ETFs Could Turbocharge the Crypto Asset Class

Cryptocurrencies have never been for the faint of heart as they experience boom-and-bust price variance. The asset class peaked in late 2021 when its market cap reached $3 trillion. On September 8, it was just over the $1 trillion level. Bitcoin is the undisputed king of the cryptos, with a market cap of nearly 50% of the total asset class.

In a recent lawsuit, Grayscale, the issuer of the Grayscale Bitcoin Investment Trust (GBTC), prevailed over the U.S. SEC after the regulator denied its application for a Bitcoin ETF. The appeals court said the rejection was “arbitrary and capricious.” The SEC said the Grayscale products were not “designed to prevent fraudulent and manipulative acts or practices.” While the appeals court ruling did not guarantee a Bitcoin ETF listing, it said the SEC did not explain its rejection.

If the ruling opens the door to Bitcoin and other cryptocurrency ETF listing, it could ignite another explosive rally in the boom-and-bust asset class. The Gold SPDR (GLD) is an example of an ETF that added liquidity to the underlying market. GLD is the most successful commodity ETF, with over $56.4 billion in assets under management. GLD trades an average of more than six million shares daily. A Bitcoin ETF following a similar path could cause volatility to decline as increased liquidity reduces price variance.

Gold and GLD could offer insight into a Bitcoin ETF

• State Street Global Advisors introduced the GLD physical gold ETF in November 2024 when the gold price was at a high of $454.80.
• GLD provided an investment alternative to physical gold bars and coins, mining shares, futures, and futures options.
• Gold has been in a bull market since GLD’s introduction, with the price rising to $2,072 in 2022 and 2023 and at over $1,940 per ounce on September 8, 2023.

The reasons why a Bitcoin ETF could attract massive buying

• Many market participants do not want to hold Bitcoin or cryptocurrencies in computer wallets.
• Crypto exchanges that hold customer tokens have experienced hacking and other problems- Mount Gox and FTX caused uninsured losses.
• A Bitcoin ETF would be SEC-regulated.
• The boom-and-bust history attracts investment and speculative interest.

The reasons for extreme caution

• A government’s power of the purse comes from control of the money supply.
• Crypto detractors state they have no intrinsic value.
• Bitcoin and other cryptocurrencies have played a role in illegal and nefarious activities.
• Cryptos reflect the trend towards globalization as they transcend borders. Governments may choose to ban participation.

Events have caused the booms

• The late 2017 introduction of CME futures on Bitcoin caused a significant rally.
• High-profile acceptance has led to the 2020 break above the 2017 high and peak in late 2021.
• Introducing physical ETFs that track Bitcoin and other cryptocurrencies could spark another rally that takes prices and the overall market cap to new highs.

Only invest capital you are willing to lose

• Risk is always a function of potential rewards.
• The boom-and-bust history puts capital at extreme risk.
• While cryptos represent the technological advances in worldwide finance, they can become worthless.