Updated Jan 6, 2024 - Economy

Unpacking the bitcoin ETF frenzy

Illustration of a traffic light with the green light featuring a bitcoin symbol

Illustration: Sarah Grillo/Axios

The headline from Fortune's Jeff John Roberts says it all: "The crypto world is losing its mind over when bitcoin ETFs will arrive."

Why it matters: Pretty much every major price increase in bitcoin in recent months has been chalked up to anticipation that the long-awaited day will soon arrive when investors will be able to buy funds directly tied to the spot price of the OG cryptocurrency.

By the numbers: Bitcoin is up 162% over the past year, and currently trades at about $45,000 per coin. It was worth less than $30,000 as recently as October.

The big picture: It's not immediately obvious why the arrival of bitcoin ETFs would cause a huge spike in demand for bitcoin.

  • There are already lots of ways of getting exposure to bitcoin on the stock market, if you want it, from closed-end funds owning bitcoin (GBTC) to ETFs tracking bitcoin futures (XBTF) to companies that are mostly just piles of bitcoin (MicroStrategy) to companies that are plays on the future of crypto more broadly (Coinbase).
  • Institutional and retail investors alike have many ways to buy bitcoin directly if they want to do so, and to hold it with trustworthy custodians.
  • Retail investors also don't generally get sent 1099 forms on their crypto trading profits, and as a result often don't report those profits on their tax returns. Any trading profits in a bitcoin ETF, by contrast, will be fully taxed.

The other side: In between institutional and retail sit a huge mass of private bankers, investment advisors, and wealth managers, including roboadvisors.

  • Most of these outfits — who in aggregate control trillions of dollars in private wealth — might be perfectly happy allocating a small percentage of a client's portfolio to bitcoin in theory, but don't want to deal with a whole new layer of custodianship and reporting. A simple-to-understand ETF would make buying bitcoin a lot easier, and therefore more common.
  • Intriguingly, while the bitcoin world broadly considers bitcoin ETFs to be just around the corner, only 39% of advisors believe such a thing will be approved this year.
  • At the moment, only 19% of them are allowed to buy bitcoin for client accounts.

The bottom line: Bitcoin ETFs will have to rapidly accumulate a lot of assets in order to justify the kind of price appreciation we've seen over the past year. Then again, bitcoin is an asset without any real fundamentals, which means its price can — and does — go just about anywhere.

  • Sometimes, what goes up just ends up going up further.
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