ECB is right: ETFs do nothing to prove bitcoin’s inherent value

‘Bitcoin is still not suitable as an investment’

Tom Eckett

Bitcoin EU

The approval of a bitcoin ETF in the US has created a wave of demand for crypto assets on both sides of the pond, however, this does little to change the asset’s lack of intrinsic value.

According to data from CoinShares, global crypto exchange-traded products (ETPs) have seen $5.8bn inflows so far this year, as at 23 February, amid the wave of positive sentiment for digital assets since the Securities and Exchange Commission (SEC) greenlighted physical bitcoin ETFs in the US.

The regulatory nod has many crypto proponents predicting a wave of institutional adoption as investors become fearful of missing out on the “trade of the century” as claimed by the Winklevoss twins, who filed for the US’s first bitcoin ETF in 2013.

Some 11 years on and the European Central Bank (ECB) is yet to be fooled that bitcoin can deliver on its promise of becoming a global decentralised digital currency, even if the SEC has allowed physical ETFs to offer exposure to the digital asset.

In a blog post, titled ETF approval for bitcoin – the naked emperor’s new clothes, ECB director general for market infrastructure and payments Ulrich Bindseil and adviser Jürgen Schaaf reiterated claims made by the bank that “the fair value of bitcoin is still zero”.

“Bitcoin’s price level is not an indicator of its sustainability,” the ECB warned. “There are no economic fundamental data, there is no fair value from which serious forecasts can be derived. There is no ‘proof of price’ in a speculative bubble.

“While in the short run, the inflowing money can have a large impact on prices irrespective of fundamentals, prices will eventually return to their fundamental values in the long run. And without any cash flow or other returns, the fair value of an asset is zero.”

Trying to put any intrinsic value on bitcoin is a challenge. A bubble can be described as a period when current asset prices rapidly climb to exceed their intrinsic valuation. Since the start of 2016, bitcoin’s price has risen over 15,000% to currently trade over $60,000 so the coin certainly ticks the bubble box of a rapid rise in performance.

While this has certainly been one of the ‘trades of the century’ from a valuation perspective, there is nothing stopping bitcoin from returning to those levels, given it does not generate cash flows or dividends such as real estate or equities.

“Bitcoin is still not suitable as an investment,” the ECB warned. “Less financially knowledgeable retail investors are attracted by the fear of missing out, leading them to potentially lose their money.”

While ETFs allow investors to invest in crypto via a regulated vehicle without the risks of holding bitcoin directly, they will not solve the fact these coins have no intrinsic value. This will always be a challenge for fund selectors looking to allocate to the nascent asset class.

This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full edition, click here.

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