In January, US regulators approved spot Bitcoin ETFs to begin trading publicly in the United States. These funds have made investing in Bitcoin far more accessible, as investors can now easily buy and sell shares tied directly to the price of BTC from their ordinary brokerage accounts.
Among the largest of these new Bitcoin ETFs is the iShares Bitcoin Trust ETF (IBIT). With a new cryptocurrency bull market seemingly on the horizon, is now a good time to buy into IBIT or a similar fund?
Looking at iShares Bitcoin Trust
IBIT is a large Bitcoin ETF managed by BlackRock. The fund’s current net assets total $17.74 billion held entirely in Bitcoin.
At the time of this writing, the fund held just under 275,000 Bitcoin. There are 481.9 million shares of IBIT outstanding, making for an approachable price of just $36.80 per share.
One downside to IBIT and other Bitcoin ETFs is their relatively high fee rate. IBIT, for instance, charges a sponsor fee of 0.25%.
This is far from a huge sum, but it’s much higher than what investors would usually see in stock market ETFs. Vanguard’s flagship VOO S&P 500 ETF, for instance, carries an expense ratio of just 0.03%.
Bitcoin ETFs Have Become a Self-fulfilling Prophecy
When looking at spot Bitcoin ETFs like IBIT, it’s interesting to note the effect the funds themselves may well have had on the price of Bitcoin.
Spot ETFs started trading in the US on January 11, and between then and early April the price of BTC rose by more than 45%.
Spot ETFs have given investors a new and more straightforward way to buy Bitcoin. They also appear to have appealed to institutional investors, as the approval of Bitcoin ETFs coincided with a surge of orders in excess of $100,000.
This surge in demand is only compounded by Bitcoin’s recent halving. As part of an ongoing process by which adding to the supply of Bitcoin is made progressively more difficult, the cryptocurrency’s block reward was cut in half on April 19.
More than 93% of the 21 million maximum Bitcoin supply has already been mined, meaning that from this point forward the supply will grow at an extremely slow rate.
This combination of much slower supply growth and peaking demand creates the conditions for an upward price spiral. In a sense, a combination of timing and stimulated demand have turned Bitcoin ETFs into self-fulfilling prophecies where returns are concerned. The question, though, is whether prices will remain permanently elevated or if the market will eventually correct.
The Underlying Problem of Bitcoin’s Value
Although Bitcoin ETFs have undoubtedly driven higher demand for the cryptocurrency at a time when it will become more difficult to mine, there is still a fundamental argument about the actual value of Bitcoin itself as an investment.
Shortly after Bitcoin ETFs began trading, JPMorgan Chase CEO Jamie Dimon reiterated his view that the cryptocurrency was fundamentally worthless.
That sentiment has also been espoused by noted investor Bill Ackman, who in 2021 stated his belief that cryptocurrencies as a whole had no intrinsic value.
Value investors have signed off on this argument with no greater detractor than Warren Buffett, who famously observed, Bitcoin fundamentally produces nothing.
Those putting money to work rely on other investors to eventually pay a higher price for Bitcoin to earn profits, rather than valuing the currency on its ability to generate cash flows. As such, despite a global market capitalization that is now well over $1 trillion, Bitcoin remains a speculative investment that isn’t backed by intrinsic worth.
That said, there are also plenty of bullish voices talking Bitcoin up. Among these are Cathie Wood and Elon Musk. Wood, known for high-flying valuation targets on tech stocks, sees BTC eventually going to $3.8 million.
Musk hasn’t issued a price target, but he has called for more use of crypto by actual businesses. These two investors may not carry the weight of Buffett and Dimon, but they do showcase the thinking of younger, more tech-heavy buyers and investors when it comes to putting money into Bitcoin.
Is IBIT a Smart Investment?
Although surging demand from Bitcoin ETFs has driven prices up, there are already early signs that the good times may be wavering. At the time of this writing, Bitcoin spot ETFs were experiencing their second consecutive day of major outflows.
Total outflows exceeded $200 million, suggesting a turnaround in investor sentiment on Bitcoin. It should be noted, though, that this outflow pales in comparison to the $12 billion investors have sunk into spot ETFs since January.
That said, there is still room for Bitcoin to move upward. Supply and demand fundamentally support higher prices as long as the new ETFs keep investors coming to Bitcoin.
This isn’t, of course, an argument in favor of Bitcoin’s actual value. Rather, it’s an observation of how market forces dictate asset prices.
Even if Bitcoin ultimately corrects in the long run, it seems very likely that the coin’s run as a popular investment asset isn’t quite over yet. With a pullback Bitcoin certainly has the potential to rise for several months or years to come.
Furthermore, Bitcoin has historically managed to advance in spite of bearish assurances that the cryptocurrency’s collapse is just around the corner.
BTC set a new record of $73,750 in March, though it has shed nearly $10,000 since then. Given the correction and the combination of factors pointing to higher prices down the road, though, now may be a good time for investors to buy Bitcoin.
At the end of the day, Bitcoin is still a risky and intrinsically shaky investment. Investors who are risk-tolerant and reasonably bullish on cryptocurrency may want to take small positions in a Bitcoin ETF like IBIT to capture potentially outsized short-term gains.
These investors should, however, remain aware that Bitcoin may not have the ability to deliver compounded returns over multiple decades in the way stocks historically have.
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