Last month, the SEC approved 11 Bitcoin tracking ETFs for use in the marketplace, meaning that general consumers can purchase a more direct stake in the cryptocurrency asset without going to an exchange or opening up a Bitcoin digital wallet. If you think there have already been ETFs tracking cryptocurrency assets, you would be correct. In the past, ETFs were limited to holding cryptocurrency futures or investing in companies involved in the cryptocurrency market (like Coinbase, Crypto.com, etc.), which had strong but not direct correlations with the asset’s market price. These new ETFs are backed by Bitcoin, allowing for more correlated exposures to the asset with lower tracking error.[1]
I think Bitcoin and cryptocurrency are a bit of a strange asset to hold because it is hard to argue that they are similar to a particular asset class we are more familiar with. There are arguments across the board about what it acts as, but I think only some would argue that it is like a bond as it doesn’t provide an income stream. Some say that it behaves like a tech stock because it often has some correlation. However, stocks are based on companies with revenues, financials, etc. while Bitcoin is not. Some argue that it is like digital gold as it is scarce and is a store of value. However, gold has real-life applications other than storing value, namely, electronics, aerospace, and jewelry.[2] Then, of course, there is the currency aspect of it. Technically, yes, Bitcoin could be used as a currency and have use cases outside of black-market transactions. That said, the broad economy isn’t displaying laundry detergent prices in BTC. As of now, I would view these assets as purely speculative until there are broader use cases.
Although these approved Bitcoin ETFs are unrelated, other crypto tokens can have potential use cases using blockchain technology. We all saw the frenzy of NFTs in 2021/2022, and the idea of paying money for a digital image you could duplicate with a right click of your mouse may seem silly. However, “tokenization” doesn’t have to be digital art; it could be a digital ticket to a major sporting event or concert where one could verify its authenticity. Or it could reduce the cost of major transactions.[3]
The main reason to care about this is that clients will ask and may want to kick the tires of these types of investments. Cryptocurrencies are in the financial news, albeit less so in 2024 than in 2021. Also, the marketplace is starting to jump into these markets, so it is good to know what is going on once there is more concrete news like the SEC green-lighting spot Bitcoin ETFs.[4]
Our position stands where it was, and I’ll paste Jane Riley’s most recent comments in the January Compliance bulletin here:
Bitcoin EFT and all crypto currencies – Even though the SEC has approved some Bitcoin ETFs for public trading, we have not changed our policy. You may not recommend them to clients, but you may take orders only if the clients specifically ask for them. Please get written acknowledgement from the client that they are aware of the risks and you are not making any recommendation.
[1] Dong, T. (2024, January 18). 11 new spot Bitcoin etfs to buy in 2024 | investing | U.S. news. U.S. News. https://money.usnews.com/investing/articles/new-spot-bitcoin-etfs-to-buy
[2] King, H. M. (n.d.). The many uses of gold. Geology.com. https://geology.com/minerals/gold/uses-of-gold.shtml
[3] B., H. (2023, October 19). Crypto tokens and their diverse use cases. LinkedIn. https://www.linkedin.com/pulse/crypto-tokens-diverse-use-cases-harry-b-/
[4] The Wall Street Journal. (2024, February 6). Why wall street firms are embracing crypto – the wall street journal google your news update – WSJ podcasts. https://www.wsj.com/podcasts/google-news-update/why-wall-street-firms-are-embracing-crypto/bd96180e-7662-49d6-bf19-26c64894faa5?mod=Searchresults_pos2&page=1
