Bitcoin Boom or Bust?

October 28, 2021

It’s finally here! There’s an ETF in the US for Bitcoin. The ProShares Bitcoin Strategy ETF hit the market on Tuesday, October 19th. Bitcoin, and more broadly, cryptocurrency, have long been a hot topic and one of intense debate. Is this an asset that is headed for the moon or doomed to fail? There are passionate supporters on both sides, but now with an ETF making this asset class even more accessible, does this mean you should be an investor in Bitcoin?

What is ‘Currency’?

One of the reasons you might want to own Bitcoin is because you’re worried about governments around the world printing currency. Certainly, a currency with a fixed quantity seems better than a central bank being able to push a button to create money and potentially inflation. However, one of the challenges with cryptocurrency is in the name. Is this really a currency, or perhaps a store of value, like gold? The name cryptocurrency implies currency; however, one of the requirements to be a currency is that items would be priced in Bitcoin. Do you ever hear someone say a loaf of bread costs .00006 Bitcoin? I have not yet. Until that happens, you have no guarantee how much something is going to cost in Bitcoin, even minutes later.

Who’s in Control?

The other challenge is with currency itself. Yes, in many ways, it can seem attractive to get the government out of the currency business. However, I always have to ask myself whether I think governments want to control currency or not. To me, the clear answer here is yes. And as long as that answer persists, I think there’s a challenge in Bitcoin being a true currency. In some ways, it could be good to have the government involved in currency. Why?

  • Consumer protection
  • Investor protection
  • The ability to have monetary policy
  • Monitoring and regulating illicit behavior
  • Trust – does technology earn people’s trust? The government at many times doesn’t either, but I was at a conference with Roberto Rigobon, MIT’s foremost thinker on crypto, a couple of weeks ago. He consulted with Facebook on their own cryptocurrency attempt, Libra. He said the technology was beautiful, eloquent, safe, and ahead of many others. However, he said it would never work. Why? “The only thing technology and trust have in common is the letter t.” To him, there was not a trust factor with Facebook (which is another headline these days), so there was no way this could be a currency. Libra failed incredibly quickly.

Bitcoins ETF Debut

Future debate will continue about whether Bitcoin is a currency or an asset. However, it’s easily investable now with the BITO ETF (and likely others coming/converting soon). So, should you get in? After all, there was huge trading on BITO’s first day. In fact, it was the second most heavily traded ETF on debut on record. Here is what has happened in the few days since debut:

Data dates above are 2021


There was huge volume, which you can see above, and a nice price bump of 3% in one day. However, since then, it has trended downward. How did this fare against Bitcoin itself or another, more expensive option, the Grayscale Trust?

Data dates above are 2021


The others happened to do better. Does that mean they are better structures? Not necessarily. But it may mean that volume and demand for the first ETF opening had more to do with some short-term movement of the ETF than the actual underlying asset. That is to-be-determined.

Another thing to note is that the BITO ETF does not represent direct exposure to Bitcoin. Instead, it holds futures contracts that come with their own set of risks. Due to its structure that has to constantly purchase new futures contracts and an expense ratio that is not cheap (0.95%), BITO could have significantly different returns compared to true Bitcoin.

Backing up, if you look at the long-term chart of Bitcoin, in hindsight, you would have loved to be an investor.

Data is from 6/13/2014 through 10/21/2021


However, despite a meteoric 88.66% per year return, there have been many times on this journey that outsized losses of 50% or more have been encountered:

Data is from 6/13/2014 through 10/21/2021


That’s not a bad thing in and of itself, but it’s a tale of volatility and speculation. That is likely to persist. As mentioned, there’s still debate over what Bitcoin even is, an asset or a currency. That sounds speculative too. We may see future returns repeat the past. Or we could see this fall away entirely and be nearly meaningless because other governments have created substitute assets. They are actively working on this.

Back to Roberto Rigobon. He was a fascinating speaker with a ton of market and government interaction about crypto assets and the future path of this for the world. He said he would never own Bitcoin. Yet he did one time. Why? In the beginning of the pandemic, he had a daughter over in Europe. With potential lockdowns, he wanted the comfort of her having access to money immediately to be able to buy a ticket out of there when needed. Sending Dollars would take days. So, what did he do? He opened up a Bitcoin account, put Dollars in there, had his daughter do the same thing. Within an hour, she had the funds. That’s success. He then told her to shut down the account immediately, as he did for himself. This highlights the value of Bitcoin for moving money quickly. That’s the value of the underlying system of blockchain. This technology will persist and make many things in our lives easier to transfer at a faster and cheaper rate. Even with the above, Professor Rigobon just reflects one person’s opinion. For Bitcoin, let the debate, and volatility, continue.