Feels great to be back in action after a year-end break. Hopefully, a few weeks of “no-writing” would have energized the brain to put out even better content in 2024.

The year has already started with the big bang news of the SEC approving bitcoin ETFs. An average joe investor in the US can now buy and sell Bitcoin as easily as individual stocks and mutual funds. Many large asset managers like BlackRock, Fidelity, and ARK have already been greenlit to list. As of Jan 12, Bitcoin ETFs have already seen $655Mn in net inflows on the very first day.

In my view, US regulators have shown remarkable foresight by going this route. Bitcoin had already become too mainstream, with massive institutional and retail exposures via crypto exchanges, many of them offshore. By bringing it as a formal asset class within the mainstream of asset management, the SEC is actually protecting the interests of investors by getting Bitcoin investments to flow through regulated trading platforms on US soil that are under necessary regulatory oversight.

I loved how Vijay Boyapati captured the significance of this event on X:

One of the big positives of Bitcoin ETFs that is often overlooked is the massive reduction in KYC inertia that investors so far had to go through while buying directly on crypto exchanges. This itself should unlock a massive set of new adopters.

Now that we have discussed all the positives, let me highlight one concern I have been thinking about. While Bitcoin’s value as a potential non-government medium of exchange, or ‘digital money’, has always been played up by early believers, it’s looking more unlikely by the day. In fact, in light of the FTX blowup, Binance pleading guilty to Federal charges, and now this regulatory approval, access to Bitcoin’s monetary system is becoming increasingly dependent on existing systems controlled by the government. In this scenario, it’s highly unlikely that governments of major economies will let Bitcoin emerge as a decentralized alternative to fiat currencies.

If this is true, Bitcoin’s main value proposition for investors then becomes similar to that of a scarce commodity, a sort of ‘digital gold’ with supply capped at 21 Mn Bitcoins, and with characteristics (durability, fungibility etc.) that humanity at large finds valuable (like shiny gold or sparkly diamonds).

Taking this line of thinking forward, Bitcoin then is expected to compete with physical gold in terms of allocation within investor portfolios. Except, it suffers from one key drawback vis-a-vis gold. I believe that one of gold’s standout features is its relative lack of volatility, as well as physical illiquidity. Bitcoin lacks both of these qualities.

Over the last 1 year, the per-ounce price of gold has oscillated between a high of $2,078 and a low of $1,809. Even over the last 3 years, the price action has been between $1,618-$2,078. A fairly tight price band, compared to Bitcoin oscillating between $10k and $40k!

That’s why, barring institutional trading desks, retail investors don’t tend to minutely track their gold exposures. Asian households, especially Indians, tend to also store gold in the physical form via jewelry, bars, and coins. Given its lack of divisibility, and low ease of transportation, storage, and selling, physical gold is also considered largely illiquid and more like a rainy-day reserve. I have never seen an Indian household run Excel math on the valuation of their physical gold reserves like they would for their stock portfolios.

This relative lack of volatility and liquidity is actually a feature, not a bug, for physical gold. It helps in its uninterrupted compounding and acts as a multi-generational store of value for families. In practice, people either buy or inherit gold, and then forget about its valuation. This is the best way to accrue compounded returns for any asset.

However, Bitcoin as digital gold won’t demonstrate these features. It’s perhaps the most volatile asset class out there, traded and marked-to-market 24 x 7, 365 days. Now with ETFs, an average joe investor can continuously track its price action, and trade in or out of it. This will also lend it much more to FOMO trading.

If this investor behavior plays out with Bitcoin ETFs, it will be more akin to day trading or F&O rather than traditional gold investing. Whether this is good or bad depends on what an individual’s goals are.

Keeping this risk in mind, I would urge new retail investors into Bitcoin to clearly articulate their goals behind investing in it, decide their investment stance (trading, buy-and-hold, frequency of inflows etc.), and manage their exposure as % of overall net worth. This would ensure that Bitcoin can truly play the role of digital gold in your portfolio.

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