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Let’s begin the year with a bang! By which I mean I’ve decided to allocate some money to a spot bitcoin exchange-traded fund (ETF) if one becomes available soon. Emails to the usual address.
I made up my mind while running along the Exmoor coast last week, steep cliffs plunging into the surf. Many readers will says that’s where my retirement savings will end up. But, as I wrote last summer, it’s time to take more risk.
And there is no bigger investment story right now. Google searches for “bitcoin ETF” have tripled over the past week. The world’s biggest cryptocurrency started 2024 by trading 7 per cent higher. Since October add a zero.
The catalyst is the expectation the Securities and Exchange Commission is about to give the green light to multiple spot applications (you can already buy ETFs holding bitcoin futures contracts). Bloomberg reckons there’s a 90 per cent chance approval will be given by January 10.
That’s almost as precise as my mate Chris. Before setting off on my jog he told me there was a 98 per cent chance of bitcoin prices doubling this year. Even if he is half right, you don’t need my second-year statistics course at Cambridge to know that’s a nailed-down 50 per cent return.
I would be mad to miss out. And, besides, I’ve changed my view on the suitability of bitcoin ETFs for retail punters. It used to worry me that they seem to fail at least two SEC tests when it comes to investor protection and market integrity. It still does.
Take safe custody. No one can “steal” an ETF, of course, and gangs don’t have a clue where you hide your “cold wallet” — if you prefer to hold bitcoins offline. The digital wallets ETFs will use are also secure.
But thieves can raid the biggest and most popular exchanges — and have done — undermining prices. Remember that the sole purpose of a spot ETF is to track a price. It therefore doesn’t matter if off-exchange coins are safe.
The integrity of the whole system can be violated. It’s a bit like being comfortable that your Apple shares are secure with a custodian, even though Gru from Despicable Me can make the retail stores disappear with a ray gun.
Spot bitcoin ETFs fail another crucial test too: whether the underlying market can be monitored to a sufficient degree to prevent fraud or manipulation. This is mainly why previous SEC applications were rejected.
Sure, blockchains are permanent ledgers. But bitcoin transactions are pseudonymous and can involve multiple addresses. It’s irrelevant that an ETF is transparent if the assets it holds are not.
In addition, so-called “whales” dominate ownership, with 0.25 per cent of addresses holding 80 per cent of total bitcoin supply, according to Bitinfocharts data. Whoever invented bitcoin is thought to own 1.1mn coins.
That’s roughly a 20th of the total supply to date — and there are at least five wallets holding around 100,000 coins each, according to Arkham Intel. The scope to move prices, it seems to me, is massive — and that’s before we even consider fraud.
All that said, the more you think of bitcoin as an investment, whether in an ETF or not, its many flaws don’t differ hugely from most of the other regulated assets you own happily.
Regarding ownership concentration, bitcoin’s pales beside Bernard Arnauld’s 48 per cent stake in LVMH, let alone his majority voting share. Mark Zuckerberg owns 13 per cent of Facebook, as does Elon Musk of Tesla. Those guys move prices each time they blink.
Another reason people say bitcoin has no place in serious portfolios is because it doesn’t exist — just ones and zeros with no intrinsic value. But I own plenty of invisible assets in my other funds that are only worth what others are willing to pay for them.
For companies in my FTSE 100 fund, for example, the tangible book value only accounts for 45 per cent of the total net asset value. In other words, the majority of the ETF doesn’t exist either — company brand names, goodwill and the like.
That bitcoin produces no income is also cited as a problem. It is therefore nothing more than a speculative asset. So what? Gold, vintage cars and undeveloped land are the same. By that definition, so is the house or flat you live in.
What is more, a fifth of stocks in the S&P 500 did not pay out a dime last year either — some never do, including Facebook, Berkshire Hathaway and Amazon. Finance theory tells us we shouldn’t care about dividends anyway.
This relates to another concern I don’t share: that bitcoin is therefore impossible to value. You don’t need an income stream to value assets — ask any art dealer. With the same vertical supply curve as a one-off painting — 19.6mn of the maximum 21mn bitcoins are already circulating — demand sets prices.
Besides, what isn’t hard to value? Analysts are routinely wrong about every asset class, while the majority of active fund managers underperform. In Europe, for example, more than 90 per cent of active equity funds now trail their benchmarks over a decade, based on S&P Dow Jones data.
Finally, I like the fact that bitcoin’s correlation with the major asset classes is less than 0.25 — it’s going to be the mad uncle in my portfolio. Sure, it also has an annualised volatility approaching 50 per cent (don’t all relatives?) but as returns are so high, risk/adjusted returns remain attractive.
So come on SEC, have some fun why don’t you! Or at least be consistent — there are loads of ways my savings can crash into the sea that you already approve of.
The author is a former portfolio manager. Email: stuart.kirk@ft.com; Twitter: @stuartkirk__
