Bitcoin will face two really big tests this week.
First, the price it will “float” at when Australia’s first direct Bitcoin and Ethereum exchange traded funds are listed and secondly, how strong demand for the new ETF’s will be.
With Wednesday the likely listing date for the Cosmos and possibly 21Shares/ETF Securities products pending final regulatory approvals, the stage is set for a test of demand for Bitcoin in Australia.
The cryptocurrency has had a rocky start to this year, falling around 15% as markets turned risk off in the face of rising inflation and interest rates.
However, the arrival of a physically backed Bitcoin ETF is something of a game changer because it greatly widens the pool of available investors and increases the safety of the investment, given the amount of regulation around custody of coins.
In the case of the Cosmos product, it is backed by the Purpose Bitcoin ETF Toronto listed fund, with the Cosmos ETF buying shares in the Purpose product directly.
The 21Shares/ETF Securities product is backed by tokens held in cold storage by Coinbase Global Inc.
Apart from broadening the market for Bitcoin and Ether, the arrival of spot priced ETF’s will be a real test of the longer-term future for crypto assets.
There is a massive divide in opinions about that future of Bitcoin with naysayers such as Jeremy Grantham saying it is a massive bubble and could eventually be worth nothing.
Others such as Cathie Wood, chief executive of US-based investment management firm Ark Invest, claim that a single bitcoin will be worth more than US$1 million (A$1.3 million) by 2030.
They can’t both be right but the bigger question for Bitcoin investors is whether the much-vaunted lack of correlation between Bitcoin and other assets is real or sustainable.
Critics point to the poor performance of crypto assets in general this year as proof that they are not the hedge against inflation that has been claimed and that they are just another risk asset that has been marked down in response to a global tightening of ultra-loose monetary policies around the world.
Fans of crypto rightly point out that there is much more discipline in the production and supply of most crypto assets compared to fiat currencies such as the US dollar which have arguably been dramatically over-produced through a long period of money printing.
The winner of that battle will only be determined by time, with the potential production of digital currencies by central banks using the same blockchain technology that powers Bitcoin also a complicating factor.
The decision to buy a Bitcoin than a Chinese digital Renminbi or other central bank digital currency is effectively a call on whether you trust existing monetary regulators or those technology fans that created the tight rules around the creation of crypto assets.
Either way you look at it, the launch of more transparent and easily traded bitcoin is a welcome innovation that in time will answer all of these questions, leaving the question of whether and how much of this sort of asset you should buy where it belongs – in the hands of the investor.