News, Views & Truths (25/10/21)

Published on: October 25, 2021

Hello everyone. I hope you have all had a thoroughly refreshing weekend and are ready to grasp the working-week-nettle with the utmost vigour. Let us celebrate this with this week’s News Views and Truths.

Cryptocurrencies took another step towards being recognised as a mainstream asset with the launch last week of the first Bitcoin futures exchange-traded fund (ETF), allowing investors to buy and sell the performance of the cryptocurrency without the need to trade on digital currency exchanges.

The Proshares Bitcoin Strategy ETF attracted $550 million flow into the product on its day of release, highlighting the huge demand for accessing the asset and pushing the price of Bitcoin to an all-time high of $66,900 on Wednesday of last week, passing the previous intraday record of $64,899 from mid-April this year.

So, what does this all mean? Well, first off, we need to look at the shareholding base for a direction of travel.  Data shows that retail investors accounted for only 15% in the first two days of trading, highlighting significant institutional interest. And this demand could lead to a flurry of products bringing the largely unregulated crypto markets to global indices.

The Securities and Exchange Commission (SEC), which regulates US markets, have allowed this development, as the ETF holds futures contracts traded on the Chicago Mercantile Exchange, a fully and wholly regulated venue, rather than trading the digital asset outright. And this could be an issue…

An ETF that relies on the futures can become dislocated from the asset it is supposed to track; an easy example would be an oil ETF. One reason for this is known as “roll cost”, where the underlying fund manager shifts to new futures contracts on the expiration of the previous future. 

If the market expects the underlying asset price to rise, the futures price would be higher than the current “spot” price and as such, the additional costs incurred would result in the ETF lagging the price of owning the asset directly.

And that is why several asset managers are already pushing the SEC to allow Bitcoin spot price ETFs; Invesco has announced it will focus on gaining approval for an ETF that directly holds digital tokens, while Greyscale Investments announced its plans to convert its $40bn Bitcoin Trust, the world’s biggest crypto investment fund, into one which will own the digital asset outright.

Dave LaValle, global head of ETFs at Grayscale stated, “ultimately the goal is that investors should have a choice between ETFs that are futures and physical bitcoin-based.”

However, that is likely some way away.  The SEC wants to see the spot crypto exchanges come under regulatory scrutiny and rules, moving away from the “Wild West” tag that they currently hold.  And to move towards this, SEC chair Larry Gensler has already called on US lawmakers for powers that would allow for ultimate oversight on crypto trading platforms, requiring them to register directly with the regulator.

However, there is no doubt that this is the first step towards digital asset legitimisation. But the question that I have is, what on earth are you supposed to do with it?

Eagle-eyed readers will note that I have not referred to the asset as a currency, as it’s just simply not one. Fancy getting paid in crypto?  It’s all when and good when the asset is racing away, but the reverse can and does happen.

So, in my eyes, it is easier to refer to Bitcoin and other crypto’s, as a digital commodity, the price of which is driven by supply and demand, in the same way as physical commodities.

Now once we have come to that realisation, it is a lot easier to rationalise its potential position within a portfolio and the diversification benefits that its inclusion can bring. And despite commentary referring to crypto as the “new gold”, it isn’t.

Adding gold to a portfolio increases diversification, but the volatility, over time is dampened. The addition of crypto does the exact reverse and as such, investors need to go into this potential trade with their eyes wide open. 

It is the purest form of the investment hive mind; influenced solely by flows and demand, hence, I would suggest, many crypto commentators almost zealot-like positivity on the phenomena, knowing that, as long as the hype train and positive commentary continues, money will flow, pushing demand up and increasing the price.  

But when it stops, it doesn’t just go into reverse.  It falls off the tracks. Choo-choo. 

This week, across both Three Counties and Greaves West and Ayre, we have sent out to all our investment clients recommendation letters to rebalance their advisory investment portfolios for the coming year.  I have produced a video, detailing these changes and the rationale for each in a video which can be watched here  

Naturally, if you have any questions regarding your personalised letter, get in touch with your usual adviser and they will answer any of your questions.  And if you want to talk through anything with me, please do not hesitate to get in touch.

That’s it for another week; stay safe and I will see you all next week, if not before.

Want to know more?