In what will probably be the first of many such launches,fund manager VanEck unveiled a new ASX-listed exchange-traded fund (ETF) that will hold bitcoin as its underlying asset.
The rise of bitcoin ETFs will give investors another way to bet on the cryptocurrency’s price,but it won’t remove the risks.Dionne Gain
For the uninitiated,ETFs are a hugely popular type of investment fund that allow you to obtain exposure to an asset,or range of assets,at low cost. The rise of crypto ETFs means investors can buy in via an online share broker,rather than through a crypto exchange or other intermediary.
Is this a big deal? Yes,and no.
It’s surely a milestone that the country’s main stock exchange has accepted a crypto asset (the smaller Cboe exchange already hosts some crypto ETFs),following similar moves by stock exchanges overseas. If there were any doubts,this means bitcoin looks here to stay.
However,at the same time,it doesn’t remove any of the well-known risks of cryptos. Investing in a bitcoin ETF will remain highly risky because of the massive swings in the cryptocurrency’s price – moves of 10 per cent a day are not uncommon,and bitcoin’s price is up 50 per cent so far this year.
What the rise of bitcoin ETFs should do is resolve the long-running question about whether the cryptocurrency is useful for making payments,or if its main appeal is for speculative trading. Surely,this must prove it’s the latter.
Cryptocurrencies – privately issued digital assets that operate separately from the banking system – aren’t new. Bitcoin,the biggest crypto,is more than 15 years old;the first time it was used in the real world,it was to.
People from across the technology and financial world have spent years debating the usefulness of cryptocurrencies for as long as they’ve been around. Could they challenge traditional money issued by commercial banks and central banks? Or is their main appeal that they might make you rich?
The truth is no one knows how cryptos might eventually change the world of payments and money. That topic will probably be debated for decades and,throughout history,money has continually evolved. There are thousands of cryptocurrencies – some more useful and attractive than others.
It’s also important to separate bitcoin from the technology that sits beneath it – a “distributed ledger” known as blockchain. Banks and other corporates have been exploring how blockchain technology could be used in all sorts of projects,such as “smart payments,” or cutting the cost of moving money around the world.
Even so,the rise of bitcoin ETFs on the ASX supports the idea that cryptocurrencies’ main appeal is as a speculative investment that tends to have wild price swings.
These risks were brought home in the,which prompted regulators around the world to crack down on crypto operators,and sent global crypto prices tumbling. But bitcoin has more than recovered since then,hitting record highs this year.
Packaging up bitcoin into an ETF should mean there are certain minimum standards about how the fund holds those assets. The ASX this week said each unit of the bitcoin ETF would correspond with a certain number of bitcoin.
However,will it make crypto any less volatile as an investment? No – that’s not the point. The Australian Securities and Investments Commission reminded investors of this fact this week,saying:“ASIC has repeatedly warned investors that crypto is risky,inherently volatile and complex. Investing in it is a highly speculative activity. Investors should only put in what they are prepared to lose.”
Many investors are more than happy to do this,of course. Self-managed super funds held $1 billion in crypto assets,according to figures published earlier this year,and banks have reported ongoing interest in crypto trading from their clients.
To be fair,there’s a chance some of these new forms of digital money – including central bank digital currencies – could help the financial world become in the long term.
For common tasks such as moving money overseas,for example,the traditional banking system is still far too expensive. The Reserve Bank’s head of payments policy Ellis Connolly this week said payments cost 5 per cent to 6 per cent of the transaction price on an overseas purchase. While Connolly didn’t discuss digital currencies,they could eventually help to lower those costs.
In the world of investing,innovations can also produce real benefits. The rise of ETFs is a case in point:These products are useful because they allow investors diversify across a wide range of assets at low cost. Bitcoin is simply the latest asset that ETFs are allowing people to invest in.
One firm vying to release a new bitcoin ETF is Betashares,and it had separate news this week when it secured a $300 million investment from Singapore’s giant sovereign wealth fund,Temasek,for an undisclosed stake.
Betashares founder and chief executive Alex Vynokur says there was “clear alignment” with Temasek over the company’s long-term goals,which include pushing further into superannuation,and ultimately,in using technology to help people make better investment decisions. Exactly what this would look like is unclear,but Vynokur says automation could be used to counter the emotions of “fear and greed,” which often detract from investment performance.
“Having technology avoid some of the pitfalls of emotional investing I think is really powerful,” Vynokur says.
Betashares has much broader plans than a bitcoin ETF,but it is worth asking,is the rise of bitcoin ETFs an example of technology improving investing in a meaningful way? I don’t think so. Rather,it’s just a way of giving investors something else to bet on.
Ross Gittins is on leave.
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