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These days, it seems like nothing gets crypto enthusiasts talking like the possibility of a bitcoin ETF. If cryptocurrency was a gold rush, you’d think ETFs were the shovel. They’re going to take bitcoin “to the moon,” right?
If that were the case, the SEC’s ruling on August 22 to reject 9 ETF proposals would be devastating. While the ruling isn’t terribly surprising, given that the SEC has rejected ETFs in the past, the latest round was notable because the ETFs under consideration were based on bitcoin futures, rather than the actual asset. This would give investors another layer of protection from volatility in the bitcoin spot markets, and would mean that the funds themselves don’t have to directly take on the risks associated with holding cryptocurrency, such as handling cryptographic keys.
Apparently, this wasn’t enough to get the SEC on board, and now it seems likely that a bitcoin ETF is a long way off for American investors. That’s the bad news. The good news is that to see this decision as a reason for despair is to greatly overestimate the importance of ETFs.
To illustrate this, let’s go way back, to about 8700 BC. That’s the estimated date for when humans first used copper. For almost 5,000 years, copper was the only metal humans knew of, and even after the introduction of precious metals such as gold and silver, or metals such as iron for creating tools and weapons, copper has remained an important natural resource all the way up to the present day.
And when was the United States’ first copper ETF launched? 2011. The copper market existed for thousands of years before it had an ETF. It did just fine.
Obviously, bitcoin and copper aren’t the same thing. For one, you can’t fashion tools out of bitcoin. And unlike copper, lines of code are not a resource with constrained supply (though it’s worth noting that bitcoin does have limited supply). The point is simply that an ETF is not crucial for a healthy market. The SEC decision may not have been ideal, but the market will be alright. The technological benefits of cryptocurrency—such as the fast, secure transfer of funds—haven’t gone away. There are already other financial instruments investors can use to get into bitcoin without going through an ETF, such as futures contracts or the recent arrival of a bitcoin ETN on American shores.
In many ways, your outlook on the future of cryptocurrency depends on what you’re hoping to achieve. If your goal is get-rich speculation, and you’re only interested in whether an event will lead to short- and medium-term gains or losses in the price of various cryptocurrencies, then the ETF decision may sting a little more. If, on the other hand, you really believe in the value of blockchain technology and digital assets to improve the financial system, then you have plenty of reasons to be optimistic.
A recent survey by ING found that 25% of Europeans expect to own cryptocurrency at some point, presenting the possibility of a huge increase in adoption from the 9% who own it today. In a recent survey of senior executives, Deloitte found that 84% of respondents either somewhat agree or strongly agree with the statement that “Blockchain technology is broadly scalable and will eventually achieve mainstream adoption.” This sort of adoption isn’t guaranteed to take bitcoin “to the moon,” and that’s okay. When it comes to integrating digital assets with the everyday operations of our financial system, we don’t need sky-high prices; it’s actually stability we want. For those of use who want a stable, sustainable future for digital assets, there is plenty of reason to be optimistic, with or without an ETF.
On December 17th CME Group, the world’s largest exchange company, launched a bitcoin futures contract. CME is the second exchange to do so, following Cboe’s bitcoin futures launch about a week earlier.
The price of Bitcoin dropped after the futures launch, from nearly $20,000 earlier in the day to $18,576.53, according to the Wall Street Journal. There were predictions that the introduction of futures would spell the end of bitcoin’s super-high prices, because skeptics would now have a vehicle for betting against the cryptocurrency.
So what does the introduction of bitcoin futures mean for the overall crypto landscape, as well as for the value of bitcoin and other cryptocurrencies moving forward?
According to Tim McCourt, Managing Director of Equity Products at CME Group, the company decided to launch Bitcoin futures based on a number of converging factors, including interest from a diverse group of traders and the recent establishment of CMEs Bitcoin Reference Rate (BRR), which provides a reliable daily price market for bitcoin.
When it comes to institutional investment, one of the most important events in the development of a new asset class is the introduction of a reliable index. An index allows investors to track their performance against that of the overall market and, perhaps more importantly, provides a relatively clear picture of overall trends in the market, making possible the introduction of derivative products such as futures contracts. While we haven’t yet seen the emergence of a definitive cryptocurrency index, the BRR can play a similar role for the bitcoin market specifically, if not the cryptocurrency market in general.
As an example of how indexes affect investment, let’s consider the Goldman Sachs Commodities Index (GSCI), which was created in the early 1990s. Before the creation of the GSCI, commodities futures were generally traded by organizations with a business stake in the physical commodities themselves. The point was to protect your business model by hedging against the supply fluctuations inherent to agriculture, not to get rich on a rising market; Wall Street was a world away. After the introduction of the GSCI, however, institutional investors began to take a real interest in commodities trading, directing large amounts of capital into futures contracts and boosting prices.
Whenever institutional investors get involved with a new asset class, there are naturally more long than short positions. Sustained capital inflows create an upward trend in the price of the asset—a trend supported by the fact that far more people are betting in favor of rising prices than betting against them. These dynamics played a significant role in the increase in grain prices after the introduction of the GSCI, and a similar trend is possible for digital assets.
Of course, the case for cryptocurrency growth is complicated by the fact that several high-profile investors, such as Jamie Dimon of J.P. Morgan and Warren Buffett, have already taken skeptical positions toward the new asset class (though Dimon has backpedaled somewhat). However, these positions seem to be more of a reaction to the hype and speculation surrounding cryptocurrency markets than a judgement on the technology itself. In our opinion, it is the usefulness of the underlying blockchain technology that makes digital assets so valuable: they bring speed, security, and transparency to transactions in a way that is distinct from any other asset class. (Again, notice the parallels with the commodities market, where financial vehicles were built on top of underlying assets with real-world usefulness.) As the hype fades away, and institutional capital becomes a larger share of the cryptocurrency market, we hope that the conversation will focus less on get rich schemes and more on underlying market dynamics, where history is our greatest teacher. When this happens, familiar trends will emerge, institutional investors will indeed go long on blockchain—pushing up prices, though not necessarily “to the moon”—and the financial system will start to reap the benefits of a new class of asset accepted on its merits as a vehicle for wealth, not its ability to make millionaires overnight.