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Jean-Marie Mognetti is CEO and Co-founder of CoinShares.
The year 2024 is poised to be a landmark year for the cryptocurrency industry. With the U.S. Securities and Exchange Commission (SEC) granting approval for Spot Bitcoin Exchange-Traded Funds (ETFs), the institutionalization of the asset class has reached a pivotal milestone. This approval is not just a regulatory endorsement; it signifies the maturation of Bitcoin as a legitimate investment vehicle, suitable for inclusion in the portfolios of traditional investors. This move by the SEC is expected to usher in a new era of mainstream acceptance and integration of cryptocurrencies into the global financial system.
During the early phases, Bitcoin was not yet recognized as a distinct financial asset. The ecosystem lacked essential infrastructure — there were no custody solutions, regulated exchanges, or trading platforms, and the banking sector largely refused to engage with Bitcoin businesses. The absence of public companies in the cryptocurrency sector further highlighted its nascent stage. Security breaches were rampant, with frequent exchange and investor hacks. Regulatory frameworks in leading markets such as the USA and Europe were underdeveloped, creating an environment of uncertainty. However, recent years have seen a surge in innovative solutions enhancing the cybersecurity landscape of the cryptocurrency industry.
The period of 2021–2022 was characterized by a speculative frenzy, driven by the emerging Web 3.0 narrative of read/write/own, which ultimately did not demonstrate its anticipated impact. This era also witnessed the collapse of significant industry players such as FTX and 3AC. Despite leading to a downturn, a swift recovery and transition into the deployment phase followed.
It is now clear that Bitcoin’s financialization is a fait accompli. The announcement of BlackRock’s Spot Bitcoin ETFs in June 2023 marked a seminal moment, irrevocably affirming Bitcoin’s place in the financial landscape. The SEC’s approval of these Spot Bitcoin ETFs in the USA in January 2024 was the crystallization of Bitcoin’s acceptance — there is no going back.
Today, the infrastructure is much more robust, encompassing custody solutions, regulated financial products, strong regulated trading venues, publicly listed companies, and banks that are now engaging, albeit at different paces, with cryptocurrency entities. Cybersecurity concerns have diminished with the introduction of more sophisticated solutions and systems, enhancing the security and reliability of cryptocurrency investments.
The deployment phase is witnessing unprecedented growth, with nearly USD 18 billion in inflows into the newly launched Spot Bitcoin ETFs as of 24 July 2024. Fidelity is incorporating Bitcoin into its renowned All-in-One portfolio strategies, allocating 1.3% to conservate, 2.6% to balanced, and 3.8% to growth strategies. BlackRock’s iShares Bitcoin Trust (IBIT) ETF has achieved the most successful launch in the history of US ETFs, highlighting the market’s strong appetite for Bitcoin-based financial products. Bitcoin ETFs now account for 10–15% of total Bitcoin spot-trading volume on global centralized exchanges and represent over 3% of Bitcoin’s total supply, underscoring their significant market impact. Bitcoin’s volatility is decreasing, and the market is showing no signs of excessive leverage demand, indicating a mature and stabilizing asset class compared to previous cycles.
The traditional 60/40 portfolio, comprising 60% equities and 40% bonds, has long been a cornerstone of balanced investment strategies. However, the evolving financial landscape and changing market dynamics call for diversification beyond conventional asset classes. Bitcoin, with its unique characteristics and historical performance, presents a compelling case for enhancing the performance of a 60/40 portfolio.
Bitcoin’s low correlation with traditional asset classes is one of its most appealing features. During periods of market stress, when equities and bonds often move in tandem, Bitcoin’s price movements tend to be independent. This diversification benefit can help reduce overall portfolio volatility and improve risk-adjusted returns.
Bitcoin’s impressive historical returns have the potential to boost portfolio performance significantly. Over the past decade, Bitcoin has averaged an annualized return of approximately 200%, vastly outperforming traditional assets such as stocks and bonds. Despite its volatility, Bitcoin has demonstrated a remarkable long-term upward trajectory, driven by increasing adoption, limited supply, and growing recognition as a store of value. By allocating a small percentage of a portfolio to Bitcoin, investors can capture some of these growth prospects without substantially increasing risk.
Additionally, Bitcoin’s role as a hedge against inflation is becoming increasingly relevant in today’s economic environment. With central banks around the world implementing expansive monetary policies, the risk of inflation eroding the purchasing power of traditional assets is a growing concern. Bitcoin, often referred to as ‘digital gold’, offers a hedge against inflation due to its fixed supply and decentralized nature.
Incorporating Bitcoin into a 60/40 portfolio is not about replacing traditional assets but about enhancing the portfolio’s overall resilience and growth potential. A modest allocation to Bitcoin — typically suggested to be between 1–5% (see A Little Bitcoin Goes a Long Way, CoinShares Research) — can provide meaningful diversification, potential for higher returns, and a hedge against inflation, making it a valuable addition to the modern investment strategy.
As the case for including Bitcoin and other cryptocurrencies in investment portfolios becomes more compelling, the question arises: how should one gain exposure to this emerging asset class? Exchange-Traded Products (ETPs) and Exchange-Traded Funds (ETFs) offer the most efficient, secure, and accessible means to invest in cryptocurrencies. ETPs and ETFs provide a convenient and regulated way to invest in cryptocurrencies. These products allow investors to gain exposure to digital assets through traditional brokerage accounts and offer several advantages, including ease of access, liquidity, and institutional-grade security. By investing in crypto ETPs and ETFs, investors can avoid the complexities and risks associated with direct ownership while still benefiting from the potential upside of cryptocurrencies. Note that the cost structure of ETF and ETP products includes management fees of 0.3–2.5% for European ETPs and 0.25–1.5% for American ETFs.
Investing in crypto through ETPs and ETFs offers several distinct benefits. These products provide transparent and straightforward exposure to cryptocurrencies, with the added security of institutional-grade custodianship. They are also traded on regulated exchanges, ensuring compliance with financial regulations and offering peace of mind to investors. Furthermore, ETPs and ETFs are designed to be accessible to a wide range of investors, from retail to institutional, making them an attractive option for those looking to diversify their portfolios with cryptocurrencies.
When deciding between direct ownership via exchanges and investment through ETPs and/or ETFs, it’s important to consider factors such as security, ease of use, and regulatory oversight. Cryptocurrency exchanges have improved their security measures over the years, but they are still susceptible to hacking and other risks. ETPs and ETFs, on the other hand, are typically backed by custodians with robust security protocols and are subject to regulatory standards, offering an added layer of protection.
The SEC’s approval of SPOT Bitcoin ETFs marks 2024 as a transformative year for the digital asset industry, paving the way for broader institutional adoption. Bitcoin’s potential to enhance the performance of traditional investment portfolios underscores its growing significance in the financial world. As investors consider adding crypto to their portfolios, understanding the various methods of exposure — particularly through ETPs and ETFs — will be crucial in making informed and strategic investment decisions. The seamless integration of Bitcoin into traditional investment paradigms signifies not just an evolution of the asset class, but a fundamental shift in how modern portfolios are constructed and managed.
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