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Why Bitcoin ETFs May Outperform Gold ETFs in the Long Run

Why Bitcoin ETFs May Outperform Gold ETFs in the Long Run

Gold and bitcoin are often compared as alternative assets that can hedge against inflation, currency devaluation, and geopolitical risks. Both have limited supply, global demand, and no central authority. Both have also attracted the attention of investors who seek to diversify their portfolios and gain exposure to the potential upside of these assets.

However, gold and bitcoin are not the same. Gold has a long history of being used as a store of value and a medium of exchange, while bitcoin is a relatively new invention that relies on cryptography and blockchain technology. Gold is tangible and physical, while Bitcoin is digital and virtual. Gold is widely accepted and regulated, while bitcoin is still controversial and volatile.

These differences have implications for the performance and prospects of gold and bitcoin exchange-traded funds (ETFs), which are investment vehicles that track the prices of these assets and allow investors to buy and sell them on stock exchanges. Gold ETFs have been around since 2003, and have grown to more than a $200 billion industry in 2023, with SPDR Gold Shares (NYSE:GLD) being one of the largest. Bitcoin ETFs, on the other hand, have only been approved and launched in the U.S. in January 2024, after years of rejections and delays by the Securities and Exchange Commission (SEC). As of January 13, 2024, there are 19 bitcoin ETFs trading, with ProShares Bitcoin Strategy ETF (BITO) being the first and the largest fund.

In this article, I will argue that bitcoin ETFs may outperform gold ETFs in the long run, based on the following reasons:

  • Bitcoin has a higher growth potential and scarcity than gold
  • Bitcoin ETFs have lower fees and higher returns than gold ETFs
  • Bitcoin ETFs have more innovation and diversification than gold ETFs

Bitcoin has a higher growth potential and scarcity than gold

One of the main drivers of the value of gold and bitcoin is their scarcity, which means that their supply is limited and cannot be easily increased. Gold has a finite amount of 190,040 metric tons that can be mined from the earth, of which about 80% has already been extracted. Bitcoin has a fixed supply of 21 million coins, of which about 19 million have already been mined. However, the rate of new supply of gold and bitcoin is not the same. Gold production has been declining in recent years, due to the depletion of reserves, the rising costs of mining, and the environmental and social impacts of the industry. Bitcoin production, on the other hand, is predetermined by an algorithm that halves the reward for miners every four years, until the last bitcoin is mined around 2140. This means that the annual inflation rate of gold is around 1.5%, while the annual inflation rate of bitcoin is around 1.8% and will drop to zero in the future.

This difference in supply dynamics has implications for the demand and price of gold and bitcoin. Gold demand is mainly driven by jewellery, investment, and central bank purchases, which are influenced by factors such as income, wealth, interest rates, inflation, and geopolitical events. Bitcoin demand is mainly driven by speculation, adoption, and innovation, which are influenced by factors such as technology, regulation, network effects, and social sentiment. While both gold and bitcoin have seen increased demand in recent years, due to the global economic and health crisis, the stimulus measures, and the low interest rates, bitcoin has shown faster and stronger growth than gold, due to its novelty, accessibility, and potential. According to the World Gold Council, the annual average gold price rose from $1,481 per ounce in 2019 to $1,769 per ounce in 2020, and then to $1,794 per ounce in 2021, representing a cumulative increase of 21.1%. While data on CoinMarketCap shows that the annual average bitcoin price rose from $7,344 per coin in 2019 to $11,449 per coin in 2020, and then to $46,788 per coin in 2021, representing a cumulative increase of 537.1%.

These trends suggest that bitcoin has a higher growth potential and scarcity than gold, which could translate into higher returns for bitcoin ETFs than gold ETFs in the long run. While gold has a more established and stable market, bitcoin has a more disruptive and dynamic market, which could offer more opportunities and rewards for investors who are willing to take more risks and embrace more changes.

Bitcoin ETFs have lower fees and higher returns than gold ETFs

Another factor that affects the performance of gold and bitcoin ETFs is their fees and returns, which reflect their costs and benefits. Fees are the expenses that investors pay to the fund managers for managing and operating the ETFs, which reduce the net returns that investors receive from the ETFs. Returns are the profits or losses that investors earn or incur from the ETFs, which depend on the price movements of the underlying assets and the dividends or distributions that the ETFs payout.

Generally speaking, bitcoin ETFs have lower fees and higher returns than gold ETFs, which could make them more attractive and profitable for investors. Based ETF Database, the average expense ratio of the 10 gold ETFs trading in the U.S. is 0.42%, while the average expense ratio of the 17 bitcoin ETFs trading in the U.S. is 0.33%. This means that bitcoin ETFs charge less fees than gold ETFs for providing the same service of tracking the prices of the assets. Moreover, according to ETF.com, the average year-to-date return of the 10 gold ETFs trading in the U.S. is -0.76%, while the average year-to-date return of the 17 bitcoin ETFs trading in the U.S. is 7.54%. Again, this means that bitcoin ETFs have generated more profits than gold ETFs for the same period.

These differences in fees and returns can have a significant impact on the long-term performance and compounding of gold and bitcoin ETFs. For example, assuming an initial investment of $10,000 and an annualized return of 7% for both gold and bitcoin ETFs, but a difference of 0.1% in expense ratio, the gold ETF with a 0.4% expense ratio would grow to $38,696 after 20 years, while the bitcoin ETF with a 0.3% expense ratio would grow to $39,346 after 20 years, representing a difference of $650 or 1.7%. This gap would widen even more if the difference in expense ratio or the difference in return is larger.

Therefore, bitcoin ETFs have lower fees and higher returns than gold ETFs, which could make them more attractive and profitable for investors in the long run. While gold ETFs have lower volatility and risk than bitcoin ETFs, bitcoin ETFs have lower costs and higher rewards than gold ETFs, which could outweigh the trade-offs for investors who have a longer time horizon and a higher risk tolerance.

Bitcoin ETFs have more innovation and diversification than gold ETFs

A third factor that affects the performance and prospects of gold and bitcoin ETFs is their innovation and diversification, which reflect their variety and quality. Innovation is the process of creating and introducing new products and services that meet the needs and preferences of customers and markets. Diversification is the strategy of investing in different types of assets and sectors that have low or negative correlation with each other, which can reduce the overall risk and volatility of a portfolio.

Generally speaking, bitcoin ETFs have more innovation and diversification than gold ETFs, which could make them more competitive and resilient for investors. While doing research, I spoke to a gold ETF analyst last week and he based on his point of view and shared the following with me. The gold ETFs trading in the U.S. have only two types of strategies: physical gold ETFs, which hold gold bullion in vaults, and gold miner ETFs, which invest in stocks of companies that mine and produce gold. These ETFs have similar characteristics and performance and are highly correlated with each other and with the gold price. The average correlation coefficient of the gold ETFs trading in the U.S. is 0.94, which means that they move almost in the same direction and magnitude.

On the other hand, the bitcoin ETFs trading in the U.S. have four types of strategies: spot bitcoin ETFs, which hold bitcoin directly in custody, futures bitcoin ETFs, which invest in bitcoin futures contracts, short bitcoin ETFs, which bet against the decline of bitcoin futures, and blockchain and bitcoin ETFs, which invest in stocks of companies and other ETFs with exposure to cryptocurrency and blockchain technology. These ETFs have different characteristics and performance and are less correlated with each other and with the bitcoin price. The average correlation coefficient of the bitcoin ETFs trading in the U.S. is 0.77, which means that they move somewhat in the same direction and magnitude, but not always.

These differences in innovation and diversification can have a significant impact on the long-term performance and stability of gold and bitcoin ETFs.

Bitcoin ETFs have more innovation and diversification than gold ETFs, which could make them more competitive and resilient for investors. For example, spot bitcoin ETFs, such as BlackRock (NYSE:BLK) Bitcoin Strategy ETF (BTCR) and VanEck Bitcoin Trust (XBTF), offer the most direct and simple way to invest in bitcoin, as they track the spot price of bitcoin and hold bitcoin in custody with qualified custodians, such as Fidelity Digital Assets and Coinbase (NASDAQ:COIN) Custody. Futures bitcoin ETFs, such as ProShares Bitcoin Strategy ETF (BITO) and Valkyrie Bitcoin Strategy ETF (BTF), offer a more indirect and complex way to invest in bitcoin, as they track the futures price of bitcoin and invest in bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME), which are cash-settled and do not involve the delivery of bitcoin. Short bitcoin ETFs, such as Simplify Short Bitcoin Strategy ETF (SBTC) and Direxion Daily Bitcoin Bear 1X Shares (BITD), offer a way to profit from the decline of bitcoin, as they track the inverse of the futures price of bitcoin and invest in short positions of bitcoin futures contracts traded on the CME. Blockchain and bitcoin ETFs, such as Amplify Transformational Data Sharing ETF (BLOK) and Bitwise Crypto Industry Innovators ETF (BITQ), offer a way to invest in the broader cryptocurrency and blockchain industry, as they invest in stocks of companies and other ETFs with exposure to cryptocurrency and blockchain technology, such as Coinbase, MicroStrategy, and Grayscale Bitcoin Trust.

These different types of bitcoin ETFs offer different advantages and disadvantages for investors, depending on their risk appetite, return expectation, and investment objective. For instance, spot bitcoin ETFs have the lowest tracking error and the highest correlation with the bitcoin price, but they also have the highest fees and the highest regulatory uncertainty, as they are subject to the PSA requirements and the potential actions of the SEC. Futures bitcoin ETFs have lower fees and lower regulatory uncertainty, as they are subject to the SFA requirements and the existing rules of the CME, but they also have higher tracking error and lower correlation with the bitcoin price, due to the futures premium, contango, and rollover costs. Short bitcoin ETFs have the potential to generate positive returns when the bitcoin price falls, but they also have the potential to incur unlimited losses when the bitcoin price rises, as well as high fees and high volatility. Blockchain and bitcoin ETFs have the potential to capture the growth and innovation of the cryptocurrency and blockchain industry, but they also have the potential to suffer from the volatility and risk of the stock market, as well as the diversification and dilution of their exposure to bitcoin.

Therefore, bitcoin ETFs have more innovation and diversification than gold ETFs, which could make them more competitive and resilient for investors. While gold ETFs have more simplicity and stability than bitcoin ETFs, bitcoin ETFs have more variety and quality than gold ETFs, which could offer more options and solutions for investors who have different needs and preferences.

Conclusion: Bitcoin ETFs may outperform gold ETFs in the long run

In conclusion, I believe that bitcoin ETFs may outperform gold ETFs in the long run.

While gold ETFs have their own merits and advantages, such as lower volatility, lower risk, and lower correlation with other assets, I think that bitcoin ETFs have more merits and advantages, such as higher growth, higher reward, and higher innovation, which could outweigh the trade-offs for investors who have a longer time horizon and a higher risk tolerance.

I think that bitcoin ETFs are not only a viable alternative to gold ETFs but also a superior one, as they offer more value and opportunity for investors who seek to diversify their portfolios and gain exposure to the potential upside of digital gold.

Source: https://in.investing.com/analysis/why-bitcoin-etfs-may-outperform-gold-etfs-in-the-long-run-200608903

FAQ

Why does the author, Anndy Lian argue that bitcoin ETFs may outperform gold ETFs in the long run?

The author, Mr Anndy Lian argues that bitcoin ETFs may outperform gold ETFs due to Bitcoin's higher growth potential and scarcity, lower fees, and higher returns compared to gold ETFs. Additionally, the author emphasizes the innovative and diversified nature of bitcoin ETFs, suggesting they offer more opportunities for investors.

What factors contribute to the higher growth potential of bitcoin compared to gold, according to the article?

Anndy Lian states that the higher growth potential of bitcoin compared to gold is attributed to the predetermined supply dynamics of both assets. While gold production has been declining, Bitcoin's algorithm-controlled supply and halving reward for miners contribute to its higher growth potential and scarcity.

How does Anndy Lian highlight the cost-effectiveness of bitcoin ETFs over gold ETFs?

Anndy Lian points out that, on average, bitcoin ETFs have lower fees (expense ratios) compared to gold ETFs. The lower fees, coupled with higher returns for bitcoin ETFs, make them more cost-effective and potentially more profitable for investors.

What role does innovation and diversification play in the comparison between gold and bitcoin ETFs?

Anndy Lian suggests that bitcoin ETFs have a competitive edge over gold ETFs in terms of innovation and diversification. Bitcoin ETFs offer different strategies, including spot bitcoin ETFs, futures bitcoin ETFs, short bitcoin ETFs, and blockchain and bitcoin ETFs, providing investors with more variety and potentially better risk management.

How does the author address the potential risks associated with investing in different types of bitcoin ETFs? different types of bitcoin ETFs?oes the author address the potential risks associated with investing in different types of bitcoin ETFs?

Anndy Lian acknowledges that each type of bitcoin ETF comes with its own set of advantages and disadvantages, such as regulatory uncertainty, tracking error, correlation with bitcoin prices, fees, and potential exposure to stock market volatility. The article suggests that investors should carefully consider their risk appetite, return expectations, and investment objectives when choosing among different types of bitcoin ETFs.

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j

Anndy Lian: Why RWA Tokenization is Taking Off

Anndy Lian: Why RWA Tokenization is Taking Off

‘Show Me The Money’

Many companies are tokenizing assets, and while I think that technology is 100% ready — and you can see big banks coming in — there’s one thing that is really missing.

And that’s not just adoption. It’s “how can companies make money?” What is the actual revenue model?

It’s hard because — if we take tokenizing properties as an example — how will an exchange earn money?

Exchanges can only earn money through different products or the number of transactions — but if you’re offering products like a securitized token or a property, you will not get that much trade on a day-to-day basis.

So the way to earn that money is very tough.

There is also a huge liquidity problem. What makes us so sure that if we tokenize that property, someone from the crypto space is willing to pay for the token?

So I think an issue here is how the revenue model can help sustain a company — maybe it is workable for the bigger banks or a large asset manager, but how are the smaller or medium players going to find a reason to buy in?

Right now, I don’t think that property is the best avenue, but maybe commodities are a good target.

So, we need sustainable revenue streams and to not ignore liquidity issues, particularly in tokenizing assets like real estate.

But we are seeing some successes: Art tokenization offers a unique blend of digital and physical value, driving demand and creating new revenue streams.

Successful art tokenization projects such as Oracle Red Bull Racing’s NFTs, and leveraging non-fungible tokens (NFTs) for ownership show the ways to unlock value in the digital art space.

Hype vs Utility of Tokenization

I still think that the whole tokenization sector is largely driven by hype. Still, a smaller percentage of people and companies will look at the technology at a deeper level — to look at how we can reduce fraud and increase the traceability element that the blockchain can offer.

The other outstanding issues are standardization of asset classes and regulation — especially from country to country.

Navigating regulatory complexities is a significant challenge: Without clear guidelines and frameworks — it becomes arduous.

I think tokenization also doesn’t accelerate as fast as we want because a huge percentage of people do not think that tokenizing will be that useful — if they think that the only goal is “tokenize a product”.

People will think in terms of: “Will the property sell well, whether it’s tokenized or not?”

But I always go back to the basics — it’s about traceability, about reducing fraud. If you can use that as the use case (for property, deeds, and so forth) and make it easy to use, then tokenization can revolutionize financial transactions, making them faster, more cost-effective, and transparent.

Trust and the Blockchain

Trust is a fundamental aspect of any financial system. Blockchain technology, with its immutable and transparent nature, has the potential to bring trust, immutability, and integrity to transactions.

Some other key things that need to be considered are:

  • Interoperability is crucial for the widespread adoption of blockchain technology. We need seamless integration between different networks and protocols to unlock its full potential.
  • Decentralization is one of the core principles of blockchain technology. It empowers individuals and reduces reliance on centralized authorities, promoting greater transparency and trust.

And we need to acknowledge the power of smart contracts, which are a game-changer in the realm of decentralized finance (DeFi). They enable automated and trustless execution of agreements, reducing the need for intermediaries and streamlining processes.

The Bottom Line

If we get all of these things working in sync, I believe that tokenization has the potential to democratize access to investment opportunities, allowing individuals from diverse backgrounds to participate in previously inaccessible markets.

It is not just financial systems; blockchain can empower individuals to take control of their personal data and privacy, mitigating risks associated with centralized data storage.

We’re at the early stages of understanding how blockchain and crypto can revolutionize various industries. From supply chain management to healthcare, the potential applications are vast.

Education is key. Many people still view crypto with skepticism or fear due to misconceptions or a lack of understanding. We need to demystify the technology and showcase its potential to drive positive change.

You can see Anndy talking about tokenization in a fireside chat with Faraj Abutalibov, Chief Commercial Officer of the Venom Foundation, at the World Tokenization Summit, held in Dubai last November:

 

Fireside chat with Anndy Lian at World Tokenization Summit, Dubai

 

 

Source: https://www.techopedia.com/anndy-lian-why-rwa-tokenization-is-taking-off

FAQ

How can companies generate revenue through asset tokenization, especially in industries like real estate?

Anndy Lian's response to the question: Companies can generate revenue through various products and increased transaction volumes. While tokenizing properties might face liquidity challenges, offering unique products like securitized tokens or exploring commodities can open up new revenue streams. Successful examples include art tokenization, where the blend of digital and physical value, as seen in projects like Oracle Red Bull Racing’s NFTs, has driven demand and created successful revenue models.

What challenges hinder the widespread adoption of tokenization beyond the hype, and how can these challenges be addressed?

Anndy Lian highlighted that tokenization faces challenges in standardization of asset classes and regulatory frameworks, varying from country to country. The perception that tokenizing a product might not be useful is another obstacle. Addressing these challenges requires a deeper understanding of tokenization’s potential to reduce fraud and enhance traceability. Focusing on the fundamental use cases, such as improving transparency and reducing fraud in financial transactions, can accelerate adoption.

How does blockchain technology contribute to building trust in financial systems, and what are the key considerations for its successful implementation?

Anndy Lian said that blockchain, with its immutable and transparent nature, has the potential to bring trust, immutability, and integrity to financial transactions. Key considerations for successful implementation include interoperability for widespread adoption, decentralization to empower individuals and reduce reliance on centralized authorities, and the utilization of smart contracts for automated and trustless execution of agreements in decentralized finance (DeFi).

What role does education play in the broader acceptance of blockchain and crypto technologies, and how can misconceptions be addressed?

Education is crucial in demystifying blockchain and crypto technologies. Many people view these technologies with skepticism or fear due to misconceptions or a lack of understanding. By providing comprehensive education, showcasing the potential positive impact of blockchain across various industries – from supply chain management to healthcare – and addressing common misconceptions, we can foster broader acceptance and understanding of these technologies.

In what ways can successful integration of blockchain and tokenization democratize access to investment opportunities and empower individuals?

Successful integration of blockchain and tokenization has the potential to democratize access to investment opportunities. This involves creating seamless interoperability between different networks, promoting decentralization to reduce reliance on centralized authorities, and leveraging smart contracts for trustless execution of agreements in decentralized finance. Anndy Lian pointed out that this not only transforms financial systems but also empowers individuals to control their personal data and privacy, mitigating risks associated with centralized data storage.

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j

Why Institutional Allocation to Crypto Is Rising

Why Institutional Allocation to Crypto Is Rising

The cryptocurrency market has experienced a remarkable recovery in 2023, after a prolonged bear market that lasted for most of 2022. The total market capitalization of all cryptocurrencies has increased by 34%, from $798.69 billion at the beginning of the year to $1.07 trillion as of October 10, 2023. Bitcoin, the leading cryptocurrency by market share, has surged by 74% since its yearly low of $15,883 in November 2022, reaching over $27,669.84 as of October 10, 2023.

This impressive performance has attracted the attention of institutional investors, who have been increasing their exposure to crypto assets in 2023. According to a survey by Binance Research, 35.6% of institutional investors increased their crypto allocation over the past year, while 47.1% maintained their allocation. Moreover, 50% of institutional investors expect to increase their allocation in the next 12 months, while only 4.3% expect to reduce it.

But what are the main drivers behind this growing institutional interest in crypto? I will explore some of the key factors that are fueling the institutional allocation to crypto in 2023, and why this trend is likely to continue in 2024 and beyond.

The Bitcoin Halving Event

One of the most anticipated events in the crypto space is the Bitcoin halving, which occurs every four years and reduces the supply of new bitcoins by 50%. The next Bitcoin halving is expected to take place in May 2024, when the block reward for miners will drop from 6.25 bitcoins to 3.125 bitcoins per block. This will reduce the annual inflation rate of Bitcoin from around 1.74% to around 1.1%, making it one of the scarcest assets in the world.

Historically, the Bitcoin halving has been a catalyst for a new bull market cycle, as it creates a supply shock that increases the demand for Bitcoin. According to the CoinMarketCap Bitcoin halving calculator, Bitcoin has reached a new all-time high (ATH) roughly a year after each halving event. For instance, after the first halving in November 2012, Bitcoin reached its ATH of $1,163 in November 2013. Similarly, after the second halving in July 2016, Bitcoin reached its ATH of $19,783 in December 2017. And after the third halving in May 2020, Bitcoin reached its ATH of $68,789 in April 2021.

Based on this historical pattern, many analysts and investors expect that the next Bitcoin halving in 2024 will trigger a new bull market that will push Bitcoin to new heights. For example, according to the stock-to-flow (S2F) model, which quantifies the scarcity of Bitcoin by comparing its existing supply to its new production, Bitcoin could reach a price of $288,000 by 2024. Similarly, according to a recent research by Delphi Digital, Bitcoin could achieve a new price high by Q4 2024, based on its four-year cycle theory.

Interest Rate Cuts by the Fed

Another factor that could boost the institutional allocation to crypto is the monetary policy of the Federal Reserve, which has a significant impact on the global financial markets. In 2023, the Fed has been facing a dilemma between fighting inflation and supporting economic growth, as the US economy has been recovering from the effects of the COVID-19 pandemic. Inflation has been rising above the Fed’s target of 2%, reaching 5.4% in September 2023, the highest level since 2008. However, the Fed has been reluctant to raise interest rates, which are the main tool to curb inflation, as it could jeopardize the economic recovery and the labor market.

Instead, the Fed has been signaling that it will start tapering its quantitative easing (QE) program, which involves buying $120 billion worth of Treasury bonds and mortgage-backed securities per month, by the end of 2023. This would reduce the amount of liquidity and stimulus that the Fed injects into the economy, and could have a negative effect on the stock market and other risk assets, as it would increase the cost of borrowing and reduce the demand for credit.

However, some analysts and investors believe that the Fed will not be able to taper its QE program as fast as it intends, and that it will have to cut interest rates again in 2024, as the economic recovery slows down and the inflationary pressures subside. This scenario would be bullish for crypto assets, as it would increase the demand for alternative and scarce assets that can hedge against inflation and currency devaluation, such as Bitcoin and other cryptocurrencies. Moreover, it would lower the opportunity cost of holding crypto assets, as the returns on traditional assets, such as bonds and cash, would be lower or negative.

Potential Launch of Spot Bitcoin ETFs

Another factor that could increase the institutional allocation to crypto is the potential launch of spot Bitcoin exchange-traded funds (ETFs) in the US, which are investment products that track the price of Bitcoin and trade on regulated stock exchanges. Spot Bitcoin ETFs would provide a convenient and cost-effective way for institutional investors to gain exposure to Bitcoin, without having to deal with the technical and regulatory challenges of buying and storing Bitcoin directly, such as setting up a wallet, choosing a custodian, and complying with anti-money laundering (AML) and know-your-customer (KYC) rules.

Spot Bitcoin ETFs have been long-awaited by the crypto industry, as they could bring a surge of fresh capital and liquidity into the market, and increase the adoption and legitimacy of Bitcoin among mainstream investors. However, the US Securities and Exchange Commission (SEC) has been reluctant to approve any spot Bitcoin ETF proposals, citing concerns over market manipulation, fraud, and lack of regulation in the crypto space.

In 2023, several spot Bitcoin ETF applications have been filed with the SEC, but none of them have been approved yet. However, some analysts and investors are optimistic that the SEC will finally approve a spot Bitcoin ETF in 2024, as the crypto market matures and the regulatory environment improves. For instance, the SEC has recently approved several Bitcoin futures ETFs, which are investment products that track the price of Bitcoin futures contracts, rather than the spot price of Bitcoin. This could be seen as a positive sign that the SEC is warming up to the idea of crypto ETFs, and that it could pave the way for spot Bitcoin ETFs in the near future.

US Elections

The midterm elections will determine the balance of power in the US Congress, which consists of the House of Representatives and the Senate, and which has the authority to pass laws and regulations that affect the crypto industry. According to the latest polls, the Republicans have a slight edge over the Democrats in both chambers, which could result in a divided government for the remaining two years of Biden’s term. This could have significant implications for the crypto industry, as the Republicans and the Democrats have different views and approaches on crypto regulation.

Generally speaking, the Republicans tend to favor a more laissez-faire and innovation-friendly attitude towards crypto, while the Democrats tend to favor a more interventionist and consumer-protective stance. For instance, Republican Senator Pat Toomey, who is the ranking member of the Senate Banking Committee, has been vocal in supporting the crypto industry and urging the regulators to provide more clarity and guidance. He has also co-sponsored several bills that aim to foster crypto innovation and adoption, such as the Eliminate Barriers to Innovation Act and the Securities Clarity Act. On the other hand, Democratic Senator Elizabeth Warren, who is also a member of the Senate Banking Committee, has been critical of the crypto industry and calling for more regulation and oversight. She has also questioned the environmental and social impact of crypto, as well as its role in facilitating crime and tax evasion.

Therefore, the outcome of the midterm elections could have a significant impact on the legislative and regulatory environment for crypto in the US. If the Republicans gain control of both chambers, they could push for more pro-crypto bills and policies that would create a more favorable and predictable climate for the crypto industry and investors. This could encourage more institutional allocation to crypto, as the perceived risks and uncertainties would be reduced. However, if the Democrats retain control of both chambers, they could pursue more anti-crypto bills and policies that would impose more restrictions and requirements on the crypto industry and investors. This could discourage more institutional allocation to crypto, as the perceived costs and challenges would be increased. Alternatively, if there is a split control of the chambers, there could be a stalemate or a compromise on crypto regulation, depending on the level of bipartisanship and cooperation between the parties. This could create a mixed and uncertain scenario for the crypto industry and investors, which could have a neutral or a moderate effect on the institutional allocation to crypto.

In Conclusion

The institutional allocation to crypto is rising due to a combination of factors that make crypto assets more attractive and viable for institutional investors. These factors include the upcoming Bitcoin halving event, which will reduce the supply and increase the demand of bitcoins, the outcome of the US midterm elections, which will shape the legislative and regulatory environment for crypto in the US, and the overall improvement of the crypto market conditions, such as the increased liquidity, volatility, and innovation. However, there are also some challenges and risks that could hinder the institutional allocation to crypto, such as the lack of clear and consistent regulation, the high technical and operational complexity, and the potential cyberattacks and frauds. Therefore, institutional investors should carefully weigh the pros and cons of crypto assets and conduct thorough due diligence before investing in them. Crypto assets are not for the faint-hearted, but for those who are willing to embrace the uncertainty and opportunity of the new digital frontier.

 

Source: https://www.securities.io/why-institutional-allocation-to-crypto-is-rising/

FAQ

According to the Binance Research survey, what percentage of institutional investors increased their crypto allocation over the past year, and what percentage maintained their allocation?

According to the Binance Research survey, 35.6% of institutional investors increased their crypto allocation over the past year, while 47.1% maintained their allocation.

What is the significance of the Bitcoin halving event, and when is the next one expected to occur?

The Bitcoin halving event, occurring every four years, reduces the supply of new bitcoins by 50%. Anndy reminded all that the next Bitcoin halving is expected to take place in May 2024.

What is the potential impact of the US midterm elections on the legislative and regulatory environment for crypto in the United States?

The outcome of the US midterm elections could significantly impact the legislative and regulatory environment for crypto in the United States. Depending on which party gains control of both chambers, there may be shifts in policies, with Republicans generally favoring a more pro-crypto stance and Democrats leaning towards more regulation. The election outcome could influence the level of institutional allocation to crypto, affecting the perceived risks and uncertainties in the market.

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j