Money & Banking

Bitcoin and why its value has rocketed once again

PTI London | Updated on October 23, 2021

The cryptocurrency soared past its all-time high of $64,895 to the new record of $66,975 following the launch of an ETF

Bitcoin’s journey into mainstream finance has reached another major milestone – and another record price.

The cryptocurrency was trading at $66,975 (₹50,22,689) following the launch of an exchange traded fund (ETF) in the US which has dramatically increased bitcoin’s exposure to investors.

ETF fund

The fund, which opened on October 19, allows investors to speculate on the future value of bitcoin without actually owning it. It is the first time investors have been able to trade an asset related to bitcoin on the New York Stock Exchange, and was preceded by much media attention and hype in financial markets.

It began trading at $40 (₹3,000) a share and finished the day up 5 per cent with some $570 million (₹4274.62 crore or ₹42.7462 billion) of assets, making it the second most heavily traded new ETF on record (the first was set up by BlackRock, the world’s biggest asset management company).

Also see: Bitcoin edges off all-time high

And the impact on the price of bitcoin has been extraordinary. It soared past its all-time high of $64,895 to the new record of $66,975 and at the time of writing, was hovering around $65,000. This is a big change from mid-July 2021, when bitcoin hit a 2021 low of under $30,000, reflecting its huge volatility.

Crypto trading on a regulated market

Many financial institutions have previously tried to get approval for bitcoin ETFs without success. Until now, the Securities and Exchange Commission (SEC), the US government agency which protects investors, has been reluctant to approve any. This was partly due to the intense volatility of bitcoin, as well as broader concerns about the unregulated industry of cryptocurrencies.

But Gary Gensler, Chair of the SEC, said the commission would be more comfortable with “future-based” ETFs because they trade on a regulated market. This is a significant change of direction for the SEC which has happened since Gensler arrived at the helm in April 2021.

ETFs trade like any normal stock, are regulated, and anyone with a brokerage account can trade them. This new fund, named the ProShares Bitcoin Strategy ETF (or BITO for short), is the first to expose mainstream investors to the highs and lows of bitcoin’s value, without them having to go through the complex process of purchasing the coins themselves.

Also see: CoinDCX launches crypto trading facility for institutional investors

Although US investors could already buy bitcoin futures directly from the regulated Chicago Mercantile Exchange and unregulated exchanges such as BitMEX (as well as bitcoin directly from unregulated exchanges), the launch of an ETF opens up the market to a wider variety of investors, including pension funds — and adds to the growing acceptance of bitcoin in the financial markets.

Diverse opinions

Some are still sceptical of bitcoin due to its link with criminal activity, although a recent report suggests this seems to be diminishing. And Jamie Dimon, the CEO of investment bank JP Morgan, claims bitcoin is “worthless” and that regulators will “regulate the hell out of it”. Nevertheless, JP Morgan gave its wealth-management clients access to cryptocurrency funds in July 2021.

Banking blockbuster Eric Balchunas, a senior analyst at Bloomberg, is not surprised by the price appreciation and described the ETF launch as “a blockbuster, smash, home run debut (which) brings a lot of legitimacy and eyeballs into the crypto space”.

BITO and cryptocurrency

But what impact will BITO have on the cryptocurrency space? As a new product, it has already exposed more investors to the ups and downs of bitcoin’s value in a regulated market. Many of these are likely to have previously felt uncomfortable buying cryptocurrencies from unregulated exchanges and having to store the asset themselves.

Also see: Crypto users see the light at the end of the tunnel

Other investment funds with an interest in cryptocurrencies will be no doubt be encouraged by BITO’s success, and keen to list ETFs of their own which are exposed to bitcoin and its rivals. Several other ETF providers are likely to launch their bitcoin ETFs in the days following ProShares’ debut, including Invesco, VanEck, Valkyrie and Galaxy Digital.

It is a development which is bound to make investing in cryptocurrencies easier and more common — and an important stepping stone for their adoption into mainstream finance.

Author Credit: Andrew Urquhart, Professor of Finance & Financial Technology, ICMA Centre, Henley Business School, University of Reading, London

Published on October 23, 2021

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