Among the financial giants that have been allowed to sell “exchange-traded funds” that invest directly in bitcoin is Boston's Fidelity Investments, along with other heavyweights like BlackRock and VanEck. On Fidelity's investment platform, one of the largest in the world, you can now Buy these ETFs along with common stocks and bonds.
Franklin Templeton, another giant investment firm, on Thursday posted an image of Ben Franklin's avatar featuring the “laser eyes” meme, which cryptocurrency enthusiasts typically use on social media to decorate their profile pictures with a satirical futuristic vibe.
“It's a pretty big deal, but maybe not for some of the reasons people got excited about X, and all the memes and jokes of the last few hours,” said Christian Catalini, founder of MIT's Cryptoeconomics Lab. “This is a very important step towards establishing Bitcoin as an important new asset class that traditional financial institutions can engage with directly.”
(Catalini is also a co-founder of Bitcoin payments company Lightspark.)
If you weren't interested in cryptocurrencies after the FTX market landslide fourteen months ago, this might surprise you: Despite mounting regulatory and economic setbacks, cryptocurrencies have been some of the market's best performers in 2023.
Bitcoin, the largest and most valuable cryptocurrency, rose 154% last year. Meanwhile, the S&P 500 rose 24 percent, and the Nasdaq rose about 44 percent.
This all happened when Sam Bankman-Fried, the one-time CEO of FTX, was tried and found guilty of fraud related to the collapse of his company.
“It's been a difficult journey to see the belief system in this industry come to fruition,” said Dave Balter, CEO of FlipSide Crypto. A Cambridge company specializing in cryptographic data analysis. “The ‘big thing’ on a personal level is a spiritual one, as infidels and disbelievers now realize why our conviction has never wavered.”
But despite some big names entering the world of cryptocurrencies, there are some notable opponents – and they are airing some of the same criticisms that have faced cryptocurrencies for years. Specifically, Bitcoin and other cryptocurrencies have always been among the riskiest and most volatile investments – subject to sharp fluctuations in value that are difficult to predict.
Vanguard, a bastion of vanilla index funds, said it has no plans to offer bitcoin ETFs through its brokerage even as its rivals rush to do so.
“Our view is that these products are inconsistent with our offering that focuses on asset classes such as stocks, bonds and cash, which Vanguard views as the building blocks of a balanced, long-term investment portfolio,” the company said in a statement. Statement to the Wall Street Journal.
Lest anyone think that cryptocurrencies have lost their ability to unpleasantly surprise investors, the market took another major hit just days after the ETF approval that many backers had been eagerly awaiting. By Sunday, Bitcoin had seen its price fall more than 10% from its mid-week high, as investors looked to take profits after the recent rally.
This was just the first week of growing pains in the relationship between Bitcoin and major traditional investment firms.
“It's like communicating with the enemy,” said Ryan Shea, a London-based cryptocurrency economist at fintech company Trakx. “But for moms and dads to feel comfortable in this world, and gain legitimacy, it's important to get to the next level.”
Traditionally, buying Bitcoin or other cryptocurrencies looked a lot different than trading familiar investments. Investors often have to set up accounts at cryptocurrency exchanges like Coinbase (although a few stock brokerages offer some cryptocurrency services). And for those who want maximum control over the security of their assets, there are a few standalone “crypto wallets” to use for storage.
Compare this process with the relative ease of investing in one of these new Bitcoin ETFs, which you can buy and sell in the same way you trade shares in Microsoft or Nvidia. While ETFs for stocks and other investments have long been available to brokerage clients, this is the first time one of these funds can actually hold bitcoin.
Indeed, the 11 funds approved by the SEC are already competing for new funds in the market, and this could mean lower costs for consumers in the short term. They compete on fees, which tend to be less than 0.5% of assets, and some, like ARK Investment Management, have temporarily waived fees altogether.
Bitcoin-related products that were previously on the market, including derivatives-based funds and trusts, charge fees of up to 2 to 3 percent.
“It's a land grab,” said Paul Karger, co-president of Twin Focus in Boston, a wealth advisory firm. “A handful of big winners will own most of the inflows into Main Street.”
Given the lower fees, these new funds may comply Bitcoin price movement closely. That's something their predecessors, who were largely based on futures and had been around for a couple of years and changed, didn't do. This discrepancy, called “tracking error” in trading parlance, occurs when the value of an ETF diverges from its underlying assets.
Bitcoin futures ETFs have a “tracking error,” which can be as high as 5 to 10 percent, while spot ETFs are expected to have a one-to-one correlation to the underlying price, said Matthew Walsh of Boston investment firm Castle Island Ventures. Of Bitcoin. “It's a big win for retail investors,” Walsh said.
With this move, Bitcoin is a step closer to becoming a “legitimate” asset, said Eric Bigelsen, partner and vice president of investment at ETF 3Edge. While he would love to have 11 boxes to choose from, now comes the work of figuring out which box he likes best. “There are definitely concerns out the door,” he added. The most important of which are fraud and asset security.
It will take a significant amount of education for investors to feel comfortable, said Ophelia Snyder, co-founder and president of 21Shares, a financial firm that worked with ARK to create one of the new bitcoin ETFs. But early signs show there is a lot of potential.
“Cryptocurrencies have never seen money like this before. A billion dollars is a lot of money in one day, but we saw it within the first two hours. This is not the same game anymore.
Suchita Nayar can be reached at suchita.nayar@globe.com.
