SEC Green-Lights Bitcoin ETFs: 3 Things I Expect To Change

Summary I think the approval of 11 physically-backed Bitcoin ETFs by the SEC will prove to be a game-changer for the crypto industry. With low fees, better security than owning it outright and easy accessibility, Bitcoin is bound to become a mainstream investment. It might become the new normal for pension funds, money managers and the investment industry to recommend investing a part of one's wealth in crypto. This will have major influence on the long-term behavior of Bitcoin. I expect less volatility, more stability and a move towards trading as an inflation and recession hedge. I believe that Wednesday, the 10th of January 2024 will be remembered as an important date for Bitcoin ( BTC-USD ) and cryptocurrency in general. The approval of the spot Bitcoin ETFs by the SEC was a defining moment that could change a lot for the crypto markets. Bitcoin is now long past the age at which it was almost exclusively owned by IT geeks or alternative investment specialists. The cryptocurrency came of age. I think this approval is a game-changer. With the new spot ETFs it is possible to invest in Bitcoin with fees as low as many regular ETFs. In this article, I will outline three things that I believe will change for Bitcoin after the approval of the ETFs. The approval of the 11 Bitcoin spot ETFs means that investors can now own physically-backed ETFs with exposure to Bitcoin. These ETFs have expense ratios ranging from 0.20% to 0.80%, which makes them comparable in their costs to many other regular ETFs. Of course, Bitcoin ETFs backed by futures contracts, such as BITO ( BITO ) already existed, but their costs are higher. Also, the contango bleed in these futures-backed ETFs will eat a large part of your investment. Now with the spot ETFs we finally have a Bitcoin ETF that I consider to be a realistic long-term investment vehicle. Investing in Bitcoin is bound to become the new normal At the moment, many people own investments in Bitcoin or another cryptocurrency. But it is usually not supported as a regular investment by pension funds, intermediaries or money managers. I am currently in my thirties, and have owned Bitcoin myself (in cold storage). I consider myself to be digitally literate. Many people are not. Possibilities to invest in cryptocurrency have dramatically increased already during the last couple of years. Investing in crypto over Coinbase ( COIN ) or Robinhood ( HOOD ) is likely something that is done more by the younger generation. People with the most money are, on average, member of an older generation, and they are also the least likely to be interested or able to make such investments. But from now on, this wealthy but digitally less literate part of the population will gain easy and cheap access to Bitcoin spot ETFs. Also, it is more and more likely that brokerages, intermediaries and pension funds will even start recommending allocating a small percentage of your holdings to Bitcoin, as it is with gold or real estate. I believe this will have three possible indirect effects: 1. Volatility will likely drop Cryptocurrency markets are infamous for their volatility. Just take a quick look at the longest chart YChart would generate for me. I made it logarithmic to be better able to view the percentual in- or decreases during the first couple of years (a linear chart would look even more volatile). It is obvious that the performance of Bitcoin has seen some major ups and downs over the years: Data by YCharts Well, why do I expect this volatility to drop? Three main reasons: With a larger part of the population invested in Bitcoin and many hedge funds, pension funds and intermediaries also owning assets, the share of people owning it goes up. Not only this, but the most important thing is that the people who will be new investors in Bitcoin are likely to be the ' late majority '. These people are often passive investors who do this over a middleman or a money manager, and are less likely to be trading in and out of investments. This will add a buffer to any future move that Bitcoin makes, both up and down. Intuition-wise, ETFs are for the long term, and I believe they are more likely to be held for a longer time period than direct investments. The average holding period of individual stocks is 10 months , the average holding period of stock-based ETFs is 2 years . Of course, these stats deal with stocks, but if people hold stock ETFs for a longer period of time on average, then I expect the same to be true for crypto ETFs. There is of course the large difference that, while stock ETFs are often very diversified compared to owning a single stock, this is not the case for a Bitcoin ETF versus owning Bitcoin outright. So the evidence remains thin here, but I still believe it is plausible. There is less of an urgency to lock in quick wins, because the new physically-backed ETFs have low costs (unlike many alternatives) and a low theft risk. While I owned Bitcoin directly, I was always afraid of hacks. Eventually I turned to cold storage, but by then I was always afraid of losing my codes. ETFs simply do not have these drawbacks since you simply buy them at your broker using the same credentials you use for stocks, making them an option that feels safer. 2. Bitcoin and cryptocurrency might start behaving more as an asset category than as an individual speculation vehicle This effect is likely to be a result of the first one, since if any kind of investors (institutional, individual, middlemen, money managers) that are less likely to quickly buy and sell Bitcoin ETFs are investing in it, this could lead to lower volatility. This, in turn, could contribute to different views about the nature of an investment. With regard to portfolio strategy, many investors own baskets of assets: stocks, bonds, gold, real estate, etcetera. In case of underperformance of any of these assets, investors might choose to do a reweighting of their portfolio: sell a couple of percent here, buy a couple of percent there. Completely selling an asset category is also a possibility, but this is much less common. If cryptocurrency is considered to be a separate asset category, temporary underperformance of this category is likely to be endured more easily. Also, if volatility drops, these fluctuations will be less, which will make it easier to endure the resulting drops. This creates a virtuous circle. Note however that these drops in volatility (if they happen) and better stability of the Bitcoin market will also lead to lower and slower value increases in case of price increases. Bitcoin will not directly become a boring investment, but it might become more like gold ( GLD ) in its price behavior. With many differences of course. 3. Bitcoin might actually start to trade as an inflation/recession hedge Data from the past suggests that Bitcoin has predominantly traded alongside the stock market, albeit with a very large multiplier. This means that Bitcoin has not performed as an inflation or a recession hedge at all. On the other hand, it has many properties that would make it an ideal vehicle to use as an inflation/recession hedge in theory, like gold. But even gold is not free from inflation: every year, more than 3,000 tons of gold is mined. It is estimated that the total amount of gold 'above the ground' stands at almost 209,000 tons. This means that the 'gold inflation' amounts to slightly more than 1.4%. This is not very high but far from zero, and will be a significant contributor of possible underperformance over the long term compared with zero inflation assets like Bitcoin. At the start of the next halving of Bitcoin, it will have reached block number 840,000 . At that moment, 93.75% of the maximum number of Bitcoin will have been mined already. So it's easy to calculate the upcoming inflation until 100% is mined: (100-93.75) / (93.75/100) = 6.66%. It is estimated that 100% of Bitcoin will have been mined around the year 2140, so the expected annual 'Bitcoin inflation' rate will be very limited. But due to the nature of the halvings, the bulk of this inflation will be during the upcoming years. After the 6th halving 99.2% of the maximum number of Bitcoin will have been mined, and it is expected that this happens in 2032. Already, inflation in Bitcoin is quite low, but after 2032 we can safely assume that it will be close to zero. Add to this some deflation caused by lost tokens, and the eventual inflation will likely be negative. Bitcoin is not tied to any nation, government or central bank. It cannot be used as a political instrument or in an economic strategy to (for instance) devaluate a currency. Also, it is digital so very easy to transport, and liquidity is not a problem. Essentially, Bitcoin seems to be a bulletproof asset. These properties make it an ideal (fiat) inflation and recession hedge on paper. But this has not been shown in practice yet. Well, why do I expect this to change? Same reason as the above two effects: people will start using Bitcoin or cryptocurrency as a separate asset category in their portfolio management. Most people do not entirely sell a whole category in case of a (possible) drawdown. Also, I believe people or institutions who are entering Bitcoin via ETFs for the first time are less likely to use it as a trading vehicle and more likely to use it as an investment vehicle. As economic performance or inflation has little direct effect on the intrinsic value of Bitcoin, there are strong reasons to assume that it will hold its own during an a recession or a period of high inflation. This will not happen overnight, but I expect this change to an inflation and recession hedge to become apparent over the course of the next 10 years or so. Takeaway As a result of the approval of the new physically-backed ETFs, I expect that Bitcoin has some interesting upside for the coming year, because of many investors buying into the newly approved products, that have lower cost than their alternatives. The upcoming Bitcoin halving is assumed to also be a bullish event for Bitcoin. On the longer term I expect more stabilization, and more gold-like behavior in terms of price. Bitcoin will not suddenly become a boring investment, but I can see volatility gradually decreasing. Also, Bitcoin and cryptocurrency could start behaving more as an asset category than as a trading tool. This will also increase stability and decrease fluctuations. Third, Bitcoin might start to trade as an inflation and recession hedge. But I do not want to spoil a good party: of course Bitcoin will still experience major upsurges and major downturns. I only expect the frequency and the size of these to decrease for the reasons that I explained in this article. Still, if you are investing in Bitcoin or any other cryptocurrency, be aware that these can be very volatile investments. I would never invest in these with borrowed money and I would also recommend anyone to not invest more than you are willing to lose: you should be able to survive economically if you lose your entire investment. But if the volatility of Bitcoin really decreases according to my expectations, I might not need to include this disclaimer for future articles anymore.