Is Bitcoin Almost Ready For Prime Time?

Is Bitcoin Almost Ready For Prime Time?

For many years the only way to purchase cryptocurrencies such as Bitcoin has been through unregulated private exchanges. And investing in such digital assets has not been for the faint of heart. Aside from the extreme volatility of the assets themselves, the exchanges have suffered a number of high-profile failures. In 2022 alone Terraform, Celsius, Voyager Digital, FTX, and BlockFi all went bankrupt, losing billions of dollars of investor money in the process.

It should come as no surprise that more and more asset management companies have been trying to get a piece of the action. In order to assuage investor safety concerns, their preferred approach is to get SEC approval to package cryptocurrencies through exchange-traded mutual funds (ETFs). Such an investment structure would be considered safer than exchanges or investment trusts, formats that have been easier to establish but less regulated.

The first U.S. Bitcoin ETF was approved in 2021. However, it was based on Bitcoin futures rather than on Bitcoin’s spot price (i.e. current price). Since then a number of Bitcoin futures ETFs have entered the market. Unfortunately the complexity of futures investing layered on top of the challenge of Bitcoin valuation in general makes such products in my opinion not ready for most investors’ portfolios.

Since then several asset managers have applied for the creation of a spot-price Bitcoin ETF, only to have their applications rejected. Grayscale Investment LLC is currently suing the SEC for having denied the firm’s application to convert its existing spot Bitcoin trust into an ETF. The firm argues that since the SEC allows futures-based ETFs, the same anti-fraud capabilities should be able to be relied on for spot price ETFs. The SEC, for its part, has been reluctant to open up more of these purely speculative investments to regulatory oversight without having the confidence that sufficient controls have been put in place.

BlackRock Inc., one of the largest asset managers in the U.S., has recently entered the fray. They filed a registration statement with the SEC for the creation of a new spot Bitcoin ETF under its well-known iShares brand. If approved it would trade on the Nasdaq exchange and Coinbase Global Inc. (CGI) – the biggest cryptocurrency exchange – would be the custodian. Does all this activity by well-established asset managers suggest Bitcoin is almost ready for prime time investing?

I don’t think so. Partly it’s because the SEC has just charged CGI subsidiary Coinbase with having operated as an unregistered national securities exchange/broker/clearing agency on its cryptocurrency asset trading platform. Not a good start for a firm trying to project the image of a trustworthy highly-compliant operator in this space. And also partly because no regulatory agency appears to have a good handle yet on the right approach to oversight.

In my opinion we’re still in the Wild West stage when it comes to digital asset investments. Asset management pioneers are pushing regulators to move forward quickly because there’s lots of money to be made. Regulators – responsible for protecting the public – are justifiably hesitant to move too fast. I wouldn’t even consider shifting any investment portfolio money into a Bitcoin investment until the SEC and other regulators have become comfortable with these kinds of investment products and their associated safeguards.

And at that point we can begin to try to address the huge question of how cryptocurrency assets should be valued.

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