INVESTING
ETFs have made Bitcoin investing easier than ever. But they may be adding air to a bubble.
DON’T LOOK NOW, but Bitcoin is back. This may come as a surprise to investors who wrote off crypto altogether after a spectacular series of frauds and mishaps led the value of the currency to plummet by around 75% from late 2021 through 2022.
Yet it’s hard to argue with recent numbers. Since it bottomed out at $16,000 in November 2022, Bitcoin has rebounded; in March it passed the $70,000 mark for the first time. Like it or not, the quirky currency stands as one of the best-performing assets of the year and of the decade—even after a recent pullback.
Many changes have driven this rally, but one of the biggest is the fact that you can now invest in Bitcoin through exchangetraded funds (ETFs)—a process that feels far safer and easier for newcomers. Long-established financial brands like BlackRock and Fidelity have jumped into the ETF game, conferring legitimacy on a sector still viewed by many as the province of rogues and gamblers. The halo effect of the giant asset managers may spread still further in coming months, as they begin including Bitcoin ETFs in some of the model portfolios they recommend to investment advisors. But for the novice wondering if now’s the time to invest, it’s critical to understand how Bitcoin and other cryptocurrencies work—as well as the forces behind the recent rally.
Different this time?
Bitcoin first appeared in the wake of the 2008 financial crisis, when governments around the world printed massive amounts of money to prop up their banking systems. Pseudonymous founder Satoshi Nakamoto saw Bitcoin as a form of decentralized money with a fixed supply that would not be subject to inflation or political control. Its design calls for only 21 million Bitcoins to be minted by 2140. Over 90% of those have already been issued, and future supply will be constrained even more after the next so-called halving, slated for April 20, which will substantially slow the rate at which new coins are created.
This scarcity is a big part of Bitcoin’s appeal and why its boosters hail it as “digital gold.” Indeed, in March, the cryptocurrency’s market cap for the first time eclipsed that of silver, topping $1.4 trillion.
But Bitcoin is far more volatile than gold or silver, and subject to spectacular flameouts. The current bull market comes after three previous episodes of mania—each followed by a jaw-dropping crash.
It’s worth noting that each collapse roughly coincided with a significant news event. In 2014, it was a catastrophic hack that cleaned out an exchange called Mt. Gox, then the industry’s prime source of liquidity. A 2017 bubble popped not long after the Securities and Exchange Commission issued a report that foreshadowed a regulatory crack
