Bitcoin has hit a new record high, prompted in part by the launch of the ProShares Bitcoin Strategy ETF, the first ETF tracking the cryptocurrency to be launched in the US. Other ETF launches are said to be waiting in the wings.

This raises the question of whether bitcoin is now in the middle of a new bull phase, prompted by exchange traded funds offering easy, tradable access to the cryptocurrency. Such a phenomenon has been observed in the gold market since Gold Bullion Securities listed the first gold-backed ETF in 2003.

SHINING LIKE GOLD

The World Gold Council calculates the gold-backed ETF market is now worth $201 billion, and these funds are used by institutional and retail investors alike, because it’s much easier to hold an ETF in your portfolio, pension or ISA, than it is a gold bar or coin.

The prospect of new ETFs offering access to bitcoin is potentially more powerful in terms of driving the bitcoin price than it is gold, as the latter is also held by central banks and used in jewellery and industry, as well as for investment.

However that is offset by the fact that it’s already relatively easy for retail investors to buy and hold crypto without the ETF wrapper. Plus the ProShares Bitcoin Strategy ETF doesn’t actually invest directly in bitcoin, but rather in bitcoin derivatives, namely futures contracts. That makes the link with the bitcoin price less reliable, and opens investors up to the cost of rolling over these contracts when they expire, which can be substantial.

ENVIRONMENTAL CONCERNS

If the ProShares launch sparks a flood of other providers to enter the ETF market, that should be positive for bitcoin demand. But the cryptocurrency’s price will be determined by a host of other factors too.

The huge carbon footprint of cryptocurrency mining prompted a big sell off earlier in the year. While that seems to have been forgotten in the recent price surge, it won’t have been missed by companies and investment funds who are under increasing pressure to become greener, and facing more stringent reporting requirements surrounding their carbon emissions.

Environmental concerns prompted Tesla to back off from plans to allow customers to pay for cars with bitcoin, and other companies won’t want to facilitate crypto payments if it impinges on their green credentials, particularly when transactions can already be quite easily fulfilled using dollars, euros or pounds. Like other industries, crypto mining can become cleaner, but it will take time and investment.

REGULATORY PRESSURE

The interventions of regulators can also be significant in the movements of cryptocurrencies, as we saw when Chinese authorities ramped up their clampdown on crypto over the summer.

Indeed, the latest bitcoin price surge may actually be down to the fact the US regulator has allowed the ProShares ETF to launch, which potentially paves the way for further funds to get the nod, opening up a new wave of liquidity for the crypto market.

However, the regulator was probably swayed by the fact the ProShares fund trades in futures contracts on a regulated exchange, rather than directly in bitcoin on less regulated crypto exchanges, and that will still be a sticking point for investors who want pure bitcoin exposure.

Here in the UK, the FCA (Financial Conduct Authority) has banned the sale of crypto derivatives and exchange traded notes to retail investors. Given the complexity of these instruments, the extreme volatility of the underlying asset, and the high potential for consumer harm, this looks a proportionate regulatory response.

As the market develops, products may become simpler and the FCA’s stance may change. But this serves to underline the crypto market
is still in its infancy, and has a long way to crawl before it becomes mainstream.

LONGER TERM ADOPTION UNCERTAIN

The launch of the ProShares ETF is a positive development for bitcoin, but the longer term adoption of cryptocurrencies by businesses, consumers and regulators is much more important to long term returns, and all remain deeply uncertain. As such, consumers should only invest money in crytpo they are willing to lose in its entirety.

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