While it has, for much of its existence, been considered a speculative asset, only useful for making short-term gains, Bitcoin has had some recent developments that are changing the way that many perceive it. The most impactful recent development for Bitcoin has been the introduction of tokens representing the cryptocurrency to ETFs. It could be that exposure to ETFs could fundamentally change how Bitcoin is perceived and used.
While Bitcoin might have started its existence with the intention of becoming a peer-to-peer payment system, circumventing the traditional financial markets and systems and allowing users to engage in decentralized finance, much of its lifespan has been spent differently. Most users have engaged with Bitcoin as an investment tool to hedge against inflation and currency depreciation, and as an asset useful for short-term speculation. While there is still a relatively high level of p2p Bitcoin movement on exchanges, the biggest change for Bitcoin recently has been its approval and introduction to exchange-traded funds (ETFs) in a tokenized form. As the level of participation in Bitcoin from institutional investors continues to grow through its exposure to ETFs, some analysts are drawing the conclusion that its perception and the type of asset it is being treated as have changed as a result.
Let’s take a closer look at why Bitcoin’s adoption by ETFs matters, how they are changing the way that Bitcoin is being perceived and used and how Bitcoin might be transforming into a predictor of macroeconomic conditions.
Why Bitcoin’s Adoption by ETFs Matters
To cut a long story short, the adoption of Bitcoin into ETFs matters because it is yet another step towards the greater mainstream adoption of the cryptocurrency. Investors in ETFs can acquire tokens that represent a share of the asset, and they can do so without ever needing to engage directly with the blockchain and the other technological hoops that traditionally have accompanied Bitcoin and other cryptocurrencies. This means that traditional institutionalized investors, such as retirement funds or retail investors, can gain exposure to Bitcoin in their portfolios through the same financial markets that they already operate in.
This means that a large portion of institutional capital is suddenly engaging with Bitcoin. This has immediately increased the liquidity and market depth that the cryptocurrency enjoys. With these things comes a greater portion of stability, which the cryptocurrency has historically lacked. While it might still be seen as relatively volatile, it is being considered as less risky than it has previously been. But, most importantly for our consideration, its incorporation into these ETFs is changing the way it is perceived and used.
An Asset that Institutional Investors Can Use Strategically
As we mentioned earlier, for much of its existence, Bitcoin has been considered as little more than a speculative asset. Movements in its price were driven largely by sentiment and news. While this is still certain to have some effect on its standing, the large number of institutional investors gaining exposure to Bitcoin through ETFs is changing the way Bitcoin acts.
Because of the way that institutional investors engage in any market, by employing a large number of macroeconomic analysis tools and risk management strategies, they are also applying those things to Bitcoin. This means that the movements of Bitcoin are falling more in line with those of other assets being traded by the same portfolios, as it is being considered in the same light and evaluated by the same rubric. As such, some portfolios are using Bitcoin as a vehicle for strategic investments, instead of simply an asset for speculation.
Bitcoin Shows Signs of Being an Indicator For Future Price Movements
A recent development of the introduction of Bitcoin to ETFs has been the potential for Bitcoin to be an asset that can indicate future liquidity and monetary policy cycles. In the past, Bitcoin has, like most assets, been much more of a reactionary asset. This means that its price has moved in reaction to macroeconomic changes like shifts in global liquidity or changes to interest rates. But some recent analysis seems to suggest that the opposite may now be true, that Bitcoin could be used to predict some future changes.
While the data set is still small, as Bitcoin has not long been exposed to ETFs, several correlations from the post-ETF era of Bitcoin are indicating that Bitcoin movements are now ahead of policy shifts, by six months to a year. This means that the movements of Bitcoin investors are signalling their expectations about economic conditions in the future. These changes are well-aligned with the conceptualization that institutional investors might be using Bitcoin as a proxy for changes that they anticipate regarding liquidity and risk appetite.
Bitcoin’s use as a potential macro-sensitive barometer is a great sign for those who want to see it move beyond existence as a speculative asset and to have a wider role in the global financial ecosystem.
Increasing Correlations with Other Assets
As part of their adoption by institutional investors, the way that Bitcoin is seen to correlate with other assets is changing; in short, it is increasing. In particular, it would seem that many traditional institutional investors consider Bitcoin to be in the same vein as traditional technology equities and stocks. As a result, when those stocks are seeing specific sorts of movement, so are the ETF-traded Bitcoin tokens.
These correlations are indications of how Bitcoin is perceived in the wider financial market. There are also signs that Bitcoin is being influenced by financial conditions outside of market sentiment. Interestingly, if Bitcoin is truly showing signs of being an indicator of future policy movements, then rather than following and being influenced by these markets, it could be that Bitcoin is doing the influencing, and, at the very least, is shaping the expectations of investors.
Final Thoughts
Has the exposure of Bitcoin to ETFs changed the type of asset it is? Yes and no. It remains fundamentally a decentralized cryptocurrency that can still be used for all of the same things it has previously done, like making digital payments, and it can still function as a speculative short-term asset. But there are signs that it can be more than that, and that it has a place in the wider financial ecosystem. The truth is that the way that any asset is treated and perceived will change the way that it can be used and how it will be perceived in the future.