Sunday, July 14, 2024

Bitcoin ETFs: A rocky start, but will they improve?

The journey to approval for the first bitcoin exchange-traded funds (ETFs) was a long one. It all began back in 2013, when the price of a bitcoin was just under $100 and famous figures like Sam Bankman-Fried were virtually unknown. Now, after a decade of rejection, 11 ETF applications have finally been given the green light by the Securities and Exchange Commission (SEC), as bitcoin’s spot price hit over $46,000.

When bitcoin ETFs were approved, many people expected it to be a game-changer for the digital asset class, attracting institutional investors and increasing liquidity. This approval was also anticipated to legitimize the crypto world, similar to how the approval of America’s first gold ETF back in 2004 helped drive up the price of gold, increasing its value. However, the approval of bitcoin ETFs did not result in the anticipated long-term price rally. In fact, the price of bitcoin has dipped since the SEC’s approval, and inflows into new ETFs have been offset by outflows from Grayscale Bitcoin Trust.

Factors that led to a surge in gold’s value in the late 2000s, such as the lifting of prohibitions on bullion ownership in China and global interest rate declines, are not mirrored in the case of bitcoin. Furthermore, unlike gold, bitcoin is already a financial asset, and it is more readily accessible to investors through mainstream brokers.

There is a less positive precedent for bitcoin in the performance of thematic equity ETFs, as research shows that they underperform broader ETFs by about a third over the five years following their launch. The buzz surrounding thematic ETFs at their launch often leads to the underlying assets being expensive, resulting in subpar returns for investors.

ETFs are not a guaranteed way to boost the price of assets, and in some cases, they have been known to generate hype and long-term underperformance. Therefore, the advent of bitcoin ETFs may not necessarily translate to long-term price growth for the cryptocurrency.

The road to approval for bitcoin ETFs was a long and challenging one, but whether it will lead to the desired outcome for the cryptocurrency is yet to be seen. Despite the fanfare surrounding their approval, ETFs may not be a silver bullet for bitcoin’s price.

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