Why is crypto in the news?
Please note: All data referenced in this article is sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.
In January, US regulators gave their approval of “spot bitcoin” exchange-traded funds (ETFs), representing a significant turning point. For the last five years, in excess of 20 exchange-rule filings for spot bitcoin ETFs have been rejected.
For many investors, the question that now arises is whether this decision legitimises the asset class and paves the way for its deployment in traditional discretionary portfolios.
In this short article, we take a closer look at the opportunities and risks at play.
Changes and concerns
Broadly speaking, this latest development expands the market of crypto. But it shouldn’t be read as an endorsement.
Before now, investors could already trade it via brokers, mutual funds and some payment apps. Those who were previously unable to hold bitcoin, now have the option to use liquid ETFs.
Since their inception, crypto markets have been vulnerable to significant periods of boom and bust. Memorable past events include the 2020 market crash during the pandemic, and the downfall of the FTX exchange in 2022. Despite contagion from such events not impacting the traditional financial system so far, it would be naive not to acknowledge that crypto has the ability to create a systemic risk event.
Additionally, some reservations surrounding bitcoin have centred on the fact it’s an unregulated assess class, which lends itself to ‘Wild West’ market behaviour. In the UK alone, losses to crypto fraud jumped by more than 40% in the 12 months to March 2023, taking the estimated total losses to in excess of £300 million1.
While those security concerns remain, regulators have moved fast to bulk up processes surrounding the new ETFs, and their approval comes with conditions. They include, but aren’t limited to full, fair and truthful disclosure (to investors) about the products.
In parallel, the fact the ETFs will be listed and traded on registered national securities exchanges, provides a welcome degree of monitoring and fraud protection. This doesn’t mean that the ETFs are risk-free, but it might put them closer to an environment more akin to how a traditional asset class is traded.
The parallels with gold
While it might be easy to think of crypto as a currency, partly because of the full name, there is a noticeable difference. Unlike a traditional currency, crypto isn’t considered a practical store of value, given the levels of associated volatility.
Likewise, some people consider crypto to share similarities with gold – partly for its potential role as a hedge, and partly due to its scarcity. However, that’s largely where the comparisons end.
In many ways, crypto is its own asset class and the nuances and realities of how it behaves, need to be very carefully considered by investors.
What role might crypto play?
For those willing to accept high risk and large volatility swings, crypto could, under certain circumstances, be used by investors wanting to take a small, speculative punt on the asset class.
The caveat, as always, is the level of risk that will come with it – the higher the exposure to crypto, the larger the drawdown risk.
Despite approving spot bitcoin ETFs, the US regulator was at pains to stress that it was not endorsing the underlying asset class. It remains speculative, volatile and a tool for illegal activities.
As a result, crypto still isn’t widely deployed across traditional, discretionary portfolios. This could change over time, if the asset can develop its currency capabilities and improve its function as a transparent investor option.
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