Understanding Crypto-Linked Stocks and ETFs

The SEC recently approved Bitcoin ETFs. Should we include this asset class in our portfolios now? Here are a few things you might want to consider before making a decision: 📶 Positive correlation between the stock market and cryptocurrencies: As an asset class, cryptocurrencies have demonstrated a positive correlation with the stock market so far. That means their prices move in the same direction as stocks. The purpose of using different asset classes in a portfolio is to control volatility without sacrificing returns. Having assets with a positive correlation in the portfolio does not help achieve that. 📶 No diversification across different cryptocurrencies: ETF products currently available on the market contain only one underlying asset - Bitcoin. Normally, stocks, bonds, and commodity ETFs include hundreds of underlying assets, providing sufficient diversification and significantly reducing risks. An ETF with one asset does not offer that protection, leaving an investor with the risk that another cryptocurrency will dominate the market in the future, negatively affecting the specific ETF's performance. 📶 Huge management fees: Management fees for the current products range from 0.2% to a whopping 1.5%. It may seem like a small amount, but it accumulates significantly due to the compounding effect. For instance, if you invest $100K in a bitcoin ETF today for 30 years, assuming this new asset class grows much faster than the stock market with an average 15% annual growth rate instead of 9%, you'll end up paying $2.2M in commissions if management fees are 1.5% (15% growth rate results in $6.6M; 13.5% growth rate provides $4.4M). 📶 SEC does not seem to be happy about these products. A federal appeals court ruled in August 2023 that the SEC must reconsider the Grayscale application to launch the first bitcoin ETF. The SEC did so in January 2024, and the SEC chair Garry Gensler didn't look excited during the interview to Andrew Sorkin on CNBC that day: https://lnkd.in/gsPA8zMm In my personal view, what essentially happened: 👉 The financial industry developed yet another way to charge whopping commissions.  👉 Crypto speculators gained better access to the general public, while actual blockchain enthusiasts would never use such products.  👉 Ordinary people willing to take risks are the ones who will be screwed again.  👉 The SEC understands all of that but can't really do anything about it.

According to J.P. Morgan analysts, Fidelity Investments and BlackRock spot Bitcoin ETF’s are ahead in two key areas that measure liquidity: 🔸The first metric is JPMorgan's proxy for market breadth, based on the Hui-Heubel ratio. This metric is lower for BlackRock and Fidelity ETFs by around four times, implying that these two ETFs show significantly more market breadth than GBTC, JPMorgan analysts led by Nikolaos Panigirtzoglou wrote in a report on Wednesday. 🔸The second metric is based on measuring how much ETF closing prices deviate from their net asset value on average. This metric suggests that the ETF price deviation from the NAVs of the Fidelity and BlackRock spot bitcoin ETFs approached that of the SPDR Gold Shares ETF in the most recent week, implying a significant improvement in liquidity, the analysts said. Meanwhile, the deviations for the GBTC ETF have remained higher, indicating lower liquidity. #BTC #Bitcoin #ETF #crypto #invest https://lnkd.in/eqJ7sW25

In my latest for Forbes I lay out implications of an upcoming shift in the crypto world. New bitcoin ETFs coincide with a pre-programmed policy (called “the halving”) that will constrain the production of new bitcoin. What happens if this shift in supply coincides with increased demand from easy-to-use ETFs? The debates are heated, but one thing is clear: whatever your beliefs about bitcoin, it’s on the brink of a new era where ease-of-investing finally meets crypto.   As we stand on the cusp of the next bitcoin halving, the much-anticipated launch of user-friendly bitcoin ETFs has sparked a conversation about shifts in market dynamics. With these ETFs, we're not just looking at a new investment vehicle; we're witnessing a potential gateway for a whole new cohort of investors.  🚀 Bitcoin ETFs offer a familiar investment experience akin to stocks, promising to break down barriers to crypto investment, particularly among those who control wealth but have so far steered clear of digital currencies. 📈 Analysis suggests significant inflows into the ETFs with the potential to drive up prices (BlackRock was the first provider to hit $1 billion in inflows last week, and Fidelity Investments also reached that milestone in just 5 days of trading). Yet, it also raises questions about increased market volatility and the subsequent effects on the crypto world, including mining margins and how ETFs conflict with crypto’s 24/7 markets. 🏛️ On the regulatory front, the SEC’s nod could be a game-changer, offering a layer of perceived safety and clarity mix and potentially accelerating broader acceptance of bitcoin as a legitimate asset class. 💡 As we anticipate the unfolding of these events, key questions to ask include: ➡ Could this be the turning point for widespread bitcoin adoption? ➡ Will the halving coupled with the advent of ETFs create the perfect storm for a surge in bitcoin’s price? ➡ How will the potential volatility impact the long-term perception of cryptocurrencies? Read more about the intricate dance of bitcoin ETFs, the halving, and the future of crypto in my latest article, and jump in with your 💬 thoughts on the future of bitcoin investment with the introduction of ETFs? Do you foresee a bullish horizon or a wave of volatility? Share your insights below! #bitcoin #etfs #cryptocurrency #halving #digitalasset #blockchain https://lnkd.in/gZ_XvsFA