The long-awaited moment by the community has finally arrived, and the world of cryptocurrency is celebrating a significant new milestone, hoping to rebound after years marked by turmoil and legal issues that severely undermined its credibility. Now, anticipation is building for the latest Bitcoin halving, just a few months away, seen by investors as a key moment for a new rally, 15 years after its creation.
What happened?
On 10 January, the US Security and Exchange Commission (SEC) approved the first Bitcoin ETFs, a total of 11 products issued by companies such as Blackrock, Fidelity and Invesco. This will allow American retail investors to add Bitcoin exposure to their portfolios without directly purchasing the crypto, greatly simplifying the process.
Bitcoin’s supply is capped at 21 million, of which 19.59 million is currently in circulation. New Bitcoins are minted through the so-called “Mining”, a process where the miners use powerful equipment to solve cryptographic equations and add new blocks to the Bitcoin blockchain. Every 210,000 blocks (or, roughly, 4 years) the reward obtained by miners halves, artificially reducing the supply. The upcoming halving, expected in April this year, will do exactly that: decrease the rate of new supply as the block reward falls from 6.25 to 3.125 Bitcoin.
Why is it important for the Crypto Community?
First and foremost, US asset managers will find it easier to allocate their funds to Bitcoin, overcoming the regulatory uncertainties and technical complexity that have so far hampered the process. With established relationships with ETF providers, asset managers can now integrate Bitcoin exposure without navigating the technical and regulatory complexities of Bitcoin exchanges or intermediaries in terms of trading and custody.
The SEC’s approval is a big facilitator also for retail investors in the US. It opens the door for increased adoption of the 15-year-old asset, allowing retail investors to purchase the ETFs directly in a brokerage account or opt for a managed portfolio that includes an allocation to Bitcoin. They can now gain financial exposure to Bitcoin without having to open a new account on an exchange offering Bitcoin or engage in peer-to-peer transactions.
It is also important to say that the endorsement from the SEC refers to the instrument (i.e. the ETFs) while the underlying currency/asset is still not regulated and we must not confuse the two things.
Moreover, it is very important to say all the issues related to the actual illegal use of bitcoin and its purpose from a functional perspective are still not addressed and if the Crypto community wants this to become an asset that can be really investable, it will have to find a way to police all those behaviours either supporting more regulation or self-regulation (albeit we can probably say now with confidence than that could be naive).
What role can Bitcoin play in an investment portfolio?
Despite its over 15 years of history, Bitcoin is still largely untested by investors. The approval in the US of the new 11 spot Bitcoin ETFs could effectively improve access in that market but still does not change the fundamental questions and debate on whether this is actually an investable asset that would add value in the long term.
In the UK, the regulatory framework hasn’t changed and these new ETFs aren’t accessible. The same goes for Italy, where these new ETFs aren’t available, as outlined in this article by Morningstar.
Even if these instruments were available, in the context of a diversified core portfolio for retail investors, we don’t believe that the fundamental problem has changed. Bitcoin does not offer yield; its price is only linked to supply and demand logic, and its use cases are still unproven. All that may change, but it remains a very risky place to be. Nevertheless, it is impossible to ignore Bitcoin’s disruptive characteristics and its appeal to retail and institutional investors, which has ebbed and flowed in recent years. Therefore, if you have a strong belief in its role in a portfolio, you should do it really within the boundaries of a regulated environment, perhaps as a small satellite position within a well-diversified portfolio.
With investing, your capital is at risk. The value of your investment will go down as well as up and you may get back less than you invested. You should seek financial advice if you are unsure about investing. The views expressed here should not be taken as a recommendation, advice or forecast.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
