said they believe BTC’s price will drop by 50% before year-end. More concerning than this is that 42% of respondents said they thought BTC would completely disappear within the next several years. Only 39% believe the asset will still be around.
Now that the door has been opened for BTC spot ETFs, some are curious to see if other popular coins such as Ethereum (ETH) will have spot ETFs. If they do, it will not be soon. There must be much more comprehensive legislature and regulation before we see other coins enter the market in this form. The US is currently lacking in crypto regulation. Other countries, such as Canada have much more clear regulation and guidelines on crypto. For those countries, the BTC spot ETF has already been around for months. The next step we will likely see in the US market are risk-mitigation securities around BTC. As mentioned, futures funds for the coin have already existed. Now, we’re likely to see more products that incorporate puts and calls to mitigate the volatility of the coin, potentially making this a more attractive investment for risk-averse investors. Time will only tell how the coin will evolve and adapt to market needs.
Despite increased accessibility to BTC and less confusion about how to invest, there’s still much to unfold in the coming years. Though the investment is close to 15 years old, it seems to still be behaving like the average 15-year-old. Like a teenager trying to find its place in the world, it’s moody, unpredictable, and constantly evolving. It has great potential for success, as well as great potential for failure. No one will know for sure until it’s an established adult. The one thing that’s certain is that DWM will be there to provide you with updates as it grows and matures.