How sensible investors should approach the Bitcoin saga

Bitcoin remains unregulated. Lest we forget, that is sort of its point. But through gritted teeth, the high sheriff of global financial markets has given the green light to bitcoin-focused products that provide “full, fair, and truthful” disclosure, concluding that monitoring of cash trading, futures contracts and social media would be sufficient to detect fraud and manipulation on registered exchanges.

However, in a messy twist, the SEC stopped short of endorsing the storage and security of bitcoins, also known as custody arrangements. A non-approval wrapped in an approval, then.

On contact with the real world, such nuance is primed for instant evaporation. Enthusiasts now have what looks very much like a trump card to play. If they haven’t already done so, the ardent will be letting anyone who ever doubted them know of their errors, while proselytising to would-be converts with renewed zeal. Bitcoin, many will claim, is now legit.

And who really can blame them? Straight out of the bag, BlackRock, Invesco and Fidelity have launched their spot bitcoin ETFs, and are now firmly in the crypto-punting game. In an arena built on unreality, that all feels quite real and meaningful.

Is this evidence of regulatory co-option? A route to taxation? Perhaps. But today, these questions are secondary to a sudden and major market expansion. What matters is that US retail investors can get cheap exposure to the spot price by walking through the front door of the world’s largest asset managers, without worrying about crypto wallets, wide bid-offer spreads or buying stablecoins.

At this point, it feels fruitless to re-litigate bitcoin’s merits as an asset, in large part because they don’t exist. It can’t be a currency. Its scarcity confers no value. Dubious promises of its powering a renewable energy revolution don’t negate its truly calamitous environmental footprint.

Of more immediate concern – especially for the millions of investors who have looked askance at this mania for a decade or more and taken a pass on its volatility and Ponzi-adjacent qualities – is what to do now. A bubble this may be. But it gets harder to look past a bubble that, whatever the intentions, is now being inflated by the grown-ups in the room.

And infuriating though it may be, the adage about markets’ ability to remain irrational longer than you can remain solvent still holds. What, then, might come next?

To the seers at Standard Chartered, inflows to ETFs could hit $100bn in 2024. Lest this seem a smart reason to go long, BlackRock (US:BLK) – which fired the price war starting pistol with a 25 basis point charge on its own spot product – it’s even harder to ignore the bank’s other big forecast here, which is that the approaching tsunami of buying might serve to push its price to $200,000 by the end of 2025, more than four times the current level.

Bitcoin has already had a very good run of late, roughly tripling in price since the collapse of crypto exchange FTX in late 2022, thereby outstripping returns from gold, bonds, and pretty much any stock bar the likes of Rolls-Royce (RR.) or Nvidia (US:NVDA). Fifteen years after it was first traded, bitcoin continues to make a lot of people wealthy. When that happens, it matters little to the average speculator if the biggest beneficiaries are now-jailed fraudsters posing as utilitarians, Winklevii, genuine mobsters, or asset custodians managing trillions of dollars of pension fund money.

Instead, the unvanquished itch once again cries out to be scratched. Do you give in?

For many in the UK, the question is unlikely to be deterred by the lack of a comparative ETF D-day. The Financial Conduct Authority (FCA), having quietly resisted Rishi Sunak’s desire to make Britain a “crypto hub” by repeatedly highlighting those crypto risks, has shown no sign it will follow the US’s lead. It would be an odd look, in the context of evolving consumer duty rules, to join the party now.

Regardless, the existence of online exchanges makes it relatively easy for anyone buying and selling outside the SEC’s jurisdiction to trade on the news of the SEC’s approval.

And here, at the 11th hour, comes another – could it be the final? – fear of missing out (FOMO) test. Because if proper investment banks such as Standard Chartered are in the prediction game (as it happens, the bank came close to calling bitcoin’s 2023 finishing price correctly), then perhaps it is finally time to wake up and smell the coffee. Even if you think the coffee beans in question are putrid.

Cynicism is certainly a powerful form of rationalisation. In fact, with the latest bout of bitcoin euphoria, it may even be that cynicism is about to overtake greed as bitcoin’s dominant price driver.

Whichever it is, it ain’t the promise of technological disruption. Not so long ago, a vague battle line was drawn between the boosters and the naysayers whose warnings of doom-laden parallels were “dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present”, to quote John Kenneth Galbraith. But if spot ETFs are good because they are merely a means for more speculation to happen, then we can at least move past the utopian claims about bitcoin mounting a challenge to fiat currencies.

Better, maybe, to reduce everything to a cynical level playing field. After all, isn’t quite a lot of consumption – and therefore demand – equally meaningless or damaging? Do Hermes (FR:RMS) investors hold some sort of moral upper hand for indirectly supporting the makers of £20,000 handbags? If a share in British American Tobacco (BAT) represents a stake in the demand for products that cause obvious harm, then is it worse than a bitcoin?

The cynic doesn’t require obviously morally contentious cases. In recent years, for example, a good chunk of the iron ore demand that made bucket loads of cash for investors in Rio Tinto (RIO) and BHP (BHP) has ended up in white elephant projects in China. Putting aside questions of environmental harm and waste, did those investors care more about the ultimate source and utility of that demand, or the profit it might bring? If the latter, then is this not speculation? Follow this winding logic of whatabouttery, and you might soften on the idea of a bitcoin punt.

Sensible-sounding (if questionable) compromises suggest steering up to 5 per cent of your capital into bitcoin, and leave it be. Only, what happens if 2024 ends, Standard Chartered’s $120,000 price call is met, and that 5 per cent is suddenly 15 per cent of your portfolio? Do you calmly top slice your holding, ignoring the voice telling you you’ve left most of those massive 2025 gains on the table? Long-held principles could soon get complicated, or even unmoored.

Don’t mistake this as an argument against risk. Some risks are mispriced, some are backed by assets or margins of safety, and others are dumb. If you’re the kind of person who thinks carefully about their finances, thumbs through the Investors’ Chronicle each week, and finds themselves frowning at the idea of perpetual triple-digit annual returns, you likely know this.

But knowing and following through? Your own capacity for deferred gratification – be it genetic or self-taught – might be enough to screen out this noise and pass the test. Good luck.