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Investor Stamina: Cryptocurrency ETFs Enter NYSE - Know What You Own

January 17, 2024

Money is trust, forged through social consensus and backstopped by governments.   The role of money is to reliably promote economic activity, encourage the free exchange of goods and services for the benefit of the nation’s citizens. Basic tasks:  facilitate trade as a standard of value- use now; store value – use later.

The current currency-related systems for trading: what are investors willing to pay? 

Stocks based on earnings and cashflow

Bonds based on coupon/yield on loans

Commodities, usually natural resources or crops, based on supply and demand.  Crypto is considered a commodity based on supply and demand. It is compared to gold, perceived by enthusiasts as a universally recognized storehouse of value traded as tokens or coins. 

Crypto is a unique digital code developed by programmers. The unique number (s) are sold to investors as digital coins or tokens stored in a digital wallet associated with the investor.   It is “mined” by banks of high-powered computers that require extraordinary amounts of electricity with a measurable, negative environmental impact. Advocates talk about the finite supply of coin possibilities that will affect positively affect supply and demand over time. Computers can run out of numbers?

Crypto operates on the concept of trustless.This is a decentralized system not dependent on the trust in an entity (govt) to support and enforce currency value.  This is the core concept that power and decision making can be dispersed, made more democratic via systems that lack a centralized authority. 

Currently (2024) there are over 23,000 different traded coins/tokens and growing reported by CoinMarkCap in Forbes (3/15/23).  Some are highly recognized and promoted.  Others are obscure and hopeful.  An investor buys tokens or coins of their choice with recognized govt-issued currency in exchange for equal value of coins/tokens from a distributor.  Coins can be exchanged for other coins at the trading rates listed on a variety of crypto platforms.  Liquidity can be problematic.

The risks of trustless:  Programmers can make mistakes and can act with malice.  Insider trading and theft are common in crypto. There still are centralized entities in these systems - companies, crypto exchange, lenders – a new class of experts, decision-makers and intermediaries (trading platforms) - who exert controls, power and influence. They take in the recognized govt money and distribute the tokens/coins to the investors’ digital wallets or trading accounts. 

The hope is that the crypto system will become recognized medium(s) of exchange for daily transactions. Billions to trillions of govt currencies (unaudited) have been exchanged for thousands of coins/tokens with trillions of volatile values (unaudited). The trustless nature and volatility make accurate accounting impossible. The El Salvador govt adopted Bitcoin as it’s national currency with hopes of becoming an international cryptocurrency financial center.  The US dollar continues to be the chosen currency used by the population.  El Salvador is still corrupt and poor.

The SEC routinely rejected a Bitcoin offering because it’s an unregulated asset with a high potential for fraud and manipulation. After six years of legal struggles and the rejection of more than 20 exchange-rule filings, Gary Gesler, SEC chair and frequent critic of the asset but respectful the letter of the law (Grayscale lawsuit- Aug 2023), permitted the trading of 11 Bitcoin ETFs.  “Bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion and terrorist financing,” he said in a statement.

The 11 positions drew in $4.6 trillion in first trading day (1/11/24) yet nearly all the new ETFs posted price declines by the close.  Meanwhile, Bitcoin (BTC) surged to a two-year high of $49,000 before falling to $46,090. 

The 11 ETFs:  ARK 21Shares Bitcoin ETF (NYSE: ARKB) Bitwise Bitcoin ETF (NYSE: BITB) Blackrock’s iShares Bitcoin Trust (NASDAQ: IBIT) Franklin Bitcoin ETF (NYSE: EZBC) Fidelity Wise Origin Bitcoin Trust (NYSE: FBTC) Grayscale Bitcoin Trust (NYSE: GBTC) Hashdex Bitcoin ETF (NYSEARCA: DEFI)

View recognizable names above and think of the big banks who sold us out during 2008/2009 Credit Crisis.  Big names do not equal fiduciary trust.

The power of narrative – talking about crypto The story of crypto gives it power in an era of rapid change and strained trust. Being part of the crypto community with the hope of fast, significant wealth appeals to human nature.  It gives hope to investors who feel left out of more traditional markets.  Celebrity endorsements add to the “hip and cool” community. Big marketing efforts (think SuperBowl 2023, world airports) and close, chummy efforts (social media) keep the trading successes in the forefront. 

Much like the CMOs (collateralized mortgage obligations) of 2008, Wall St connections see the dollar volume, profit potential and are enthused about allowing crypto ETFs for trading. “It’s an exciting new asset class with low correlation to traditional investments.” Traders on Wall St use talking points such as “finally being able to fill the investors’ appetite for crypto that they have had for years” and “add some “hot sauce” to a portfolio’s growth.”  Recommended allocation discussed ranged from 1 to 6.5% of a portfolio.   Only one Wall St participate quietly uttered the statement, “not for retirees”. 

In an attempt to prepare for thoughtful and well-balanced discussions, see the references we experienced via investigative journalism and educational webinars. 

Books:  The authors were not from the financial service or bitcoin industries.  They all were trying to understand this fast-paced phenomena and its potential impact on others. 

Webinars:  No one explained the core concepts of crypto. The stated objective was to help advisors feel comfortable and safe about this “disruptive new strategy in a familiar wrapper.” It’s offered at a no/low fee ETF format within recognized brands….what’s not to like?- sarcasm!      Know what you own!

Human nature:  Savers and investors “chase return”.  They are drawn by the suggestion of “easy money/high profit” particularly in a fast-changing world that strains known ways and threatens to replace many elements of lifestyle with machine-based alternatives.  “If a machine can do it, it will.”   That scares people and their vision of their future. 

Sources to date: 

Easy Money, Cryptocurrency, Casino Capitalism and the Golden Age of Fraud; Ben McKenzie and Jacob Silverman, July 2023. 

Going Infinite, The Rise and Fall of a New Tycoon, Michael Lewis, Oct 2023

Webinars: 

1/12/2024 VettaFi, Cryptocurrency Symposium: Does the Future Belong to Crypto?  2.5 hrs.  Ark (CWoods); Balchunas, ETFs for Bloomberg; Grayscale; Invesco/Galaxy et al

1/16/2024 VettaFi, BitCoin ETFs and Crypto Investment Evolution (Grayscale) 1 hr

1/17/2024 VettaFi, Exploring Bitcoin in 2024:  Questions, Answers and Spot Bitcoin ETFs (Bitwise) 1 hr

2/12024    Wealthmanagement.com, Everything You Need to Know about Spot Bitcoin ETFs. 1 hr 

Advice from the SEC and friends:  Know what you own.