The approval of cryptocurrency ETFs does not change the nature of this asset, whose high volatility will continue to attract mainly speculation-seeking investors. For Sure?
Can the SEC turn Bitcoin into Gold? The bitcoin’s price spike following the decision by the U.S. Securities and Exchange Commission (SEC) to approve 12 exchange-traded funds (ETFs) of this crypto asset may seem like a surprise or a contradiction. It is another example of the limits of any authorization, whether administrative or regulatory. The cryptocurrency, which fell 9% in the ten days following the SEC’s decision and is struggling to get its head above $40,000, began 2024 with a 160% revaluation behind it after 2023, in which it was once again among the most valuable assets. Much of this rally, which took the price to $47,000, was fueled by expectations about the SEC’s decision, to the point that some analysts were venturing that the approval of bitcoin exchange-traded funds would cause the price of the asset to increase fivefold in less than 12 months.
Regulation and asset value
Everything points to a cause-effect relationship between the market regulator’s approval and the asset’s valuation, all the more so when managers of the weight of BlackRock also decided to throw their hat into the ring. For investors reluctant to invest in such a volatile asset, the prospect of doing so through an exchange-traded fund could remove a psychological barrier, reduce fears, and make the decision easier.
However, the fact that the SEC has given the green light to bitcoin exchange-traded funds does not change the nature of this crypto asset, whose high volatility will continue to attract mainly speculative investors while hindering any possibility of maintaining purchasing power with some temporary stability, which is usually the goal of the retail investor. Its limited usefulness as a hedge against other assets and the fact that it does not have a history and tradition capable of generating confidence, as with gold.
Today, bitcoin’ has a limited use as a currency. Various scandals and frauds obscured its reputation as an investment asset. Despite this, we cannot explain the price crash following the SEC’s decision by the fears of retailers but rather by the absence of institutional investors. Some voices predict that we must wait for the European MiCA regulation. But as of today, the only thing that seems clear is that no regulator can convert Bitcoin into gold, for example, and that the volatility of the cryptocurrency will continue to condition the investor.
Bitcoin eclipses investment assets like gold
According to research by the Ark Invest firm, bitcoin’s performance over the last seven years far exceeds that of other assets. A recent report published by U.S. investment management firm ARK Invest highlights the virtues of bitcoin (BTC) as an investment asset. According to ARK’s research, the annualized return of the digital currency far exceeds that of other assets such as gold, real estate, bonds, commodities, and stocks.
The report data indicate that the average return of Bitcoin over the last seven years is around 44% above the 5.7% recorded by the other assets analyzed in the study. They consider Bitcoin has outperformed all leading assets, making Bitcoin “an independent asset class worthy of a strategic allocation in institutional portfolios“. Ark’s researchers say this performance should be a priority beyond the questions raised by Bitcoin’s volatility, which “can obfuscate the long-term view.” They thus consider that, although a BTC depreciation of BTC can occur in the short term, a long-term investment horizon is crucial in deciding to buy the cryptocurrency. They refer to the ups and downs in price that Bitcoin experiences daily. Evaluating the historical graph of bitcoin’s value over the last seven years, you’ll appreciate how BTC went from trading at $1,000 in 2017 to trading near $42,000 in 2024.
Bitcoin’s value over the long term
“Rather than when, the better question for an investor to ask is how,” Ark points out. He adds that, historically, investors who bought and held bitcoins for at least five years have made a profit, regardless of when they initially made their purchases. Considering the volatility and return profiles of other traditional assets, ARK’s research suggests putting together an investment portfolio.
They calculate that a portfolio seeking to maximize risk-adjusted returns would have allocated 19.4% to Bitcoin in 2023. The suggestion represents an increase of more than double the 6.2% Ark determined for 2022. The company raised every year the proportion that, in its opinion, you should allocate to Bitcoin in your investment portfolio.
In this regard, the report concludes that if institutional investors were to allocate 19.4% of their portfolios to bitcoin, the price would surge significantly higher. Their estimates point to $2.3 million. Even if they assign a smaller allocation of 4.8%, BTC would be worth around $550,000. Ark projects the price would reach $120,000 if it were 1%. In this way, bitcoin could be essential in maximizing risk-adjusted returns.