THE last time this column spoke about cryptocurrencies and more specifically, bitcoin, was more than three years ago in a column, entitled “Can Cryptos Be an Asset Class”, published on Dec 12, 2020.
The argument put forth then was that bitcoin doesn’t make sense as it has no intrinsic value. It is not a currency, and it is highly volatile. It is also not backed by any asset nor legal tender and it is highly speculative.
Fast forward to 2024, bitcoin has grown up and is now 15 years old, a teenager, and more and more institutions and governments are recognising its existence, although not quite as a legal tender just yet.
In terms of price, since the last article on bitcoin was written more than three years ago, it has moved from about US$18,000 to a high of more than US$65,000 a year later, lost two-thirds of its value 12 months thereafter, climbed back up to as high as US$49,000, and was last seen at just over US$42,000 per token.
Circulation-wise, bitcoin saw total tokens outstanding increase from 18.57 million coins in early December 2020 to its current level of 19.61 million – leaving the balance of 1.39 million coins to be minted.
Hence, bitcoin today has a market capitalisation of US$826bil, with a daily trading volume of more than half a million coins worth more than US$22bil based on its last traded price.
Bitcoin mania
On Jan 10, 2024, Bitcoin made history with the US Securities and Exchange Commission (SEC) approving the trading of spot bitcoin exchange traded funds (ETF), which saw 11 ETFs being launched the very next day.
This is in addition to the multiple offerings of bitcoin futures ETF which has already been established before and has total assets under management (AUM) of some US$2bil. Interestingly, most of these bitcoin futures ETFs do not own bitcoins but have open positions on bitcoin futures contracts.
The idea of spot bitcoin ETF was greatly promoted by many, and one of the strongest promoters of it was Grayscale via its Grayscale Bitcoin Trust (GBTC).
GBTC was converted into an ETF upon the approval by the SEC and on the first trading day itself of spot bitcoin ETF, GBTC had some US$28.6bil in AUM.
However, selling pressure on GBTC followed thereafter it was converted into an ETF, and some of the flows were seen re-directed to other spot bitcoin ETFs and GBTC’s AUM (inclusive of mark-to-market changes) has dropped by approximately 27% or US$7.9bil.
One of the main reasons for the switch to other spot bitcoin ETFs is due to GBTC’s high management fee, which is pegged at 1.5%.
The remaining 10 spot bitcoin ETFs today have some US$7.3bil in AUM.
Overall, the spot bitcoin ETF has a total AUM of some US$27.8bil, which translates to 652,773 bitcoins as at Jan 31, 2023, as GBTC saw a drop of about 124,968 bitcoins while other spot bitcoin ETFs added 160,661 tokens.
Taking the example of GBTC, which has some AUM of US$20.7bil and based on bitcoin’s price of US$42,519 per token, buying one share of GBTC at US$37.99 translates to bitcoin per share of 0.00089353.
Understanding spot bitcoin ETFWith bitcoin gaining greater acceptance, especially with the establishment of spot bitcoin ETF, investors have greater choice in having exposure to the cryptocurrency market via a more acceptable and regulated form, which is via an established ETF.
In this way, investors are exposed to the underlying asset directly as these ETFs mirror the actual bitcoin price in the market and the tokens that are purchased are bought from legitimate cryptocurrency exchanges like Coinbase and Gemini, stored in digital wallets such as Electrum, Guarda Wallet and Coinbase Wallet or self-stored.
Investors into spot bitcoin ETFs can be rest assured that investments into these ETFs are much safer than trying to invest directly due to inherent risk as well as many crypto scams out there.
In the past week alone, we saw local news reports of how individuals lost millions after being duped into investing in non-existent investment platforms that supposedly were investing in cryptocurrencies that promised spectacular returns.
What’s next?
With the finite supply of bitcoin, it has become increasingly harder to mine new coins as the rate of increase in terms of new bitcoin supplies has been on a declining trend.
Over the last five years, the number of tokens has only increased by approximately 2.1 million coins or at an average rate of increase of 0.42 million tokens per annum but over the last three years, the average has been about 0.33 million per annum only.
One of the reasons for this is due to the impact of halving. In the case of Bitcoin, approximately every four years, the number of bitcoins created per block is halved. In essence, this limits the amount of bitcoins that come to market, thus pushing up its value even higher due to the limited supplies.
Bitcoin’s last halving occurred in May 2020 whereby the block reward was reduced to 6.25 bitcoin per block from 12.5 bitcoin per block, effective July 2016. Bitcoin’s first halving occurred in November 2012, when 50 bitcoins per block was reduced to 25 bitcoins per block.
A fourth halving event is expected to occur by April this year whereby the current reward will be further reduced to just 3.125 bitcoin per block, while the fifth halving event, likely in 2028, will half the bitcoin reward to just 1.5625 bitcoin per block.
Who owns bitcoins?
Slightly less than 154,520 bitcoin addresses that own the cryptocurrency, or approximately 0.3% of the total 52,469,535 of the total bitcoin addresses, own some 16.04 million of all tokens, representing 81.8% of total coins outstanding. Approximately 53% of total bitcoin addresses own just 0.25% of all coins outstanding and those holding less than one coin each, make up some 98% of all addresses but represent just 7.2% of total coins outstanding. Such a dispersed number of addresses that own bitcoin directly and at the same time the concentrated ownership among the 0.3% of account holders is expected to remain as bitcoin’s market price is hardly deemed to be affordable, which has also caused a widening base of ownership of the coin among retailers holding less than 0.01 coin.
At the same time, the emergence of derivative instruments or ETFs tracking both the spot and future prices suggests that ownership among the larger market players can only increase. There is also a likelihood that the smaller retail owners of bitcoin may shift their ownership via the ETFs as it gives them greater security and flexibility in terms of ownership via shares of the ETF rather than direct ownership of the tokens.
While bitcoin may not emerge as a legal tender but increasingly being recognised as a medium of exchange and has certainly become mainstream, with more countries allowing it to be used. An example of this is from Visa Inc. The global credit card company recently joined the crypto bandwagon and now allows users to turn cryptocurrency into cash on their debit cards. Hence, although bitcoin’s ownership structure remains largely concentrated, the introduction of spot bitcoin ETFs has provided an added avenue for the leading cryptocurrency to be recognised as an asset class and coming closer to becoming a mainstream asset.
Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.
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