Bloomberg reports brisk trading in North America’s first publicly traded bitcoin exchange traded fund (ETF). Around $165m (£117m) worth of securities changed hands on 18 February, the first day of trading for Purpose Bitcoin ETF (BTCC). It came as the price of the flagship digital currency hit a record $58,092, as a growing number of corporate treasurers and institutional investors have given explicit or implicit support, perhaps most significantly, JPMorgan Chase & Co, given the investment house’s previous reluctance to provide either.
Doubtless some investors – those who approach the stock market as they might a day out at Kempton Park Racecourse – might feel aggrieved that they have missed out on the opportunity of a lifetime. Yet at the risk of mixing metaphors, they may well have dodged a bullet instead.
Only time will tell, but I have always felt that the rise of bitcoin is mainly symptomatic of US dollar debasement, and has all the hallmarks of an asset bubble. Its adherents suggest that it affords an effective hedge if inflationary pressures continue to crank up. They would also cite its growing acceptance by certain institutions and high-profile individuals. Yet, even if it acts as an effective store of value (a highly contentious claim), the volatility that we have witnessed over the past year – and at many points since its inception – renders the digital currency virtually unworkable as a practical means of exchange.
The main problem, as far as I can see, is that the dramatic price increases we have witnessed may have been predicated on relatively low volumes. Lowly volumes and wider spreads can have an outsize – and distorting – impact on prices. It might be straightforward enough to aggregate volumes for an ETF, but rather less so for the underlying asset when it happens to be a cryptocurrency.
On the face of it, you would imagine that the open, distributed ledger system that underpins the trade in bitcoin would aid transparency. However, liquidity is divided among many competing exchange venues, some of which employ volume data as a marketing tool. Admittedly, it seems likely that we have witnessed a surge in trading volumes since the end of last year, but it is in the vested interests of crypto exchanges, data aggregators, and holders of bitcoin itself to push the liquidity angle.
The investing public may get a better idea of the infrastructure supporting the trade once shares in crypto platform Coinbase (US:CBASE) graduate from Nasdaq’s Private Market to the public sphere, possibly in the early part of March. The company has been around for nearly a decade, and is the largest exchange in the US when measured in terms of traders – around 43m globally at last count.
The company’s primary source of revenue comes from the commission it charges each time somebody trades a cryptocurrency. While we are seeing a greater number of entrants to the market, Coinbase offers a wider selection of cryptocurrencies than some other competitors, along with access to margin trading, another source of revenue and an important determinant where active (and institutional) investors are concerned. There is also a ‘Prime’ service offering, pitched at brokers, exchanges and fintech companies, which provides simplified access to the market.
It is one of the most eagerly awaited initial public offerings in the early part of 2021, but it has not gone down the traditional road of allowing investment banks to assign an opening value. However, traders in cryptocurrencies may measure its real value in the way that a publicly traded platform serves to normalise trade in the instruments – at least for now.