My Initial Observations on the New Spot Bitcoin ETFs

John L from NJ posted over 2 years ago:

So now you can buy a bitcoin ETF. The question is should you? Bonds pay interest. But sometimes default. Stocks represent an ownership interest that may involve regular dividend payments. Typically companies have assets whose value provides partial back up for the stock value. Theoretically the fair value of a stock is the replacement value of the company assets less liabilities. And bitcoin? Exactly what is the value of a bitcoin number stored in a computer? Pure speculation!

Greg G from CA posted over 2 years ago:

Characterizing Bitcoin as an "Asset" is more than generous. Suggesting the (probably naive judge's) decision/opinion that led to these ETFs might attract "Investor" interest is absurd. Individuals who buy Bitcoin, in whatever fashion, are gamblers, not investors. Unfortunately the SEC Chair's comments won't be noticed, the action will be taken as a blessing, more suckers will be born for many more minutes. Can I interest you in Tulip Bulbs? (they had more intrinsic value as an asset, just not much...)

Rob from NC posted over 2 years ago:

I wish I'd bought a boatload of Bitcoin when it was selling for less than $5 a coin back in 2011. And I wish I'd sold it when it was going for more than $60,000 per coin in 2021. But I wouldn't touch it now. I can see no way to value it objectively. It's like gold, except you can't make anything with it. It has absolutely no use other than as a medium of exchange. I suppose it's conceivable that a Bitcoin might be worth $1 million someday, but I'll take my chances by passing on it.

Jon from FL posted over 2 years ago:

There's an error in your observation. You call Bitcoin a risky asset. Bitcoin is not an asset. How can the SEC allow otherwise reputable firms to offer ETFs in a fake product? This makes me nervous.

Charles from RI posted over 2 years ago:

First, you would do well by understanding how Bitcoin works - the underlying technology (blockchain/distributed ledgers) and its protocol. Among other things, you will discover that the ultimate amount (supply) of Bitcoin is fixed; it is very different from tulip bulbs, the supply of which is unlimited. Second, Bitcoin is risky, in the sense that its value in the short run is quite volatile. However, there is sufficient long-term demand to support its value over the long run. With dependable, growing demand and fixed supply, the long-term value of Bitcoin looks good. A very sensible approach to investing in Bitcoin, is dollar-cost-averaging. Buy a little bit each month (whatever you can afford after all the other bills are paid) with a plan to hold it for, say, five years. Over that long period, you are very likely to make a satisfactory gain. Bitcoin is a decent hedge against inflation. If you live in a place which suffers from high inflation (e.g., Turkey or Argentina), holding some Bitcoin makes a lot of sense. Bitcoin will not replace fiat money. Well-managed money like the US dollar will remain because of the need to keep the national economy under control and to exert international economic power. In addition, it is very unlikely that Bitcoin will be used for small purchases of goods and services, because most merchants will continue to be unwilling and unable to accept it. Rather than invest in an ETF, I suggest owning Bitcoin directly, either in an USA regulated exchange account (like Coinbase) or in a hardware wallet (more secure, but with a high barrier to entry for most folks due to its technical user interface).

Bruce from CA posted over 2 years ago:

Now that the ETFs are here, financial advisors and fund allocators must have a viewpoint when asked about BTC and investment allocations. Some will steer assets into these ETFs. Personally, I feel quite comfortable allocating a small amount (1-5%) of my investments to crypto, as a small speculative high-risk/high-reward carve-out, a part of my portfolio I can tolerate losing. Consider BTC and the USD as currencies. Sadly, the USD will likely suffer from a great deal of inflation in future, a necessity in order to support the chronic fiscal irresponsibility of our elected leaders (of either party), who cannot seem to do much but drive us ever deeper into debt. How else can the debt be relieved except by inflation? Do you think a money market account at 5, 4 or 3% will be enough to maintain the power of your savings? By comparison, Bitcoin has a fixed supply and cannot suffer from inflation. Should it continue to consolidate confidence as a store of value, its value relative to USD could increase quite a bit over time.

Monk Monk from Texas posted over 2 years ago:

Isn't this the ultimate application of the greater fool theory? You will buy it in the hope of someone else buying it from you later at a higher price. But there is no value. Now, for this to make any sense, there has to be a practical use of bitcoin other than gambling chips. El Salvador and the Central African Republic have declared bitcoin as their national currency. Things do not seem to work well there. Early studies have shown that only the rich, highly educated male (a very small minority in both countries) have benefited, while the rest of the population was left behind. Bitcoin is not an inflationary currency, but it is deflationary. When the maximum is reached, there will be no possibility for "mining" more of it. So, it will mean that prices have to go down because the liquidity will be compressed. Economist may fear inflation, but they loath and detest deflation. In short, one cannot see a practical use for the spot. So? Well, if you want to go to Vegas and you don't want to leave the comfortable confines of your home, this "investment" can serve as an alternative. Happy gambling.

Bruce from CA posted over 2 years ago:

Monk Monk, you make some good points but it seems to me you're looking at the world through a narrow lens. It's true that Bitcoin could go to zero, though you don't provide much of a rationale by which it would do so. In my view, blockchain technology has two principal use cases. One, especially bitcoin, is as a store of value. For Bitcoin, after the mining is all done by about 2040, miners will still make money on transaction fees, which will need to be high enough to keep it worthwhile for them to have a role in the network. I understand that without much by means of fundamentals, which is what we investors usually look for to undergird our assumptions, there is little safety. So technical analysis rules in crypto, and so far we have observed bitcoin to be on a kind of exponential growth curve. You might ask yourself, how to explain the institutional interest in bitcoin? Also, while you mention the CAR or El Salvador, you don't mention examples of governments badly mismanaging their countries' finances. Argentina, Lebanon, Greece come to mind. You wouldn't put the USA into this bucket. But since the government has shown terrible fiscal irresponsibility, by piling up national debt, and now debt payment projections are dangerously high, the US Dollar is bound to lose significant value over time through inflation. Where can you preserve your savings when the country's finances have been managed so poorly? Some would put a little in bitcoin rather than USD. The other leading use case is tokenization, of real-world and digital assets. This applies more to ethereum, solana and other contract-based blockchains. This has been happening already with real-world and digital artworks, real world and digital real-estate, as well as digital collectibles (NFTs put out by Adidas, Nike or designer brands, odious status indicators like Bored Apes) and online games. I don't think you can completely dismiss the utility of the technology here. Not that you have done so, as we've been discussing bitcoin. But the recent bitcoin ordinals innovation could be bringing bitcoin into the tokenization game. In short, I don't think that you can dismiss crypto as "gambling" though I would agree it's highly speculative. If you think crypto has some promise in future, it is of course possible to construct a diversified portfolio. And for this crypto portfolio to be a small part of a larger, more conservative portfolio.