It's now a lot easier to buy bitcoin after the US market regulator last week approved the listing and trading of a number of spot bitcoin exchange-traded funds (ETFs). So, what does this mean for future of the cryptocurrency, and is now a good time for Aussies to buy in?
First, an admission. I bought a small amount of bitcoin about a month ago. First, it went down, but just recently, it went up again. I’m actually ahead (narrowly at time of writing). But, as the next chart shows, pretty much everyone who has bought bitcoin is ahead right now, thanks to a huge surge in its price.
As the chart shows, the price has only briefly been higher in AUD terms. The only Aussies who are behind are the ones who bought bitcoin when it was above $70,000, for a few brief months back in 2021.
There were slightly more opportunities to buy it higher than its current price in USD terms, but still, 90 per cent of all the weird nerds who ever bought bitcoin are now miles ahead. You don’t have to like them, but you have to respect them.
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The reason for bitcoin’s recent rise is that it has gone mainstream. ETFs have been set up on the New York Stock Exchange, meaning people can buy bitcoins in the same places they buy stocks. That is expected to finally confer a certain amount of legitimacy on bitcoin – think of it as an 18th birthday party showing bitcoin is respectable and grown up now.
At the same time, the ETF will make it easier for people to buy bitcoin. They don’t even need a new trading account. They can pile money into the ETF and it buys bitcoin on their behalf.
The combination of factors is hoped- by bitcoin enthusiasts (which I’m not) and speculators (which I am, albeit in a small value) - to push the price of bitcoin up.
I’ve ridden the wave of bitcoin enthusiasm in the past, as the next chart shows. While I don’t believe in bitcoin in the same way as some hardcore people for whom it is a faith, I’ve been careful not to let my scepticism get in the way of a good trade. There’s no money in betting against the crowd in the short run.
So, is this the right time to throw your life savings at bitcoin? Is it going to go vertical again? Never say never, but remember, the embrace of bitcoin by the global financial system could be kind of a death grip. Why? Because bitcoin was originally envisaged as an alternative to that system.
In 2008, bitcoin’s pseudonymous creator, Satoshi Nakamoto, conceived of it as permitting people to trade “without going through a financial institution”. But the main bitcoin ETF is owned by Blackrock, pretty much the biggest financial institutions there is.
Bitcoin didn’t turn out quite like Nakamoto expected. It’s not a currency. It’s not used much to buy and sell. It’s more like bonds or gold – a place to park money, and a thing on which to speculate. Lots of financial assets are like that these days. Even things like copper, which is way more useful than bitcoin, nevertheless attract a lot of traders trading it for financial reasons.
So, the development of an ETF could boost the market for bitcoin by bringing in a lot of traders and patient investor money. Or undermine it by revealing that the global financial system isn’t threatened by it, quite the opposite: the system sees it as just another financial product to be bought and sold. So, the establishment of the ETF could be an opportunity or a threat for the average bitcoin investor.
Australians need to be especially careful. Australians who buy into bitcoin face risks at the moment, because our dollar is at relative lows against the USD. Usually, we trade a bit higher than we have been trading recently, as the next chart shows.
If our dollar appreciates against the USD – say we go back to 80 US cents, then it’s likely the value of bitcoin will fall in AUD terms. Bitcoin is not pegged to the US dollar, of course, but more bitcoin trade happens in USD than AUD so it’s unlikely to follow our currency if we appreciate. And the Aussie dollar could certainly appreciate against the greenback if the US stops hiking rates and moves to a cutting phase.
The inflationary impulse is all but over now across the world, meaning the next interest rate is almost certainly down, not up, in both the US and Australia. But US inflation is down to 3.4 per cent over the past year, compared to 4.3 per cent in Australia, meaning they may see rate cuts before us.
If the Fed starts cutting rates before the Reserve Bank of Australia, then the AUD is very likely to rise against the USD, and any bitcoin investments will require even stronger growth in the USD value of the asset to hold their value.
With bitcoin, more than ever, it’s buyer beware.