Why has the value of Bitcoin exploded again?
By Andrew Urquhart, for The Conversation,
Bitcoin’s journey into mainstream finance has reached another milestone – and another record price.
The cryptocurrency was trading at $ 66,975 (£ 48,456) following the launch of an exchange-traded fund (ETF) in the United States, which significantly increased bitcoin’s exposure to investors.
The fund, which opened on October 19, allows investors to speculate on the future value of bitcoin – without actually owning it. This is the first time that investors have been able to trade a bitcoin-related asset on the New York Stock Exchange, and it was preceded by a lot of media attention and hype in the financial markets.
Read also | Bitcoin Futures Highlight Some Pitfalls For New ETFs
It started trading at $ 40 (£ 29) per share and ended the day up 5% with some $ 570 million (£ 412 million) in assets, making it the second largest ETF in the world. most traded to date (the first was created by BlackRock, the world’s largest asset management company).
And the impact on the price of bitcoin has been extraordinary. It broke its all-time high of $ 64,895 to hit a new high of $ 66,975 and at the time of writing it was hovering around $ 65,000. This is a big change from mid-July 2021, when bitcoin hit a low of less than $ 30,000 in 2021, reflecting its enormous volatility.
Many financial institutions have already tried to get Bitcoin ETF approved without success. So far, the Securities and Exchange Commission (SEC) (the US government agency that protects investors) has been reluctant to approve one. This was in part due to the intense volatility of bitcoin, as well as broader concerns about the unregulated cryptocurrency industry.
But Gary Gensler, chairman of the SEC, said the commission would be more comfortable with “futures” ETFs because they trade on a regulated market. This is a significant change in leadership for the SEC that has occurred since Gensler took the helm in April 2021.
ETFs trade like any normal stock, are regulated and anyone with a brokerage account can trade them. This new fund, named ProShares Bitcoin Strategy ETF (or BITO for short), is the first to expose traditional investors to the ups and downs in the value of bitcoin, without them having to go through the complex process of buying parts themselves.
Although U.S. investors can already buy bitcoin futures directly from the regulated Chicago Mercantile Exchange and from unregulated exchanges such as BitMEX (as well as bitcoin directly from unregulated exchanges), the launch of an ETF opens the market to a wider variety of investors, including pension plans. funds – and adds to the growing acceptance of bitcoin in the financial markets.
Some are still skeptical of bitcoin due to its link to criminal activity, although a recent report suggests this appears to be decreasing. And Jamie Dimon, CEO of investment bank JP Morgan, says bitcoin is “worthless” and regulators “will regulate hell.” (Nonetheless, JP Morgan gave its wealth manager clients access to cryptocurrency funds in July 2021.)
Eric Balchunas, senior analyst at Bloomberg, is not surprised by the price appreciation and described the ETF launch as “a first hit, a home run (which) brings a lot of legitimacy and looks. in the crypto space ”.
But what impact will BITO have on the cryptocurrency space? As a new product, it has already exposed more investors to the ups and downs in the value of bitcoin in a regulated market. Many of them have probably already felt uncomfortable buying cryptocurrencies from unregulated exchanges and having to store the asset themselves.
Other investment funds interested in cryptocurrencies will no doubt be encouraged by BITO’s success and eager to list their own ETFs exposed to bitcoin and its rivals. Several other ETF providers are likely to launch their bitcoin ETFs in the days following ProShares’ debut, including Invesco, VanEck, Valkyrie, and Galaxy Digital.
It’s a development that is sure to make investing in cryptocurrencies easier and more mainstream – and an important stepping stone for their adoption in mainstream finance.
(The author is Professor of Finance and Financial Technology, ICMA Center, Henley Business School, University of Reading)
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