GIULIETTA TALEVI: Behind bitcoin’s ‘coming of age’

$66,416.86. Or, as of this morning’s exchange rate, R960,713.

Congratulations to those of you who have stuck by your bitcoins, through thick and thin, and always resisted the temptation to pay for something (a pizza? A Tesla?) with your digital currency.

Bitcoin’s resurgence has been by no means without setbacks. While the cryptocurrency is now up about 130% year to date, it has certainly not been a one-way ride. There was that other rally above $60,000 in April, before it more than halved to about $28,000 in June.  

Yet its recent march means that its gains now dwarf those of the general market – the JSE, up 12.6% year to date, or the US’s S&P 500, up 22%. (There are a few surprise crackers on the local market, mind you, like Wesizwe Platinum – a recent spurt takes its gains to 220% for the year – or ArcelorMittal SA, up an astonishing 603% year to date. But I digress.) 

There’s no shortage of “coming of age” articles written over the past year as bitcoin increasingly inserts itself into the financial mainstream, but Wednesday’s rally, to a new record, appears  partly due to the launch of the first bitcoin exchange traded fund, the ProShares Bitcoin Strategy ETF, which made its debut on the New York Stock Exchange.

Not just a vanilla ETF, it’s a bitcoin derivatives ETF – in other words, an ETF that aims to make money from futures contracts linked to bitcoin.

Then there was the CNBC interview with Daniel Ivascyn, chief investment officer at bond market goliath Pimco, in which he said they’d be upping their cryptocurrency investments.

“This will be a gradual process where we spend a lot of time on the internal diligence side speaking to investors. And we’ll take baby steps in an area that’s rapidly growing,” he said. 

But back to the futures ETF. As you may expect, the polarising bitcoin is probably even more divisive when you throw a futures contract into the mix.

As the FT’s Robert Armstrong wrote on Wednesday (in an article titled “Bitcoin ETFs should not exist” – so no confusion where he’s coming from), “I’m sure this is good news for someone, but on the face of it, it is hard to imagine a less appealing financial product”. 

The reason, he says, is that Bitcoin Strategy “provides an expensive way to capture some of the beta in a market, which it would be easy to capture, more efficiently, another way. The annual fee is 1%. It draws its exposure to changes in bitcoin’s price from short-term bitcoin futures contracts, meaning that it has to regularly sell expiring contracts and buy new ones. Because the longer-term contracts are usually more expensive than the shorter ones, rolling the contracts over creates a drag on performance that, it has been estimated, could run to 5%-10% annually. The chances that the ETF will perform nearly as well as bitcoin are very low.” 

Armstrong also asks why the US Securities & Exchange Commission (SEC) has approved a bitcoin futures ETF before giving the go-ahead for a plain old ETF.

“I’m not sure what the answer to this is, but it seems to be that bitcoin scares the SEC, because God knows where it originates (in a server farm somewhere in China?), who holds most of it (cyberbaddies?), what it is used for (illegal activity?), or what risks it may entail (hacking? Fraud?). Bitcoin futures, by contrast, are created and traded within the confines of the CME, under the watchful eye of the Commodity Futures Trading Commission, in the upstanding American city of Chicago. Now, it seems to me that any derivatives market should have all the risks of the underlying cash market and more. But then I’m not a financial regulator.”

In a nutshell, Armstrong would rather buy the actual coin on any of the many exchanges worldwide – including SA’s Luno.

If you can access the FT, it’s a good read and you can find it here.

Another sceptical Armstrong – Ben, the founder of BitBoy Crypto – told Forbes writer Charles Bovaird: “Spot bitcoin that has to be settled in bitcoin is far more bullish than futures settled on paper.” However, he went on to say: “But don’t let that take the shine off a futures ETF as a whole. This is a paradigm shift. And it’s giving old-school investors that chance to have exposure to bitcoin.” 

Indeed, say some analysts, if you’re not going to be mining bitcoin, or buying the “physical” currency, buying funds that invest in crypto or ETFs are probably the best route in for first-time investors. And simply having more avenues to buy means demand should continue to grow. A win for everyone, it seems.

Talevi is editor of the FM’s Money & Investing section