The Securities and Exchange Commission is expected to approve a few spot price bitcoin exchange traded funds, ETFs, this week.
Earlier in the week, 10 companies, including BlackRock, the world’s largest asset manager, submitted their final amendments to register bitcoin ETFs. Former SEC Chairman Jay Clayton, speaking on CNBC, said, “I think approval is inevitable, and I think there is nothing left to decide.” Some of the largest U.S. financial institutions are involved in the launch of the first spot price bitcoin ETFs, including JP Morgan, Fidelity Investments, and, as noted above, BlackRock.
But is there value to bitcoin investments?
Well, let’s start with what bitcoin actually is. It’s a cryptocurrency, a virtual currency, designed to act as money: a means of payment, a store of value, and perhaps even a measurable standard unit of value. Bitcoin was introduced in 2008 by an anonymous developer or developers. It is a form of payment outside the control of one person, entity, or government. Today, bitcoin is the most well-known virtual currency in the world.
The central question follows: Does bitcoin have value?
Many of the country’s most respected members of the financial community believe the answer is no. Warren Buffett, perhaps the world’s most renowned long-term investor, says bitcoin has no value. That said, bitcoin has not gone away. Its spot price has been characterized by extreme volatility, but it has not disappeared. Last month, Tyler Cowen, professor of economics at George Mason University and the co-author of the prominent blog Marginal Revolution said that the public should keep an open mind about bitcoin. He noted that most financial bubbles don’t keep coming back. But bitcoin keeps bouncing back. In a December 2023 blog post, Cowen suggested that bitcoin is like a lottery ticket, with the potential for a big payoff.
With the SEC approval of spot bitcoin ETFs, the virtual currency will be integrated into the global financial system. Major institutions, such as JP Morgan, BlackRock, and Fidelity will allow an individual to hold and trade bitcoin. Visa and MasterCard will incorporate bitcoin into their transaction systems. It is inevitable that bitcoin will be a recognized asset class.
We should note here that the path to treating bitcoin as a medium of exchange will be marked by volatility. The price of bitcoin can move by 10% or more in one day. It is difficult to transact business with such volatility. When bitcoin ETFs are approved, expect the price of bitcoin to gyrate wildly. Perhaps speculators would sell on the news. Regardless, it is impossible to deny that bitcoin is a store of value.
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Bitcoin appears to be particularly popular among individuals who distrust government or believe that the U.S. government is a printing press destroying the value of the dollar. This group sees bitcoin as a hedge against the risk that the dollar loses its status as the global reserve currency. Bitcoin is insurance against a financial meltdown in the U.S. For risk-tolerant investors, taking a small position in bitcoin could be a prudent asset diversification strategy.
Top line: Bitcoin could be the lottery ticket that pays off big. But a lottery ticket is always just that, a bet.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.